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spk01: Thank you for standing by and welcome to the First Western Financial Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentations, there will be a question and answer session. To ask a question at that time, please put star 11 on your touchtone telephone. As a reminder, today's call is being recorded. I will now turn the conference to your host, Mr. Tony Rossi of Financial Profiles. Sir, you may begin.
spk12: Thank you, Valerie. Good morning, everyone, and thank you for joining us today for First Western Financial's fourth quarter 2022 earnings call. Joining us from First Western's management team are Scott Wiley, Chairman and Chief Executive Officer, and Julie Korkamp, Chief Financial and Chief Operating Officer. We will use the 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 Investor Relations website to download a copy of the presentations. 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?
spk16: Thanks, Tony. Good morning, everybody. We had a number of objectives that we wanted to accomplish in the fourth quarter. We wanted to increase our focus on deposit gathering in order to improve our liquidity and reduce our loan to deposit ratio. We wanted to continue to generate solid loan growth while tightening underwriting and pricing criteria given the potential for weakening economic conditions. And we wanted to continue to effectively manage our expense levels. I'm pleased to report that we were able to accomplish all these objectives and continue to generate strong financial performance, although earnings were lower than the prior quarter due to the increase in interest expense that we saw as a result of our strong growth in deposits in the competitive environment, putting pressure on deposit costs. Even with the tighter underwriting and pricing criteria, we still generated 21% annualized loan growth in the quarter, with increases in each of our major portfolios. The strong loan growth that we continue to generate reflects our success in steadily growing our client base in Colorado, as well as the increase in contributions we're getting from the teams that we've built to increase our presence in Arizona, Wyoming, and the Montana markets. With the strong business development capabilities that we've built, we're able to generate a significant volume of high quality lending opportunities, enabling us to continue generating strong loan growth while maintaining our prudent approach to risk management. Importantly, the growth rate we saw in total deposits was more than double our loan growth. We were particularly effective in expanding deposit relationships with a few larger clients, which accounted for a significant portion of the deposit inflows we saw in the fourth quarter. And as with our loan production, our increased presence in some of our newer markets was also a contributor to the strong deposit growth in the fourth quarter. As we mentioned on our last call, Our near-term objective was to get our loan deposit ratio down near 100%, and we were able to achieve that with our strong growth in deposits during the fourth quarter. Along with our improving liquidity by reducing our loan deposit ratio, during the fourth quarter we also increased our total capital ratio by 53 bps, basis points, to 12.37%. Moving to slide four, we generated net income of $5.5 million or $0.56 per diluted share in the fourth quarter, or $0.58 a share with acquisition-related expenses excluded. Our strong profitability, along with effective management of the investment portfolio, has enabled us to continue to drive increases in both book value and tangible book value per share. In the fourth quarter, book value per share increased 2.5% from the prior quarter, while tangible book value increased 3%. During 2022, a year when most banks saw significant declines, both metrics increased by more than 9%, reflecting the strong value we're creating for shareholders. Turning to slide five, we'll look at the trends in the loan portfolio. We had another strong quarter of loan growth, originating $182 million in loans. While this was down from the prior quarter, the average rate on new loan production increased by more than 100 basis points, so we're still generating strong production without compromising on pricing. Payoffs are also continuing to moderate, so more of our loan production is translating into net loan growth, and our total loans held for investment increased $121 million from the end of the prior quarter. The growth was primarily driven by increases in our residential mortgage construction C&I portfolios, which offset a decline in our CRE portfolio which is an area we're limiting new production as part of our overall approach to risk management ahead of a potential recession. As with the prior quarter, most of what we're adding to one to four family residential portfolio are jumbo arms that provide attractive risk-adjusted yields. Moving to slide six, we'll take a closer look at our deposit trends. The success we had in deposit gathering resulted in 44% annualized growth in total deposits during the fourth quarter. We had a decline in non-interest-bearing deposits, which was largely attributable to some clients deciding to move a portion of their excess liquidity into interest-bearing accounts to capitalize on the higher rates now being offered. We also made the decision to add some time deposits in order to lock in longer-term fixed-rate funding that we believe will enable us to more effectively manage our deposit costs going forward. Turning to slide seven, trust and investment management, our total assets under management increased by $189 million from the end of the prior quarter, which was primarily due to an increase in market values during the fourth quarter of 2022. I'll turn the call over to Julie for further discussion of our financial results. Julie?
spk00: Thank you, Scott. Turning to slide eight, we'll look at our gross revenue. Our total gross revenue is relatively consistent with the prior quarter, as an increase in non-interest income offset most of the decrease we saw in net interest income. On a year-over-year basis, our gross revenue increased 23.8% from the fourth quarter of 2021, largely due to higher net interest income resulting from both organic and acquisitive growth on our balance sheet. Turning to slide nine, we'll look at the trends in net interest income and margin. Our net interest income decreased 4.6% from the prior quarter, due to the increase in interest expense resulting from our strong growth in total deposits and an increase in our average cost of deposits. With our strong growth in deposits, we reduced our level of FHLB advances and we continue to make adjustments to our level of wholesale borrowings going forward based on the trends we are seeing in loan production and deposit flows. Excluding the impact of PPP fees and accretion on acquired loans, our net interest margin decreased 47 basis points to 3.31. The decline in our net interest margin was due to an increase in our average cost of funds resulting from the higher rate environment and very competitive environment for deposit gathering. Given the competitive environment for deposit pricing, we believe it is likely that we will continue to see some pressure on our net interest margin in the first quarter. As we exited the year, due to the changes in the composition of the balance sheet, we have moved to a more neutral position in terms of interest rate sensitivity. And we have indicated in the past, we do not make bets in future direction of interest rates. Changes in our interest rate sensitivity are a function of the trends we see in loan production and deposit flows at any given point in time, with our primary focus being on generating growth in net interest income. Over the past few years, as the growth in our commercial banking platform resulted in more commercial deposit relationships and an increase in non-interest bearing deposits, we became more asset sensitive and saw significant expansion in our net interest margin. Now we are seeing a shift back to a more neutral position, which will serve us well in protecting our net interest margin when the Fed eventually starts to lower interest rates. Turning to slide 10, our non-interest income increased 3.4% from the prior quarter, primarily due to higher bank fees and risk management and insurance fees. The higher bank fees was partially attributed to an increase in prepayment penalty fees, while the increase in risk management and insurance fees primarily reflects the seasonal bump that we typically see in the fourth quarter. The growth in these areas offset minor declines in trust and investment management fees, and net gain on mortgage loans, both of which are starting to stabilize relative to the larger declines we experienced earlier in 2022. The volume of locks on mortgage loans originated for sale declined 32% from the prior quarter. Approximately 95% of the originations were purchased loans, and we are seeing very little demand for refinancing given the rise in mortgage rates. Turning to slide 11 and our expenses, Our non-interest expense increased 3.3% from the prior quarter, primarily due to an increase in data processing costs resulting from non-recurring implementation charges relating to enhancements we have made to our trust and investment management platform. During 2022, we made significant investments in both new banking talent and technology that will contribute to our future growth in revenue and improvement in efficiencies. Following these investments, we expect the growth rate of non-interest expense to moderate in 2023, with most of the growth coming from annual salary increases. And for the first quarter of 2023, we expect non-interest expense to be in the range of 20 to 21 million. Turning now to slide 12, we'll look at our asset quality. On a broad basis, the loan portfolio continues to perform very well, with another quarter of minimal losses. although we did see an increase in non-performing loans in the fourth quarter. The increase in non-performing loans is primarily attributed to one commercial loan. As we have indicated in the past, our underwriting criteria requires multiple sources of repayment. In this particular case, we have the assets of the business, a commercial property, and a personal guarantee from a high net worth client. As a result, we believe the loan is well secured and there was no specific reserve required. We record a provision for loan losses of $1.2 million, which was driven by the growth and changes in the mix of the loan portfolio. This puts our ALLL to adjusted total loans at 78 basis points, which was relatively consistent with the end of the per quarter and reflective of our strong credit quality and the low level of losses that we have experienced in the portfolio. On January 1st, we adopted the CECL standard for allowance for credit losses. Our preliminary estimate is that our ACL to total loans ratio will be in the range of 75 to 90 basis points and a 30 to 45 basis point coverage on off-balance sheet commitments. Now I will turn the call back to Scott.
spk16: Thanks, Julie. Turning to slide 13, I'll wrap up with some comments about our outlook and priorities for 2023. While it appears that the macroeconomic environment will be challenging this year, we believe we're well positioned to effectively manage through an economic downturn while continuing to generate profitable growth, particularly when economic conditions improve. With our conservatively underwritten, well-diversified loan portfolio and the strength of clients that we serve, we expect to maintain strong asset quality as we have during prior periods of economic stress. In each of the past three years, we further tightened our already conservative underwriting criteria. As a result, the credits we've added to the portfolio over that time have a substantial cushion in their debt coverage ratios and loan-to-values to absorb any deterioration that occurs in cash flows or collateral values. We also have little or no exposure to the areas that are most likely to be impacted by a recession, such as office CRE, retail CRE, SBA, or subprime consumer. We feel very comfortable with the small amount of office CRE that we have in the portfolio. These properties aren't in major metropolitan areas where the work from home trend has been most pronounced. They largely consist of smaller properties in high-end suburban areas with tenants in more recession-resistant industries like medical practices. In terms of new business development, we're going to continue to place an increased focus on core deposit gathering to fund our loan production. Our relationship bankers are focused on developing full relationships with both loans and deposits from clients, and we expect this to result in better alignment between loan and deposit growth going forward. We continue to be conservative and highly selective in our new loan production until economic conditions improve. We expect to be able to continue generating solid loan growth as new teams that we've added in Arizona, Wyoming, and Montana continue to gain traction and increase our market share. One of our priorities for 2023 is increasing our business development in the trust and investment management area. We've made some adjustments in how this business operates, which will free up our business development officers to spend more time meeting with potential new clients. We're also going to be adding a few new business development officers in various markets. We believe these efforts will not only help drive a higher level of growth in assets under management and fee income, but also contribute to balance sheet growth given our consistent success in expanding relationships with wealth management clients to include loans and deposits as well. Our investment we're making in this area will not have a meaningful impact on our overall expense level as we're reallocating resources from other parts of the business. And as Julie mentioned, now that our near-term investment in talent technology to support our long-term growth are largely completed, we expect to keep our expense growth rate well below our revenue growth rate this year, resulting in increased operating leverage. We believe our increasing operating leverage should result with further earnings growth in 2023, with the second half of the year likely being stronger than the first half. It's now been about four and a half years since our initial public offering, and I think we've successfully delivered on the strategy we outlined at that time for enhancing the value of our franchise. While navigating through a multi-year pandemic, we've generated strong organic growth by taking market share in our existing markets and expanding into new markets, and complemented that with disciplined, well-priced, and well-executed acquisitions. The balance sheet growth we've generated has resulted in greater operating leverage and higher level of earnings and improved profitability. With our strong execution since the IPO, we've created significant value for the shareholders with our tangible book value per share increasing by nearly 140%. We built a strong, high-performing culture and a very talented team that delivers exceptional client service and effectively communicates our value proposition to consistently bring in new relationships. With the strong team we've built, the attractive markets that we operate in, and the highly productive business development capabilities we've developed, we believe we're well positioned to deliver another strong year in 2023 and create additional value for our shareholders. With that, we're happy to take your questions.
spk01: Thank you. Again, ladies and gentlemen, if you'd like to ask a question, please press star 1-1 on your touchtone telephone. Again, to ask a question, please press star 1-1. One moment, please. Our first question comes from Brett Robatine of Hobart. Your line is open.
spk02: Hey, good morning.
spk03: I wanted to talk about first the growth in deposits, link order. And I think, Scott, you mentioned some fairly sizable clients adding funds to the the deposit mix. Can you talk maybe about the larger deposits this quarter and then the efforts to continue growing that? Would we expect that to continue in terms of the acceleration of the linked quarter beta?
spk16: Yes, so we talked a little bit about this, I think, in the last two calls. Historically, we've seen that we've been able to operate the bank in a kind of a 90% to 95% loan-to-deposit ratio. And we've always kind of wondered, we know where the next loan's coming from. We always kind of wonder where the next deposit's coming from. And I think what we've seen over the years is that our clients have liquidity and they're willing to bring it here if we want it. We don't need to carry a bunch of excess liquidity on our balance sheet that we're not making money with. So I think that's exactly what we saw in the fourth quarter. We told our relationship bankers, hey, you know, we're not going to operate this thing with 108% loan-to-deposit ratio. where we were in Q3 and we went out and increased our loans or deposits at a rate that was double our loan growth rate in Q4. So I do think that we really had nice success with that and as we said in the prepared comments, you know, a lot of that came from existing clients, which is exactly what we've seen over the prior, you know, 18 years here and in my prior private banking operations. So, yes, I do think that that will continue into 2023. The comment you made towards the end of your question, though, I just want to draw some attention to that. You know, if you look at kind of quarter by quarter last year, at our deposit beta, you know, we did a pretty nice job, I think, as an organization in holding our deposit beta down in the first half of the year. And as we talked about last quarter, you know, it's really been an unprecedented environment. I mean, in the 30-something years I've been doing this, we've certainly never seen deposit, or excuse me, Fed Fund rates go up as fast, as quickly you know, by as much as quickly as what we saw, you know, through the middle and latter parts of this year. And I feel like, you know, the relationship-based focus that we have here has really served us well. You know, of course, that came back in Q4 in an interesting way where, you know, we really saw a big spike in our cost of funds to the point where our net interest margin really came down, which we said we thought was going to happen in the last call. And sure enough, it did. You know, I think we guided in our comments that we're going to see, you know, continued pressure in Q1 of 2023. But, you know, you look at where our NIM is. for example, in Q4 at 332, and you compare that to historic NIMS at First Western, or compared to other high-fee banks like us, and 332 is a very strong number. So just looking forward, I think the interesting question, and I don't really know that we want to give guidance on this, but I guess my feeling is we should planned for the worst, but we can hope for something better than the worst. And, you know, I do think that, you know, if you look further into the year, we had a lot of pressure in Q4 to catch up on some of the deposit beta that we had kept low through the year. I don't personally think that's going to continue. I don't think we're going to see, you know, a half a dozen or whatever it's been 75 basis point increases from the Fed this year. And so I don't think that these headline numbers are going to be in the media all the time and our clients are going to be saying, hey, how come, you know, I'm getting zero when Fed funds are five, which, you know, we're hearing throughout the industry. I mean, it's just going to be a different environment this year, I think. And if that's true, and I don't know if it is or if we're in a recession or whatever, you know, we may get dealt. I mean, we know from page, is it six that has our loan stuff on it? I think it's page six of our slide deck. Page five, thank you. We have something like $100 or $200 million in loans that pay off every quarter. And we produced something like $200 or $300 million a quarter at least last year. And so you look at the impact of your loans rolling off at 3% or 4% and either renewing or new loans coming on at 7% or 8%. And it just feels to me like we're pretty well positioned from an already competitively high net initial margin compared to high fee bank peers, probably banking peers. I think we're well positioned to see some growth later in the year. But we're going to see that come down in Q1. And I don't know what's going to happen the rest of the year. But just the dynamics. that seem apparent today leave room for upside later in the year. So that was a little bit of a long-winded answer to your question, Brett, but I hope it was helpful.
spk03: Yeah, Scott, that was very helpful, and I would agree. You obviously did a good job last year managing the deposit cost. It's just gotten so competitive, and essentially your competition is the treasury curve, so it sort of is what it is. My follow-up question, I wanted to ask about the loan portfolio growth from here. 4Q was construction and residential. Obviously, your slow growth from 21%, link quarter annualized in the fourth quarter, but wanted to get a sense of what the pipeline looked like, what you think you might grow this year, and then any magnitude that you're expecting from a pipeline perspective.
spk16: Yeah, we've historically said that we think we can grow loans in the mid-teens. And I think, again, if you stand back a little further than just the quarterly look, we've kind of grown loans pretty consistently, organically at least, in the mid-teens. So with tighter standards, with higher spreads, could we grow loans in the mid-teens in 2023? Well, I think so. We have the infrastructure in place. We've got some strong machine, I call it, in our existing offices, and then we've added some more high-quality lenders in some of these new markets that we're in, Arizona, western Wyoming, and Montana. So, yeah, I mean, I think we're well-positioned to see growth in deposits and loans in those markets and in relationships. But, you know, it's just hard to tell right now. I think, you know, we're seeing clients that were thinking about doing something that makes sense at 4% and maybe doesn't make sense at 8%. And, you know, these are sophisticated people and they've been through cycles and they don't need to do something. And, you know, maybe they will, maybe they won't. I would say right now our pipelines are down, but they're sure not empty. There's plenty of activity going on. And people are doing things, and we're closing on new loans.
spk00: And then I would just add, Brett, for the kind of the mixed comment that you added into that question of we did see quite a bit of mortgage offering, mortgage production last year. And for us, it continues to be very strategically important to us. Like we've always said, it's a good new acquisition of clients and retaining existing clients tool for us to use. But we continue to be cognizant of generating appropriate risk-adjusted returns on our capital. So you'll probably see us dial back our residential mortgage production from what we did at least in the prior year for the first couple quarters this year as we look at our competitors and what they're pricing those loans at. They're not quite as attractive as what we would want to put on our portfolio. So I don't think you'll see that same level of growth for us, at least in the first part of this year, unless things change.
spk04: Okay, that's very helpful. Thanks for all the color.
spk01: Thank you.
spk04: Good. Thank you, Brad.
spk01: One moment, please, for our next question. And our next question comes from the line of Brady Gailey of KBW. Your line is open.
spk17: Hey, thanks. Good morning, guys. Good morning, Brady. So the $20 million of sub-debt that was raised intra-quarter, Is that solely just for growth purposes, or was there any other thing you were thinking about when you raised that sub debt? I'm not sure if there's anything else that's expiring or maturing, but what's any color behind why the sub debt raise?
spk16: Yeah, well, we thought that going into a potential recession, more capital is better than less capital, and we didn't want to do a common raise. We don't need to. because we've been able to generate good earnings here over these last few years to support the growth we've had. But we saw a window for an attractive non-rated raise. You know, the one that was done before us, I think, closed at 8% of a regional bank. The one that was done after was 8.5%. We got ours done at 7% five-year fixed and gives us $20 million of revenue surplus tier two capital at the holding company that can be pushed down to the bank for additional, you know, common. It can be additional cash for the holding company. I mean, you know, we said general corporate purposes, which is exactly what we plan to use it for. So just seems opportunistic. And of course, it's non-dilutive. The impact on future EPS is minimal. And I think, you know, we don't know what's in the future. And, you know, when a window like that is there, I think it makes sense to take advantage of it.
spk17: All right. And the new commercial loan that entered into NPAs, it sounds like it's not a huge risk given the dynamics y'all talked about. Just a little more color, what type of loan is that and when do you expect to have that loan resolved and back out of the NPA bucket? I think three weeks from Thursday.
spk16: You know, these things are a process. You know, a couple points on that. It's a producer of a consumer product that probably got a little over their skis. That's a metaphor. They I think are an indication of the strength of our credit process and of our borrowers here, as Julie said in her prepared comments, that we always underwrite to three sources of repayment. We've got the business assets, we've got the buildings, we've got some other commercial buildings, and we have personal guarantee from a very strong borrower client so we don't anticipate a loss there. I do expect that it's going to take a little time to work out just because it always seems to, but it didn't feel to us or doesn't seem to us to be indicative of anything, like it's not some systemic problem that we have three other loans just like it that are all going to have problems or something like that. I mean, it's just, I think, a one-off thing that we felt that are putting on non-accrual in Q4. Okay.
spk17: And then the commentary about the margin coming down in Q1, any idea of the magnitude of how much it could come down or any idea where the margin exited the quarter in December?
spk16: Julie, you want to talk about?
spk00: Yeah, in December, our NIM just for the month of was 306. So that's a little bit helpful to you to see where that might lead us. And, you know, Scott touched on a lot of the NIM comments and the net interest income and market for deposits. So I think that'll help you out.
spk17: Okay. And last one for me. So 20 to 21 million of expenses in Q1. Should we expect a little bit of growth beyond that for the rest of the year? Or do you think they'll be able to hold that flat for the rest of the year? How should we think about kind of full year expenses?
spk16: Well, we think this is a good time to be managing expenses, and so we talked about, well, we talked before that our path to success is not cost-cutting, but we talked in the prepared comments about the fact that, you know, if we can keep our costs in line this year with last year, and the only real cost increase that we'll see would be, really, the salary increases, We do an annual merit adjustment for people. I think that that would be a successful expense control year for us. I do think we're at a place in the cycle where we want to be careful about growth. We want to be careful about expense growth in particular. And I think what we're trying to show you in the numbers here is if we see continued revenue growth like we have seen over the past few quarters, especially in our core earnings. And then net interest income by itself is up, is it up 49% year over year for the fourth quarter, Julie, some number like that? And then, you know, we have these kind of hideous headwinds from on the fee income side. And I keep thinking at some point, it's not going to go lower. So, you know, if it goes higher, And then you've got good expense control. I mean, that's all a formula for nice earnings acceleration. So that's where we're thinking on expense discipline. Okay, great. Thanks, guys.
spk01: Thank you. One moment, please. Our next question comes from the line of Matthew Clark of Piper Stanley. Your line is open.
spk07: Hey, good morning. Good morning, Matthew. Just the first one for me, around the margin, if you had the spot rate on deposits, deposit costs, or interest-bearing deposit costs at the end of the year.
spk00: Spot rate for the CASA deposits at December was $199, so just about 2%.
spk06: That's total. Okay.
spk00: Mm-hmm.
spk07: Okay. And then the risk management and insurance fees, you know, the seasonal step up this quarter a little bit higher than a year ago, fourth quarter. Anything, I guess, about this rate environment or just general macro environment that, you know, might have lifted that a little more than usual, or is that kind of a reasonable level of activity for next year's fourth quarter?
spk16: Yeah. We can't seem to predict that. It seems to produce a pretty consistent amount year in, year out. Through the first three quarters of this year, it was below our expectation. And we thought we were going to have a strong fourth quarter, and we did. So I think higher fourth quarters than the prior three quarters is a good expectation, whether we're going to hit the number. Next year, like we did this year, I don't know. I mean, we've got a bigger platform. We're wrapping up a bigger client base, more folks out there helping our clients with wealth planning that really drives the risk in the life insurance business. So, you know, hopefully that trends up over time, and it will be cyclical where you're going to see more in the fourth quarter.
spk07: Okay. Got it. Great. And then just... kind of big picture. I think a number of banks have kind of suffered from generating probably stronger loan growth than they should have and not funding it with deposits or low-cost deposits. You guys obviously had excess deposit growth this quarter, but it was, you know, it came at a price. I guess, what are your thoughts around kind of maybe tapping the brakes a little bit on loan growth? unless you can fund it with truly low-cost deposits and not price-sensitive type balances?
spk16: Well, honestly, we're not really thinking in terms of how to best manage NIM. We're thinking about how to grow the business with the clients that we want, given the economic and competitive environment that we're handed. And we've talked about tightening credit standards. We've talked about raising margins. We talked about the relationship focus. If you look at the actual trend line for loan production, it's gone from a little under 350, a little under 300, a little under 200 over the last three quarters. I think that that is all indicative of how we're approaching loans. I think sometimes with banks that turn the spigot off all the way, and certainly in our market we're seeing some of that, then you've got a problem turning it back on when the economy turns around. So I think the extent we can keep our bankers focused on finding the relationships that we want, growing the relationships with existing clients, making sure that our clients and referral sources and our prospects see us as being in business and willing to do things that make sense, albeit under more stringent terms and more expensive. I think that's where we want to be. And if that slows our growth rate down the balance sheet in the interim here, I think that's fine. As I said, we're going to see a lot of lift. I expect, I don't want to give guidance to this, but I expect that we're going to see a nice lift in our NIM going through this year if the Fed does in fact slow down rate increases so we don't see all this deposit pressure, and as we reprice our loan portfolio. I think the math on that stuff works pretty nicely for us. And, you know, like Julie was talking about, you know, we're not trying to make a big interest rate bet here. We're trying to run a balanced portfolio, and I think that that's going to play out nicely over the course of 2023, as it has historically here.
spk05: Great. Thank you.
spk02: Thank you. Thank you.
spk01: Thank you. One moment, please. Our next question comes from the line of Bill Delzum of Tiedem. Your line is open.
spk14: Thank you. It's Ty. It's in capital management. I have a group of questions. First of all, would you please expand further on the comment that you just made? relative to some competitors are shutting off their lending machine and what opportunities that may create for you all with market share?
spk16: Well, I don't know really what else to add. I mean, I think we're seeing some banks are approaching this part of the cycle by saying, you know, we're not going to lend. And I think that that does create opportunities for us with prospects that aren't here yet or clients that have things that are away that we can bring here I would tell you we are in very desirable markets and so we continue to see new entrants to the markets and Julie talked in her comments a little bit about people doing I won't say stupid pricing but pricing certainly we wouldn't do on resis for example on residential mortgages you know we're just seeing things that are head scratchers to us. But the beauty of our business model is we don't have to do those things. We can focus on a different area when one area looks like a competitive position we don't want to be in. And of course, with mortgages, we're able to use the secondary market capabilities that we have to still support clients without having to put low-priced stuff on our books that we don't want.
spk14: Maybe, Scott, the one thing that would be helpful is how prevalent are you finding the pulling back dramatically on lending by competitors?
spk16: I don't know how to answer that either, Bill. We're in some very different markets from each other. What we see in Denver is different than what we see in The other front-range markets, obviously the resort markets are different. Western Wyoming continues to be a really interesting dynamic market. I would say we've had more success early in Montana than we expected. And then if you look at Arizona, we've been able to take advantage there of attracting new lenders in. And a lot of the reason that the really high-quality people that you want to attract at First Western are The reason they want to join us is they see us as a growth-oriented company and not somebody that's, you know, turning it on, turning it off, turning it on. So, I mean, it does spell opportunity for us. I just think that, and I want to be clear, I've said it two or three times already, that, you know, this is not the time to be, you know, peddled with a medal on growing loans. I mean, this is a great time to be bringing in great relationships, fine, but we have been tightening credit standards. We've been tightening our underwriting contracts. standards and the terms. We've been expanding our NIM, expanding our credit spreads that we're charging clients. And we've been disciplined about that. And I think that's going to pay off for us in 2023 and beyond.
spk14: Okay. Thank you. And two additional questions, if I may. Acquisition pipeline, would you please provide an update in terms of what you're seeing given all of the macro factors that you're talking about and whether that's causing some to decide now would be a good time to sell. And then secondarily, the trust and investment management and systems enhancements. I know there was a one-time cost in the quarter, but more importantly, trying to understand what is it that you would anticipate those enhancements to do for that business, please?
spk16: Yeah, great. Two small questions. Let me start with the acquisition pipeline. So I think, you know, what you hear out there is what we see, which is that it's a difficult time for acquisitions. You know, I think with challenges with AOCI and with credit uncertainty, whatever, it's a hard time to get things done. We continue to spend time and effort on our corporate development program. You know, I explained many times before that we think that that's a core competency here and that we have a process for doing that and we continue our process. People that we're interested in know we're interested in them. We call on them and visit with them and work on opportunities and we continue to do that. I would say there have been two or three deals in the latter half of last year that were of interest to us and were just priced in a range that didn't make any sense to us. And they did ultimately find a buyer at a price much higher than we would have paid. And so, you know, I wish them well. I think that's interesting. But, you know, we don't need to do those things. We don't need to scratch on those things. And I hope as investors you guys see that we're disciplined about that stuff. You know, if you look at our last three or four, or all 13 for that matter, acquisitions here, you know, they've had very happy stories because we're disciplined about how we look at it, how we price them, and we don't stretch on these things and do things that can come back and bite the shareholders. So, you know, are we going to do something this year? I don't know. We don't have anything that we'll be announcing tomorrow, but we continue to do our corporate development efforts, and if the right thing at the right price makes sense, we would love to include that as part of our growth story going forward. The second question I think about, PTIM systems, I don't know how far, Julie, we should go with this whole thing, but let me try a specific answer and a general answer that maybe if you want to add some more color to it, you would. But, you know, as an industry, private banking has a really difficult problem, which is we need our trust in our investment, in our mortgage, in our banking systems to talk to each other, and they just don't. There's no vendor out there that has provided that in the 40 years that I've been doing this, even though some of them promise that they don't work. And so what we've done historically here at First Western is we've taken those four core systems and pulled the data out and then used the data to do the things that we need, like you know, client profitability and relationship pricing and stuff like that, you know, cross-selling, knowing the different products that individual relationship has with us, those sorts of things. Now, if we can get comfortable with security, we think that there's an opportunity to migrate these core systems into cloud-based systems that are much more accessible for fintech solutions that are not just stuck in a core system ecosystem, right? That you can use the core as just the core and then you can build systems around them that provide a lot better efficiency and effectiveness for internal use for our associates and for the client experience. And so what we've done this year well, two years ago, we converted our loan processing system to a up-to-date system that, you know, next generation that we think can support that sort of loan process efficiency. Two years ago, three years ago, we did that with our platform trading system that we use for investment management, which has all kinds of advantages internally and externally. This year, what we did in the fourth quarter is we took our trust core and our investment core and replace the incumbents with a new vendor that has a cloud-based solution that's integrated. It's just one solution for both of those cores. And then for this year, we're hoping to do that with a banking core so that we've got ourselves in a place where all these things even though they may not be able to talk to each other, but they'll talk to our overlays much more effectively and efficiently, and we can get away from being stuck in a single vendor's ecosystem and have a lot more flexibility for our system going forward. And the nice thing is, with this trust and investment vendor, you know, we're ending up, Julie, are we finally breaking even? I mean, we're hoping for some cost saves. I think
spk08: We're sure we've seen break even.
spk16: We'll see how, you know, once the dust settles and everything, if there's some cost saves to be had there. But my point is, they're not costing us more. There are some one-time conversion costs to it and obviously some pain to the conversion, as there always is, but that would be kind of my short term and long-term answer to that, Julie, what I miss in there?
spk00: No, I think you got it. I was going to touch on the efficiency for our processes and simplification for our associates, client experience improvement, and then more accessible data. So those are kind of the key points for what we are hoping to accomplish out of this one.
spk16: Yeah. Did that answer your question, Bill?
spk14: It does. That really sounds fantastic. Good luck pulling all that together, and thank you both. Yep.
spk18: Thanks for the questions.
spk01: Thank you. One moment, please. And it looks like we do have a follow-up question from Brett Rabatine. Your line is open.
spk03: Hi, I just wanted to follow back up on fee income and make sure I understood the expectations for the year, kind of seasonality maybe of the risk management and insurance fees. And then just thinking about mortgage banking You know, some folks have made some hard decisions on that business line, but my guess is you're going to continue to try and work that business. I just wanted to hear any thoughts around the mortgage expectations given up, obviously low levels at current times. Thanks.
spk16: Yeah, so obviously we've had some pretty tough headwinds in our fee businesses as an industry, and here at First Western that's true as well. two big headwinds for our fee business has been on a mortgage side, and obviously that was a big disappointment this year. But we know it's cyclical, we know it's strategic for us, like you said, so we're not going to go out of it. What we can do is manage expenses, which we've done. We've cut expenses now, Julie, two times or three times?
spk00: Three times.
spk16: Over the past 18 months?
spk00: We'll continue to assess that as... you know, production. We're typically slower this season, so we're definitely going to be assessing it as the months come in.
spk16: And then we've added some MLOs in Arizona in particular. So I think, you know, our production, you know, our market share should improve. The MLOs are 100% commission, so there's no expense associated with that if they're not producing, and they are. So So I think that's kind of the best you can do with that, given what the market gives you. If the consensus assumption, I mean, you look at the MBA numbers for this year, and they seem pretty aggressive to me, but if those come true, I mean, we should see a better year at least, or at least flat to last year in mortgages. And if we have good expense control or when we have good expense control there, I mean, that – It's not going to get worse. It's either going to be flat or get better, I think. And then on the fee incomes on the asset management side, the trust investment management side, we think there's a ton of opportunity there. It's a really interesting time right now because when everybody is doing well and you're not paying much in fees compared to the 20% or 30% gains you're making or whatever, You know, it's hard to get people to move. It's hard to get people to admit that they need help because everything they bought into their Schwab account or whatever went up. But in markets like this, they're not feeling so confident. When their spouse says to them, hey, how come you lost all this money? You know, it's nice to have a professional advisor that's helping them. And so we think it's an interesting time. We're actually very focused as a company right now on how we can strengthen our planning trust and investment management, which are really kind of three different businesses. They're all very much integrated and overlapping, but they're three different things. And we're doing some pretty significant things internally to upgrade that because we think it's a really good time right now to be out telling our story, which is a very powerful, differentiated, unique story that fits nicely into the banking story we talk about all the time of delivering this team-based integrated private bank and trust service locally. So I think, I mean, I think that there's, it's hard to imagine they're going to go down much from where we are, and I think there's opportunity on the upside. Whether we realize that in 2023 or not, I don't know, but, you know, you go back to where we've come from, and we've come a long way in those businesses, and revenues have shown nice growth, and I think that this is an interesting time for us to be able to capitalize on the market environment.
spk19: Okay, that's a great call, Scott. I appreciate it.
spk01: Thank you. I'm showing no further questions at this time. Let's turn the call back over to management for any closing remarks.
spk16: Yeah, I did have a couple of closing points I wanted to make if I could. You know, I think I mentioned in our prepared comments that if you have, if you step back a little, look at the broader context, you know, five years ago, pre-IPO, First Western was a $970 million bank with about $50 million in tangible book value. Today, we're approaching $3 billion. We have over $200 million in tangible book value. and we've done that without dilutive capital raises. In the meantime, we've built out an infrastructure that can produce and support billions more in organic expansion, acquisition growth, and we're producing strong operating leverage and growth into the future, just as we have proven in these interim years here since the IPO. I also want to recognize the hard work of our 365 First Westerners. You know, I feel like in a pretty challenging year, we've managed to produce another great year of solid organic growth in revenues and core earnings in spite of some significant headwinds. You know, we're well positioned for the challenges that 2023 may bring, and especially if some of those 2022 headwinds turn to tailwinds and these challenges that we've seen become opportunities for us I think we have a really terrific future here. So thank you so much for dialing in and for your interest and support for First Western. We really appreciate it.
spk01: Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect. Have a great day.
spk09: The conference will begin shortly. To raise and lower your hand during Q&A, you can dial star 1 1. Hello. Thank you. Thank you
spk10: Thank you. Bye. Thank you. you
spk01: Thank you for standing by and welcome to the First Western Financial Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentations, there will be a question and answer session. To ask a question at that time, please put star 11 on your touchtone telephone. As a reminder, today's call is being recorded. I will now turn the conference to your host, Mr. Tony Rossi of Financial Profiles. Sir, you may begin.
spk12: Thank you, Valerie. Good morning, everyone, and thank you for joining us today for First Western Financial's fourth quarter 2022 earnings call. Joining us from First Western's management team are Scott Wiley, Chairman and Chief Executive Officer, and Julie Korkamp, Chief Financial and Chief Operating Officer. We will use the 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 Investor Relations website to download a copy of the presentations. 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?
spk16: Thanks, Tony. Good morning, everybody. We had a number of objectives that we wanted to accomplish in the fourth quarter. We wanted to increase our focus on deposit gathering in order to improve our liquidity and reduce our loan to deposit ratio. We wanted to continue to generate solid loan growth while tightening underwriting and pricing criteria given the potential for weakening economic conditions. And we wanted to continue to effectively manage our expense levels. I'm pleased to report that we were able to accomplish all these objectives and continue to generate strong financial performance, although earnings were lower than the prior quarter due to the increase in interest expense that we saw as a result of our strong growth in deposits in the competitive environment, putting pressure on deposit costs. Even with the tighter underwriting and pricing criteria, we still generated 21% annualized loan growth in the quarter, with increases in each of our major portfolios. The strong loan growth that we continue to generate reflects our success in steadily growing our client base in Colorado, as well as the increasing contributions we're getting from the teams that we've built to increase our presence in Arizona, Wyoming, and the Montana markets. With the strong business development capabilities that we've built, we're able to generate a significant volume of high-quality lending opportunities, enabling us to continue generating strong loan growth while maintaining our prudent approach to risk management. Importantly, the growth rate we saw in total deposits was more than double our loan growth. We were particularly effective in expanding deposit relationships with a few larger clients, which accounted for a significant portion of the deposit inflows we saw in the fourth quarter. And as with our loan production, our increased presence in some of our newer markets was also a contributor to the strong deposit growth in the fourth quarter. As we mentioned on our last call, Our near-term objective was to get our loan deposit ratio down near 100%, and we were able to achieve that with our strong growth in deposits during the fourth quarter. Along with our improving liquidity by reducing our loan deposit ratio, during the fourth quarter we also increased our total capital ratio by 53 bps, basis points, to 12.37%. Moving to slide four, we generated net income of $5.5 million or 56 cents per diluted share in the fourth quarter, or 58 cents a share with acquisition-related expenses excluded. Our strong profitability, along with effective management of the investment portfolio, has enabled us to continue to drive increases in both book value and tangible book value per share. In the fourth quarter, book value per share increased 2.5% from the prior quarter, while tangible book value increased 3%. During 2022, a year when most banks saw significant declines, both metrics increased by more than 9%, reflecting the strong value we're creating for shareholders. Turning to slide five, we'll look at the trends in the loan portfolio. We had another strong quarter of loan growth, originating $182 million in loans. While this was down from the prior quarter, the average rate on new loan production increased by more than 100 basis points, so we're still generating strong production without compromising on pricing. Payoffs are also continuing to moderate, so more of our loan production is translating into net loan growth, and our total loans held for investment increased $121 million from the end of the prior quarter. The growth was primarily driven by increases in our residential mortgage construction C&I portfolios, which offset a decline in our CRE portfolio which is an area we're limiting new production as part of our overall approach to risk management ahead of a potential recession. As with the prior quarter, most of what we're adding to one to four family residential portfolio are jumbo arms that provide attractive risk-adjusted yields. Moving to slide six, we'll take a closer look at our deposit trends. The success we had in deposit gathering resulted in 44% annualized growth in total deposits during the fourth quarter. We had a decline in non-interest-bearing deposits, which was largely attributable to some clients deciding to move a portion of their excess liquidity into interest-bearing accounts to capitalize on the higher rates now being offered. We also made the decision to add some time deposits in order to lock in longer-term fixed-rate funding that we believe will enable us to more effectively manage our deposit costs going forward. Turning to slide seven, trust and investment management, our total assets under management increased by 189 million from the end of the prior quarter, which was primarily due to an increase in market values during the fourth quarter of 2022. And I'll turn the call over to Julie for further discussion of our financial results. Julie?
spk00: Thank you, Scott. Turning to slide eight, we'll look at our gross revenue. Our total gross revenue is relatively consistent with the prior quarter as an increase in non-interest income offset most of the decrease we saw in net interest income. On a year-over-year basis, our gross revenue increased 23.8% from the fourth quarter of 2021, largely due to higher net interest income resulting from both organic and acquisitive growth on our balance sheet. Turning to slide nine, we'll look at the trends in net interest income and margin. Our net interest income decreased 4.6% from the prior quarter, due to the increase in interest expense resulting from our strong growth in total deposits and an increase in our average cost of deposits. With our strong growth in deposits, we reduced our level of FHLB advances and we continue to make adjustments to our level of wholesale borrowings going forward based on the trends we are seeing in loan production and deposit flows. Excluding the impact of PPP fees and accretion on acquired loans, our net interest margin decreased 47 basis points to 3.31. The decline in our net interest margin was due to an increase in our average cost of funds resulting from the higher rate environment and very competitive environment for deposit gathering. Given the competitive environment for deposit pricing, we believe it is likely that we will continue to see some pressure on our net interest margin in the first quarter. As we exited the year due to the changes in the composition of the balance sheet, we have moved to a more neutral position in terms of interest rate sensitivity. And we have indicated in the past we do not make bets in future direction of interest rates. Changes in our interest rate sensitivity are a function of the trends we see in loan production and deposit flows at any given point in time, with our primary focus being on generating growth in net interest income. Over the past few years, as the growth in our commercial banking platform resulted in more commercial deposit relationships and an increase in non-interest bearing deposits, we became more asset sensitive and saw significant expansion in our net interest margin. Now we are seeing a shift back to a more neutral position, which will serve us well in protecting our net interest margin when the Fed eventually starts to lower interest rates. Turning to slide 10, our non-interest income increased 3.4% from the prior quarter, primarily due to higher bank fees and risk management and insurance fees. The higher bank fees was partially attributed to an increase in prepayment penalty fees, while the increase in risk management and insurance fees primarily reflects the seasonal bump that we typically see in the fourth quarter. The growth in these areas offset minor declines in trust and investment management fees, and net gain on mortgage loans, both of which are starting to stabilize relative to the larger declines we experienced earlier in 2022. The volume of locks on mortgage loans originated for sale declined 32% from the prior quarter. Approximately 95% of the originations were purchased loans, and we are seeing very little demand for refinancing given the rise in mortgage rates. Turning to slide 11 and our expenses, Our non-interest expense increased 3.3% from the prior quarter, primarily due to an increase in data processing costs resulting from non-recurring implementation charges relating to enhancements we have made to our trust and investment management platform. During 2022, we made significant investments in both new banking talent and technology that will contribute to our future growth in revenue and improvement in efficiencies. Following these investments, we expect the growth rate of non-interest expense to moderate in 2023, with most of the growth coming from annual salary increases. And for the first quarter of 2023, we expect non-interest expense to be in the range of 20 to 21 million. Turning now to slide 12, we'll look at our asset quality. On a broad basis, the loan portfolio continues to perform very well, with another quarter of minimal losses. although we did see an increase in non-performing loans in the fourth quarter. The increase in non-performing loans is primarily attributed to one commercial loan. As we have indicated in the past, our underwriting criteria requires multiple sources of repayment. In this particular case, we have the assets of the business, a commercial property, and a personal guarantee from a high net worth client. As a result, we believe the loan is well secured and there was no specific reserve required. We record a provision for loan losses of $1.2 million, which was driven by the growth and changes in the mix of the loan portfolio. This puts our ALLL to adjusted total loans at 78 basis points, which was relatively consistent with the end of the per quarter and reflective of our strong credit quality and the low level of losses that we have experienced in the portfolio. On January 1st, we adopted the CECL standard for allowance for credit losses. Our preliminary estimate is that our ACL to total loans ratio will be in the range of 75 to 90 basis points and a 30 to 45 basis point coverage on off-balance sheet commitments. Now I will turn the call back to Scott.
spk16: Thanks, Julie. Turning to slide 13, I'll wrap up with some comments about our outlook and priorities for 2023. While it appears that the macroeconomic environment will be challenging this year, we believe we're well positioned to effectively manage through an economic downturn while continuing to generate profitable growth, particularly when economic conditions improve. With our conservatively underwritten, well-diversified loan portfolio and the strength of clients that we serve, we expect to maintain strong asset quality as we have during prior periods of economic stress. In each of the past three years, we've further tightened our already conservative underwriting criteria. As a result, the credits we've added to the portfolio over that time have a substantial cushion in their debt coverage ratios and loan-to-values to absorb any deterioration that occurs in cash flows or collateral values. We also have little or no exposure to the areas that are most likely to be impacted by a recession, such as office CRE, retail CRE, SBA, or subprime consumer. We feel very comfortable with the small amount of office CRE that we have in the portfolio. These properties aren't in major metropolitan areas where the work from home trend has been most pronounced. They largely consist of smaller properties in high-end suburban areas with tenants in more recession-resistant industries like medical practices. In terms of new business development, we're going to continue to place an increased focus on core deposit gathering to fund our loan production. Our relationship bankers are focused on developing full relationships with both loans and deposits from clients, and we expect this to result in better alignment between loan and deposit growth going forward. but we continue to be conservative and highly selective in our new loan production until economic conditions improve. We expect to be able to continue generating solid loan growth as new teams that we've added in Arizona, Wyoming, and Montana continue to gain traction and increase our market share. One of our priorities for 2023 is increasing our business development in the trust and investment management area. We've made some adjustments in how this business operates, which will free up our business development officers to spend more time meeting with potential new clients. We're also going to be adding a few new business development officers in various markets. We believe these efforts will not only help drive a higher level of growth in assets under management and fee income, but also contribute to balance sheet growth given our consistent success in expanding relationships with wealth management clients to include loans and deposits as well. Our investment in this area will not have a meaningful impact on our overall expense level as we're reallocating resources from other parts of the business. And as Julie mentioned, now that our near-term investment in talent technology to support our long-term growth are largely completed, we expect to keep our expense growth rate well below our revenue growth rate this year, resulting in increased operating leverage. We believe our increasing operating leverage should result in further earnings growth in 2023, with the second half of the year likely being stronger than the first half. It's now been about four and a half years since our initial public offering, and I think we've successfully delivered on the strategy we outlined at that time for enhancing the value of our franchise. While navigating through a multi-year pandemic, we've generated strong organic growth by taking market share in our existing markets and expanding into new markets, We complemented that with discipline, well-priced, and well-executed acquisitions. The balance sheet growth we generated has resulted in greater operating leverage and higher level of earnings and improved profitability. With our strong execution since the IPO, we've created significant value for the shareholders with our tangible book value per share increasing by nearly 140%. We built a strong, high-performing culture and a very talented team that delivers exceptional client service and effectively communicates our value proposition to consistently bring in new relationships. With the strong team we've built, the attractive markets that we operate in, and the highly productive business development capabilities we've developed, we believe we're well positioned to deliver another strong year in 2023 and create additional value for our shareholders. With that, we're happy to take your questions.
spk01: Thank you. Again, ladies and gentlemen, if you'd like to ask a question, please press star 1-1 on your touchtone telephone. Again, to ask a question, please press star 1-1. One moment, please. Our first question comes from Brett Robatine of Hovid. Your line is open.
spk02: Hey, good morning.
spk03: I wanted to talk about first the growth in deposits, link order. And I think, Scott, you mentioned some fairly sizable clients adding funds to the the deposit mix. Can you talk maybe about the larger deposits this quarter and then the efforts to continue growing that? Would we expect that to continue in terms of the acceleration of the linked quarter beta?
spk16: Yes. We talked a little bit about this, I think, in the last two calls. Historically, we've seen that we've been able to operate the bank in a 90% to 95% loan-to-deposit ratio. And we've always kind of wondered, we know where the next loan's coming from. We always kind of wonder where the next deposit's coming from. And I think what we've seen over the years is that our clients have liquidity and they're willing to bring it here if we want it. We don't need to carry a bunch of excess liquidity on our balance sheet that we're not making money with. So I think that's exactly what we saw in the fourth quarter. We told our relationship bankers, hey, you know, we're not going to operate this thing with 108% loan-to-deposit ratio. where we were in Q3 and we went out and increased our loans or deposits at a rate that was double our loan growth rate in Q4. So I do think that we really had nice success with that and as we said in the prepared comments, you know, a lot of that came from existing clients, which is exactly what we've seen over the prior, you know, 18 years here, and in my prior private banking operations. So, yes, I do think that that will continue into 2023. The comment you made towards the end of your question, though, I just want to draw some attention to that. You know, if you look at kind of quarter by quarter last year, at our deposit beta, you know, we did a pretty nice job, I think, as an organization in holding our deposit beta down in the first half of the year. And as we talked about last quarter, you know, it's really been an unprecedented environment. I mean, in the 30-something years I've been doing this, we've certainly never seen deposit, or excuse me, Fed Fund rates go up as fast, as quickly you know, by as much as quickly as what we saw, you know, through the middle and latter parts of this year. And I feel like, you know, the relationship-based focus that we have here has really served us well. You know, of course, that came back in Q4 in an interesting way where, you know, we really saw a big spike in our cost of funds to the point where our net interest margin really came down, which we said we thought was going to happen in the last call. And sure enough, it did. You know, I think we guided in our comments that we're going to see, you know, continued pressure in Q1 of 2023. But, you know, you look at where our NIM is, for example, in Q4 at 332, and you compare that to historic MIMS at First Western, or compared to other high-fee banks like us, and 332 is a very strong number. So just looking forward, I think the interesting question, and I don't really know that we want to give guidance on this, but I guess my feeling is we should planned for the worst, but we can hope for something better than the worst. And, you know, I do think that, you know, if you look further into the year, we had a lot of pressure in Q4 to catch up on some of the deposit beta that we had kept low through the year. I don't personally think that's going to continue. I don't think we're going to see, you know, a half a dozen or whether it's been 75 basis point increases from the Fed this year. And so I don't think that these headline numbers are going to be in the media all the time and our clients are going to be saying, hey, how come, you know, I'm getting zero when Fed funds are five, which, you know, we're hearing throughout the industry. I mean, it's just going to be a different environment this year, I think. And if that's true, and I don't know if it is or if we're in a recession or whatever, you know, we may get dealt. I mean, we know from page, is it six that has our loan stuff on it? I think it's page six of our slide deck. Page five, thank you. We have something like $100 or $200 million in loans that pay off every quarter. And we produced something like $200 or $300 million a quarter at least last year. And so you just look at the impact of your loans rolling off at 3% or 4% and either renewing or new loans coming on at 7% or 8%. And it just feels to me like we're pretty well positioned from an already competitively high net interest margin compared to high fee bank peers, probably banking peers. I think we're well positioned to see some growth later in the year. But we're going to see that come down in Q1. And I don't know what's going to happen the rest of the year. But just the dynamics. that seem apparent today leave room for upside later in the year. So that was a little bit of a long-winded answer to your question, Brett, but I hope it was helpful.
spk03: Yeah, Scott, that was very helpful, and I would agree. You obviously did a good job last year managing the deposit cost. It's just gotten so competitive, and essentially your competition is the Treasury curve, so it sort of is what it is. My follow-up question, I wanted to ask about the loan portfolio growth from here. 4Q was construction and residential. Obviously, your slow growth from 21%, link quarter annualized in the fourth quarter, but wanted to get a sense of what the pipeline looked like, what you think you might grow this year, and then any magnitude that you're expecting from a pipeline perspective.
spk16: Yeah, you know, we've historically said that we think we can grow loans in the mid-teens. And, you know, I think, again, if you stand back a little further than just the quarterly look, we've kind of grown loans pretty consistently organically, at least in the mid-teens. So, you know, with tighter standards, with higher spreads, could we grow loans in the mid-teens in 2023? Well, I think so. You know, we have the infrastructure in place. We've got some strong, you know, the machine, I call it, in our existing offices. And then we've added some more, you know, high-quality lenders in some of these new markets that we're in, Arizona, western Wyoming, and Montana. So, yeah, I mean, I think we're well-positioned to see growth in deposits and loans in those markets and in relationships. But, you know, it's just hard to tell right now. I think, you know, we're seeing clients that were thinking about doing something that makes sense at 4% and maybe doesn't make sense at 8%. And, you know, these are sophisticated people and they've been through cycles and they don't need to do something. And, you know, maybe they will, maybe they won't. I would say right now our pipelines are down, but they're sure not empty. There's plenty of activity going on. And people are doing things, and we're closing on new loans.
spk00: And then I would just add, Brett, for the kind of the mixed comment that you added into that question of we did see quite a bit of mortgage offering, mortgage production last year. And for us, it continues to be very strategically important to us. Like we've always said, it's a good new acquisition of clients and retaining existing clients tool for us to use. But we continue to be cognizant of generating appropriate risk-adjusted returns on our capital. So you'll probably see us dial back our residential mortgage production from what we did at least in the prior year for the first couple quarters. This year, as we look at our competitors and what they're pricing those loans at, they're not quite as attractive as what we would want to put on our portfolio. So I don't think you'll see that same level of growth for us, at least in the first part of this year, unless things change.
spk04: Okay, that's very helpful. Thanks for all the color.
spk01: Thank you.
spk04: Good. Thank you, Brad.
spk01: One moment, please, for our next question. And our next question comes from the line of Brady Gailey of KBW. Your line is open.
spk17: Hey, thanks. Good morning, guys. Good morning, Brady. So the $20 million of sub-debt that was raised intra-quarter Is that solely just for growth purposes, or was there any other thing you were thinking about when you raised that sub-debt? I'm not sure if there's anything else that's expiring or maturing, but what's any color behind why the sub-debt raise?
spk16: Yeah, well, we thought that going into a potential recession, more capital is better than less capital, and we didn't want to do a common raise. We don't need to. because we've been able to generate good earnings here over these last few years to support the growth we've had. But we saw a window for an attractive non-rated raise. You know, the one that was done before us, I think, closed at 8% of a regional bank. The one that was done after was 8.5%. We got ours done at 7% five-year fixed and gives us $20 million of revenue surplus tier two capital at the holding company that can be pushed down to the bank for additional, you know, common. It can be additional cash for the holding company. I mean, you know, we said general corporate purposes, which is exactly what we plan to use it for. So just seemed opportunistic. And of course, it's non-dilutive. The impact on future EPS is minimal. And I think, you know, we don't know what's in the future. And, you know, when a window like that is there, I think it makes sense to take advantage of it.
spk17: All right. And the new commercial loan that entered into NPAs, it sounds like it's not a huge risk given the dynamics y'all talked about. But just a little more color, what type of loan is that and when do you expect to have that loan resolved and back out of the NPA bucket?
spk16: I think three weeks from Thursday. You know, these things are a process. You know, a couple points on that. It's a producer of a consumer product that probably got a little over their skis. That's a metaphor. They I think are an indication of the strength of our credit process and of our borrowers here, as Julie said in her prepared comments, that we always underwrite to three sources of repayment. We've got the business assets, we've got the buildings, we've got some other commercial buildings, and we have personal guarantee from a very strong borrower client so we don't anticipate a loss there. I do expect that it's going to take a little time to work out just because it always seems to, but it didn't feel to us or doesn't seem to us to be indicative of anything, like it's not some systemic problem that we have three other loans just like it that are all going to have problems or something like that. I mean, it's just, I think, a one-off thing that we felt that are putting on non-accrual in Q4. Okay.
spk17: And then the commentary about the margin coming down in Q1. Any idea of the magnitude of how much it could come down or any idea where the margin exited the quarter in December?
spk16: Julie, you want to talk about that?
spk00: Yeah. In December, our NIM just for the month of was 306. So if that's a little bit helpful to you to see where that might lead us. And, you know, Scott touched on a lot of the NIM comments and the net interest income and market for deposits. So I think that'll help you out.
spk17: Okay. And last one for me. So 20 to 21 million of expenses in Q1. Should we expect a little bit of growth beyond that for the rest of the year? Or do you think they'll be able to hold that flat for the rest of the year? How should we think about kind of full year expenses?
spk16: Well, we think this is a good time to be managing expenses, and so we talked about, well, we talked before that our path to success is not cost-cutting, but we talked in the prepared comments about the fact that, you know, if we can keep our costs in line this year with last year, and the only real cost increase that we'll see would be related to salary increases, because We do an annual merit adjustment for people. I think that that would be a successful expense control year for us. I do think we're at a place in the cycle where we want to be careful about growth. We want to be careful about expense growth in particular. And I think what we're trying to show you in the numbers here is if we see continued revenue growth like we have seen over the past few quarters, especially in our core earnings. And then net interest income by itself is up 49% year over year for the fourth quarter, Julie, some number like that. And then we have these kind of hideous headwinds on the fee income side. And I keep thinking at some point, it's not going to go lower. So if it goes higher, And then you've got good expense control. I mean, that's all a formula for nice earnings acceleration. So that's where we're thinking on expense discipline. Okay, great. Thanks, guys.
spk01: Thank you. One moment, please. Our next question comes from the line of Matthew Clark of Piper Stanley. Your line is open.
spk07: Hey, good morning. Good morning, Matthew. Just the first one for me, around the margin, if you had the spot rate on deposits, deposit costs, or interest-bearing deposit costs at the end of the year.
spk00: Spot rate for the CASA deposits at December was 199, so just about 2%.
spk06: That's total. Okay.
spk00: Mm-hmm.
spk07: Okay. And then the risk management and insurance fees, the seasonal step up this quarter a little bit higher than a year ago, fourth quarter. Anything, I guess, about this rate environment or just general macro environment that might have lifted that a little more than usual? Or is that a reasonable level of activity for next year's fourth quarter?
spk16: We can't seem to predict that. It seems to produce a pretty consistent amount year in, year out. Through the first three quarters of this year, it was below our expectation. And we thought we were going to have a strong fourth quarter, and we did. So I think higher fourth quarters than the prior three quarters is a good expectation, whether we're going to hit the number Next year, like we did this year, I don't know. I mean, we've got a bigger platform. We're wrapping up a bigger client base, more folks out there helping our clients with wealth planning that really drives the risk in the life insurance business. So, you know, hopefully that trends up over time, and it will be cyclical where you're going to see more in the fourth quarter.
spk07: Okay. Got it. Great. And then just... kind of big picture. I think a number of banks have kind of suffered from generating probably stronger loan growth than they should have and not funding it with deposits or low-cost deposits. You guys obviously had excess deposit growth this quarter, but it was, you know, it came at a price. I guess, what are your thoughts around kind of maybe tapping the brakes a little bit on loan growth and unless you can fund it with truly low-cost deposits and not price-sensitive type balances?
spk16: Well, honestly, we're not really thinking in terms of how to best manage NIM. We're thinking about how to grow the business with the clients that we want, given the economic and competitive environment that we're handed. And we've talked about tightening credit standards. We've talked about raising margins. We talked about the relationship focus. If you look at the actual trend line for loan production, it's gone from a little under 350 to a little under 300 to a little under 200 over the last three quarters. I think that that is all indicative of how we're approaching loans. I think sometimes with banks that turn the spigot off all the way, and certainly in our market we're seeing some of that, then you've got a problem turning it back on when the economy turns around. So I think the extent we can keep our bankers focused on finding the relationships that we want, growing the relationships with existing clients, making sure that our clients and referral sources and our prospects see us as being in business and willing to do things that make sense, albeit under more stringent terms and more expensive. I think that's where we want to be. And if that slows our growth rate down a balance sheet in the interim here, I think that's fine. As I said, we're going to see a lot of lift. I expect, I don't want to give guidance to this, but I expect that we're going to see a nice lift in our NIM going through this year if the Fed does in fact slow down rate increases so we don't see all this deposit pressure, and as we reprice our loan portfolio. I think the math on that stuff works pretty nicely for us. And, you know, as Julie was talking about, you know, we're not trying to make a big interest rate bet here. We're trying to run a balanced portfolio, and I think that that's going to play out nicely over the course of 2023, as it has historically here.
spk05: Great. Thank you.
spk02: Thank you. Thank you.
spk01: Thank you. One moment, please. Our next question comes from the line of Bill Delgham of Tiedem. Your line is open.
spk14: Thank you. It's Ty. I attend Capital Management. I have a group of questions. First of all, would you please expand further on the comment that you just made? relative to some competitors are shutting off their lending machine and what opportunity that may create for you all with market share?
spk16: Well, I don't know really what else to add. I mean, I think we're seeing some banks are approaching this part of the cycle by saying, you know, we're not going to lend. And I think that that does create opportunities for us with prospects that aren't here yet or clients that have things that are away that we can bring here. I would tell you we are in very desirable markets, and so we continue to see new entrants to the markets. And Julie talked in her comments a little bit about people doing, I won't say stupid pricing, but pricing certainly we wouldn't do on resis, for example, on residential mortgages. We're just seeing things that are head scratchers to us. But the beauty of our business model is we don't have to do those things. We can focus on a different area when one area looks like a competitive position we don't want to be in. And of course, with mortgages, we're able to use the secondary market capabilities that we have to still support clients without having to put low-priced stuff on our books that we don't want.
spk14: Maybe, Scott, the one thing that would be helpful is how prevalent are you finding the pulling back dramatically on lending by competitors?
spk16: I don't know how to answer that either, Bill. We're in some very different markets from each other. What we see in Denver is different than what we see in The other front range markets, you know, obviously the resort markets are different. Western Wyoming, you know, continues to be a really interesting dynamic market. I would say we've had more success early in Montana than we expected. And then, you know, if you look at the Arizona, you know, we've been able to take advantage there of attracting new lenders in. And a lot of the reason that the really high quality people that you want to attract at First Western are The reason they want to join us is they see us as a growth-oriented company and not somebody that's, you know, turning it on, turning it off, turning it on. So, I mean, it does spell opportunity for us. I just think that, and I want to be clear, I've said it two or three times already, that, you know, this is not the time to be, you know, pedal to the metal on growing loans. I mean, this is a great time to be bringing in great relationships, fine, but we have been tightening credit standards. We've been tightening our underwriting contracts. standards and the terms. We've been expanding our NIM, expanding our credit spreads that we're charging clients. And we've been disciplined about that. And I think that's going to pay off for us in 2023 and beyond.
spk14: Okay. Thank you. And two additional questions, if I may. Acquisition pipeline, would you please provide an update in terms of what you're seeing given all of the macro factors that you're talking about and whether that's causing some to decide now would be a good time to sell. And then secondarily, the trust and investment management and systems enhancements. I know there was a one-time cost in the quarter, but more importantly, trying to understand what is it that you would anticipate those enhancements to do for that business, please?
spk16: Yeah, great. Two small questions. Let me start with the acquisition pipeline. So I think, you know, what you hear out there is what we see, which is that it's a difficult time for acquisitions. You know, I think with challenges with AOCI and with credit uncertainty, whatever, it's a hard time to get things done. We continue to spend time and effort on our corporate development program. You know, I explained many times before that we think that that's a core competency here and that we have a process for doing that and we continue our process. People that we're interested in know we're interested in them. We call on them and visit with them and work on opportunities and we continue to do that. I would say there have been two or three deals in the latter half of last year that were of interest to us and were just priced in a range that didn't make any sense to us. And they did ultimately find a buyer at a price much higher than we would have paid. And so, you know, I wish them well. I think that's interesting. But, you know, we don't need to do those things. We don't need to scratch on those things. And I hope as investors you guys see that we're disciplined about that stuff. You know, if you look at our last three or four, or all 13 for that matter, acquisitions here, they've had very happy stories because we're disciplined about how we look at it, how we price them, and we don't stretch on these things and do things that can come back and bite the shareholders. So are we going to do something this year? I don't know. We don't have anything that we'll be announcing tomorrow, but we continue to do our corporate development efforts, and if the right thing at the right price makes sense, we would love to include that as part of our growth story going forward. The second question I think about P-TIM systems, I don't know how far, Julie, we should go with this whole thing, but let me try a specific answer and a general answer that maybe if you want to add some more color to it, you would. But, you know, as an industry, private banking has a really difficult problem, which is we need our trust in our investment, in our mortgage, in our banking systems to talk to each other, and they just don't. There's no vendor out there that has provided that in the 40 years that I've been doing this, even though some of them promise it, they don't work. And so what we've done historically here at First Western is we've taken those four core systems and pulled the data out and then used the data to do the things that we need, like you know, client profitability and, you know, relationship pricing and stuff like that, you know, cross-selling, knowing, you know, the different products that individual relationship has with us, those sorts of things. Now, if we can get comfortable with security, we think that there's an opportunity to migrate these core systems into cloud-based systems that are much more accessible for fintech solutions that are not just stuck in a core system ecosystem, right? That you can use the core as just the core and then you can build systems around them that provide a lot better efficiency and effectiveness for internal use for our associates and for the client experience. And so what we've done this year Well, two years ago, we converted our loan processing system to a up-to-date system that is kind of next generation that we think can support that sort of loan process efficiency. Two years ago, three years ago, we did that with our platform trading system that we use for investment management, which has all kinds of advantages internally and externally. This year, what we did in the fourth quarter is we took our trust core and our investment core and replace the incumbents with a new vendor that has a cloud-based solution that's integrated as one solution for both of those cores. And then for this year, we're hoping to do that with a banking core so that we've got ourselves in a place where, you know, all these things even though they may not be able to talk to each other, they'll be able to talk to our overlays much more effectively and efficiently, and we can get away from being stuck in a single vendor's ecosystem and have a lot more flexibility for our system going forward. And the nice thing is, with this trust and investment vendor, you know, we're ending up, Julie, are we finally breaking even? I mean, we're hoping for some cost saves. I think
spk08: For sure we can break even.
spk16: Yeah, we'll see how, you know, once the dust settles and everything, if there's some cost saves to be had there. But my point is, they're not costing us more. There are some one-time conversion costs to it and obviously some pain to the conversion, as there always is, but that would be kind of my short term and long-term answer to that, Julie, what I miss in there?
spk00: No, I think you got it. I was going to touch on the efficiency for our processes and simplification for our associates, client experience improvement, and then more accessible data. So those are kind of the key points for what we are hoping to accomplish out of this one.
spk16: Yeah. Did that answer your question, Bill?
spk14: It does. That really sounds fantastic. Good luck pulling all that together, and thank you both. Yep.
spk18: Thanks for the questions.
spk01: Thank you. One moment, please. And it looks like we do have a follow-up question from Brett Rabatine. Your line is open.
spk03: Hi. I just wanted to follow back up on fee income and make sure I understood the expectations for the year, kind of the seasonality maybe of the risk management and insurance fees, and then just thinking about mortgage banking Some folks have made some hard decisions on that business line, but my guess is you're going to continue to try and work that business. I just wanted to hear any thoughts around the mortgage expectations given up, obviously low levels at current times. Thanks.
spk16: Yeah, so obviously we've had some pretty tough headwinds in our fee businesses as an industry, and here at First Western that's true as well. two big headwinds for our fee business has been on a mortgage side, and obviously that was a big disappointment this year. But, you know, we know it's cyclical. We know it's strategic for us, like you said, so we're not going to go out of it. What we can do is manage expenses, which we've done. We've cut expenses now, Julie, two times or three times?
spk00: Three times.
spk16: Over the past 18 months?
spk00: We'll continue to assess that as... We're typically slower this season, so we're definitely going to be assessing it as the months come in.
spk16: And then we've added some MLOs in Arizona in particular. So I think our production, our market share should improve. The MLOs are 100% commission, so there's no expense associated with that if they're not producing, and they are. So I think that's kind of the best you can do with that, given what the market gives you. If the consensus assumption, I mean, you look at the MBA numbers for this year, and they seem pretty aggressive to me, but if those come true, I mean, we should see a better year at least, or at least flat to last year in mortgages. And if we have good expense control or when we have good expense control there, I mean, that – It's not going to get worse. It's either going to be flat or get better, I think. And then on the fee incomes on the asset management side, the trust investment management side, we think there's a ton of opportunity there. It's a really interesting time right now because when everybody is doing well and you're not paying much in fees compared to the 20% or 30% gains you're making or whatever, you know, it's hard to get people to move. It's hard to get people to admit that they need help because everything they bought into their Schwab account or whatever went up. But in markets like this, they're not feeling so confident. When their spouse says to them, hey, how come you lost all this money? You know, it's nice to have a professional advisor that's helping them. And so we think it's an interesting time. We're actually very focused as a company right now on how we can strengthen our planning trust, and investment management, which are really kind of three different businesses. They're all very much integrated and overlapping, but they're three different things. And we're doing some pretty significant things internally to upgrade that because we think it's a really good time right now to be out telling our story, which is a very powerful, differentiated, unique story that fits nicely into the banking story we talk about all the time of delivering this team-based integrated private bank and trust service locally. So I think, I mean, I think that there's, it's hard to imagine they're going to go down much from where we are, and I think there's opportunity on the upside. Whether we realize that in 2023 or not, I don't know, but, you know, you go back to where we've come from, and we've come a long way in those businesses, and revenues have shown nice growth, and I think that this is an interesting time for us to be able to capitalize on the market environment.
spk19: Okay. That's great, Collar. Scott, I appreciate it.
spk01: Thank you. I'm showing no further questions at this time. Let's turn the call back over to management for any closing remarks.
spk16: Yeah, I did have a couple of closing points I wanted to make if I could. You know, I think I mentioned in our prepared comments is if you have, if you step back a little, look at the broader context, you know, five years ago, pre-IPO, First Western was a $970 million bank with about $50 million in tangible book value. Today, we're approaching $3 billion. We have over $200 million in tangible book value. and we've done that without dilutive capital raises. In the meantime, we've built out an infrastructure that can produce and support billions more in organic expansion, acquisition growth, and we're producing strong operating leverage and growth into the future, just as we have proven in these interim years here since the IPO. I also want to recognize the hard work of our 365 First Westerners. You know, I feel like in a pretty challenging year, we've managed to produce another great year of solid organic growth in revenues and core earnings in spite of some significant headwinds. You know, we're well positioned for the challenges that 2023 may bring, and especially if some of those 2022 headwinds turn to tailwinds and these challenges that we've seen become opportunities for us I think we have a really terrific future here. So thank you so much for dialing in and for your interest and support for First Western. We really appreciate it.
spk01: Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect. Have a great day.
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