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spk09: the market is expecting at this point that there won't be one, that we can see stabilizing deposit costs for us. Again, I've talked before about the fact that I think our clients are kind of ahead of the typical bank clients because of the fact that they're larger and more sophisticated. And so going into Q4, hopefully we see stabilized deposit costs and improving asset yields so at least we're stable to maybe a little bit of margin compression Q4. Our numbers going into 2014, we're assuming higher for longer, but flat on the short end to where we are today. So if that's the scenario, then I think you see the benefit of the higher asset yields playing out over the course of the year. And I think the interesting thing, this kind of goes back to our IPO too, I think the interesting thing for our business model is if that plays out like that and we can see stable funding costs, higher asset yields, and well-controlled operating expenses, then you see improved earnings, which is what I talked about in my comments.
spk29: Yep. And then a similar question on the expense side. I know you guys are expecting 18.5% to 19%. million of expenses to finish the year. Can you hold those expenses flat next year? Do you think you see some modest creep? How do you think about expense growth in 24?
spk09: You know, our assumption is, you know, to accomplish the things we want to do long term for shareholders, we need to continue to invest. And we have that built into our 18 1⁄2 to 19 million. So all other things being equal, we believe we can hold expenses in the ballpark of where they are now. Of course, there's a little bit of seasonality with, you know, what is the FICA bump that you get? Yeah, payroll taxes that you get in the first quarter, stuff like that. But generally, you know, our starting point for our planning for next year is let's figure out how to hold expenses flat and show some revenue improvement, which would drive some operating leverage and improved earnings.
spk29: All right. And then finally, for me, the $42 million relationship that went into non-performing, I think you said it was four loans. So did all four of those loans stop paying interest or was it just one?
spk09: Yeah, this was an interesting case. You know, we thought that we were going to get this guy current in Q3. And, you know, he's a wealthy guy that has, you know, cash crisis going on right now. But at the end, we decided that what we would have had to give up to get him current wasn't worth it to us. And we would just soon take our lumps here and see the increase in NPAs. which seems to happen to us once every five years, where we get a wealthy person gets into trouble, and we have to work them out. And so this guy is, we think, still very strong. We think we're going to have a full recovery. The real estate collateral that we have is in some very desirable markets. It's in Aspen. It's in Nantucket. And it's in the West Palm Beach area. So it was just an article in the Wall Street Journal, I think yesterday, talking about how hot the high-end market, the premium market is in Aspen, which is already a premium market. But they're talking about how that continues to be a very desirable market. And so I think as we move to either he or we get liquidity on those properties, I think that that's all going to turn out fine. And as we work through a workout, it's going to take a while, like I said in my comments. Okay.
spk28: All right, great. Thanks for all the color, Scott.
spk11: Yep. Thank you, Brady.
spk26: One moment for our next question. Our next question comes from Brett Rabaton with Havde Group. Your line is open.
spk18: Hey, good morning, Scott and Julie.
spk02: Good morning, Brett.
spk18: I wanted to ask, you know, back on the margin, just, you know, obviously that non-accrual relationship was, I think, 20 of the 27 basis points of pressure. When you were giving comments around the margin, How does that relationship play into what you were talking about on the margin? I assume it kind of excludes it. It sounds like it's a few quarters before maybe that gets resolved.
spk09: Well, that will definitely come back to our benefit at some point. It's non-accrual now, so it's going to stay non-accrual as we collect on it. I assume we're going to collect past interest, penalty interest, and That will be a nice benefit in the future at some point, but I don't think that's going to be next week. It's going to be a little while. So I think for the short-term quarterly reporting, it's going to be a zero. But depending how it all plays out, I think we will get that back at some point.
spk18: OK. And then you had some solid loan growth this quarter. Just was hoping for some additional color around, you know, pipelines and, you know, as you think about the environment in 24, if you think there's going to be a lot of opportunities to add some new business or, you know, are you going to be a little more selective and maybe slow the balance sheet growth from here in terms of the loan portfolio? How do you think about that?
spk09: You know, we said that we thought we would... target mid-single-digit growth. On the loan side, well, we worked our loan-to-deposit ratio back down to where it's historically been in the 90s. And so I think that's kind of exactly the way it's played out. We saw deposit growth in Q3, outpaced loan growth by a couple of percentage points annualized. And I think if that trend continues, which I would expect it to, again, you know, month and month, quarter to quarter, you know, there's going to be some bumpiness. But hopefully we can get that taken care of here the next quarter or two. And then, you know, I think there's adequate loan demand in our markets from the kind of loans and the borrowers that we like to work with to, continue to see mid-single digit for now. I think we can grow deposits to get that loan-deposit ratio down, and I think we can do all that while we're managing and improving them the way I talked about. And I think that's fine for now. For where we are in the cycle, I don't know that we need to be doing our normal kind of 15% or 20% organic growth rate. That seems to be not really what we want to do now. So that's how we're thinking about it, Brad.
spk18: Okay. And does the concentrations on C&D or commercial real estate, does that play into anything related to how you think about growth going forward? I know you're, I think you're state FDIC, so maybe you don't have the Fed slash OCC pressure to be below the 100, 300.
spk09: Yeah, we just had an FDIC exam here. We have an excellent regulatory relationship. And I think for us, our construction loan portfolio numbers are a little higher than where we've traditionally had them, where we'd like to see them. Part of that is just stuff funding up and not paying off quite as quickly as we had planned. And so we have gone up above 100%. We're not doing new construction loans right now. And the extent we see any increase in that portfolio. It's just the pace of drawdowns versus the pace of payoffs. But we're going to work that back down under 100%. Anyway, I think that's prudent for us and the way we'd like to see the portfolio mix.
spk18: Okay. And then just lastly for me, Scott, you know, a lot of banks in this environment are looking at 24 versus 23 and just the environment and It's obviously a challenge to grow earnings for the industry, and so a lot of banks are thinking about what they might do operationally or strategically over the next quarter or two to try and improve their earning power. And so I was just curious if you were thinking about anything related to either mortgage banking, a possible securities portfolio restructuring, or anything else that might be a boost to your profitability.
spk09: I think the best thing we can do is stick to our knitting here. I talked a little bit before about the operating leverage in our business. If we control expenses, which we've done, I think, a nice job of this year, we were thinking we were going to spend about $21 million a quarter, and we've been well under that this year. If we hold that number flat for 2024 and we can have the NIM story that I just talked about play out, We also talked, I think in the last two calls, I know for sure in the last call, about the fact that we were working on a project to raise our fees 10%. And I think Julie or David, I'm not sure which, mentioned in their comments that we had completed the first phase of that in Q2, went into effect on July 1st. And I was pretty happy to see, you know, you do these things, You're like, well, I hope it shows up in the numbers. And sure enough, we thought it was going to be $960,000 from phase one, which seems like a little bit too fine of an estimate to believe. And then I think we did grow fees, $240,000 in Q3. So kind of a bullseye there. So hopefully, we'll continue to get these other phases done. We're certainly working on it. I think that'll be the largest phase, but we're looking for an overall 10% increase in our trust fees just from the higher service that we're providing and the additional value we're providing to clients. And I think we're still very competitive at these higher rates. So I think as all that stuff plays out, we should see opportunity for revenue growth in 2024. stable expenses and therefore improved earnings in the bottom line.
spk16: Okay. Appreciate all the color.
spk26: One moment for our next question. Our next question comes from Adam Butler with Piper Sandler. Your line is open.
spk21: Hey, good morning, everybody. This is Adam on for Matthew Clark. Hi, Adam. Just first touching on a couple questions on the margin. Do you happen to have the average margin in September and the spot rate on deposits in September, either interest-bearing or total?
spk09: You know, I have it, but I'm going to let David take his first earnings call question.
spk19: As CFO, David, you want to answer that question? Yeah, I would love to. Yeah, Adam, the spot rate on deposits was 312 on September 30th, and the NIM for September was 245. And that's inclusive of the negative impacts of the non-accrual loans.
spk21: Okay, got it. Thanks, Chris. And just moving over to deposits, they were up nicely in the third quarter and looks like they were driven mainly by savings and money market. And along with the $26 million in new relationships added, I was wondering if you could provide some commentary on how you were able to attract new deposits and your outlook going forward and where you see the loan deposit trending with your outlook for mid-single-digit loan growth.
spk09: Yeah, good question, Adam, and you're reminding me part of Brett's five-part question that I forgot to answer about pipelines. Pipelines at the end of Q3 for loans were down about 50% from a little over $200 million to a little over $100 million, the way we look at it, which is 90-day probability weighted. And then deposits pipeline were actually up quarter over quarter. So we're actually seeing, you know, I would say positive trends in both ways, right? I mean, I think that if we want to grow deposits faster than loans, that's the setup we'd want to see. So that's a positive. In terms of your question more specifically, how do we do it? You know, we have a very, I call it geocentric-based Distribution model where we focus on client relationships in our markets that are served by teams of relationship bankers. That are providing, you know, local boutique private trust services to that base of clients and so You know what we have said to our relationship bankers is, hey, this is a time for us to focus on existing a new relationships that we think can add more deposits and loans. And so, you know, we're not doing one-off new loans for people that aren't going to bring relationships here. And we are going to take a look. We have reporting that we give each office, which we call OneView reporting, that tells our bankers, you know, who's got what products with us. And so if you see somebody that said they were going to bring over deposits and hasn't done it, then we're calling on them and saying, hey, where's this deposit account? Or why do you have a zero balance account with us? Or are there some other deposits or other trust investment management business that we see on your financials that we could help you with? So that's really been the focus and why we're seeing good results is that we've really refocused these teams in the local offices on more of the deposit and what we call PTEM, the Planning Trust Investment Management side. and less on straight-up loan growth, which I think is a viable strategy. It's a great way to lead into new relationships, but for now we're more focused on how can we cross-sell deposits, how can we attract new deposits, how can we build relationships with folks that can bring us more stable core deposits that help build our balance sheet and strengthen our financial performance.
spk21: Okay, great. That's good to hear, and it sounds like with the pipeline that the loan-to-deposit will be trending downward going forward. And then also, it looks like the noninterest-bearing contribution to total deposits trended downward at a similar rate compared to last quarter. I was wondering if you're seeing that pressure slow and what your outlook is there.
spk09: Yeah, that's just hard to know. You know, I think we've done a really nice job of holding on to our non-interest-bearing deposits. But, you know, again, you have larger, relatively sophisticated depositors here. And I think, you know, when everybody's talking about 5% deposits, they're talking about it too. And so I would say earlier this year, we were hearing a lot more about You know, can you build me a treasury bill ladder? And I think we're hearing less of that today. And I feel like, you know, the moves that we're seeing out of DDAs are more into now accounts and into money market deposit accounts and less into CDs. So that's all positive. But, you know, I hope at some point we've seen the early movers. on the DDA's move and we're going to see a slowdown in the remaining DDA's. Haven't really seen much of that so far, but hopefully that's where we're headed. Certainly we have strengthened our treasury management team and tried to make sure that the clients understand the value that we can provide on the treasury management side, which drives them to keep more non-interest-bearing deposits here or move more non-interest-bearing deposits here. That's a big focus throughout the organization as well.
spk21: Great. I appreciate the commentary there, and I'll step back. Great. Thanks, Adam.
spk26: One moment for our next question. Our next question comes from Bill DeZellum with Titan Capital Management. Your line is open.
spk20: Thank you. First question is asking David, would you please repeat what caused the $0.03 earnings per share impact this quarter that you referenced? I just missed what you said in your comments.
spk19: Yeah, that was in our non-interest expense. It was related to, give me a second, let me pull it up real quick. So that was related to some compensation that was related to a previous acquisition and we had to accelerate that compensation expense. And so that impacted, it was about 400,000 or 3 cents of EPS.
spk09: It's an accounting. fiction bill that the way that we had to account for the whole acquisition when we did it was it included this compensation expense and then, like David says, if the person leaves early or gets terminated, then you've got to accelerate the remaining tail on that. So it's a one-time thing. The person's gone. The expense is gone. What would that be? A deferred asset is gone, and so that's a one-time thing of $0.03 in the quarter.
spk20: Thank you both for that. And then your interest-earning asset yield, I believe, dropped three basis points sequentially, and yet you are increasing rates on the loans, particularly as Fed funds goes up. Would you discuss that issue? difference and what's leading to the three basis point decline?
spk09: That's loan mix, isn't it?
spk07: Yeah.
spk09: David's saying that he thinks he knows the answer.
spk19: Also, there was an impact of the non-accrual loans as well. So those loans are generating zero of interest income, as Scott mentioned, through the quarter. And the balances are then still in the denominator. So that's going to have a negative impact on our interest earning asset yields.
spk20: And which asset categories did you see that you had grew that had lower yield that would have contributed to this in addition to the non-accrual?
spk22: We're looking up the answer for you.
spk19: Thank you. Yeah, so we saw in our loan portfolio, we saw yield reduction in the consumer and other bucket and in the commercial real estate buckets as well as CNI. And I'm speaking to spot yields there. Will that data be in the queue, David? Spot yields will not, no. Average yields are. Not at that level.
spk20: And so help us understand either the competitive dynamics or your own individual strategy relative to loan yields in those categories declining when rates are generally upward biased.
spk19: Well, I think generally our loan yields are improving, but the negative impact of those non-accruals is what's really weighing our average loan yields down quarter over quarter.
spk12: And Bill, I think in my comments, we were talking about the rate in September on our loan production, and it was at the highest level at 8.44%. I think we're generally seeing nice increases in new loan production on the rate, as well as loans are renewing and rolling into higher rates. So we are seeing good benefit from that, but we've got some of these nuances with the non-accrual loan that have impacted some of those categories.
spk20: So ultimately, the real key to this comes right back to the non-accrual.
spk01: I think that's the largest driver.
spk20: Okay, great. Thank you. And then final question is, how are you thinking about share buyback given that the stock price is trading roughly 70% of book value? But at the same time, we also recognize the business isn't earning as much as it has in the past. So what's your philosophical thought process here?
spk09: Yeah, so we discuss it with the board every quarter. And every time the stock trades down, we're like, well, we should have stock buyback in plan in place right now. But I think generally what we have thought is this is a good time to have strong capital. And the extent that there are earnings or credit or acquisition opportunities out there having a stronger capital base is going to be beneficial for the long-term shareholder value creation here. So I think the board measures all those things, Bill, and tries to make the best decision in terms of how to manage our capital. And I think, you know, we've talked about our improvements in our tangible book value per share without any significant buybacks. in our improving capital ratios, which are already way above well-capitalized ratios. I just would add to your question about the reporting of our yields and our interest income, we think we're going to collect the principal and interest on these additional $42 million in loans that we put on non-accrual. That is money that we do expect to see back in the bank in the future in spite of the short-term disappointment here. But we will sure talk about that again at our board meeting in this quarter, and we're mindful of the fact that that's a good way to drive EPS and try to use our best judgment How do you balance that against some of those other factors I talked about?
spk20: That is helpful. Thank you all for the comments.
spk08: Thank you, Bill. Appreciate the support.
spk26: One moment for our next question. Our next question comes from Ross Haberman with RLH Investments. Your line is open.
spk10: Good morning, Scott. Scott, how are you? Could you talk about, are you seeing any other dents or weaknesses in delinquencies or slow payers or anything like that besides this one, hopefully an anomaly in terms of the of the bed, the bed on which we referred to today.
spk09: So good morning, Ross. We are not seeing any other signs of credit deterioration. This is a one off. Situation. Unfortunately, in addition to the other one off situation that we reported last quarter, but. But they both are isolated cases, very different from each other. And again, from what we know today, we expect to collect fully on these things. We have now $4 million specific reserve on the $8 billion credit. And again, we think we're very well collateralized on this new issue. It's really unfortunate timing for us what, 90 days past due at quarter end, but we think we're doing the right thing and the way we've handled that with the borrower and with our accounting and obviously going to cause some short-term pain for us in terms of these conversations, but I think the fundamentals are going to be fine.
spk10: How often do you stress test, I guess, your maturing loans in terms of, you know, all these, or many of these commercial borrowers who have been borrowing at, I don't know, four, four or five percent, and suddenly your loans come due and they have to pay eight plus. You know, how often do you stress test that, you know, and paying four or five is one thing, paying eight, eight and a half is another thing. You know, do you sort of get ahead of it and say, hey, you know, Is this going to be a viable loan at 8.5%? Can they afford this type of dramatic jump up in rates?
spk09: Yes, so a couple of things we do there. When we're underwriting loans, originally we do stress tests. I would tell you the traditional kind of up and down 300 basis points looks a little different like compared to the 550 basis points or 575 where it's been now over the last 18 months. But that's something we've always looked at is, you know, what would be the scenario for this borrower if we see a rising rate environment. And then, you know, as part of our internal loan review process, we've gone through here over the last few months and looked at where we see risk in the portfolio for this repricing risk you're talking about. And what we've seen is the bulk of the risk is probably a couple of years out and is minimal. I mean, where we've looked at credits that are coming due or going to come due, the borrowers do have adequate coverage to cover higher rates. So we're not seeing that as a fundamental problem in the portfolio or with any individual credits at this point or for the foreseeable future. If rates continue to go higher, I think we'll probably need to do a deeper dive into that. But from where we are today, that seems to be a risk that's well managed in the portfolio.
spk10: I didn't quite tell from your handout Your mortgage business, was that break-even for the quarter? I couldn't quite tell from... I forgot what page it was. Page 10, in terms of your non-interest income. Was the mortgage business at a break-even this quarter?
spk07: No.
spk09: No, I think we lost... David, is it $200,000 for the quarter? I believe in... in the mortgage segment.
spk10: And from what you're seeing for the fourth quarter, will that probably be as good a guess as any for the fourth quarter as well?
spk09: Unfortunately, you know, we've really cut expense there. And unless we want to close it down, which we don't, you know, I think we're kind of stuck with some minimal contributions coming out of mortgages here, negative contributions. for the short term. We are doing a couple of things to manage that. We've looked to add MLOs, which are all variable cost. And we've also looked to manage spreads in a way that drive more volume. And so we've had some success with that. I think we've added another mortgage loan officer in our resort communities. And we've got a couple more that we're talking to. So I think the president of that mortgage group, his work is certainly well aware of our focus on that and trying to be responsive. I don't know, Julie, that's all under you. If there's any other color you want to add on that. I do think we've done a nice job over the past three years bringing the cost down in that area to where revenues look like they're going to be. And unfortunately, it's a little upside down right now. But again, that's been strategically valuable for us. It's produced assets. It's minimized our risk in mortgages, which I think is no small feat. I think if we're going to be a private bank and have mortgages, you need to have the volume to make sure you've got the compliance and risk well managed. And then, you know, we've just made so much money in the boom part of it that having, you know, some incremental losses here is not the end of the world, I think. You know, at some point that's going to turn around and be a nice profitable business again as it was a couple years ago.
spk10: Could you talk about some of your newer offices? You said you're opening one in Bozeman. Is that going to be a full service? And if it is, what kind of deposits do or timing do you need to hit a break-even?
spk13: You know, could that be, I don't know, could that be a $300 million or $400 million branch in a couple years?
spk14: I think $300 million or $400 million would be an ambitious goal.
spk09: You know, we talk in terms of revenues here when we think about new locations. And so... You know, we opened that as a LPO, and we told them that when they get to a million dollars in revenues that we could give them a full service office. We opened as a full service office. I think actually we moved into that office this week, earlier this week, and our grand opening is going to be, I believe, November 9th or something like that. And so, you know, I think... As we build that out and build the business there, I would expect that to grow to be a $2 million business a year, 18 months from now. And then it will ultimately be a $5, $10 million business with a couple million dollars in expenses. So having a nice contribution margin in the relatively near term. And I think it's very additive to what we're doing in western Wyoming. And obviously gives us a nice entree into Montana, which I think is full of opportunities for us as well. So I think that's just part of a longer term strategy to continue to expand in the Rocky Mountain West. We have a really great team there that I think is going to produce great results for us. We're very optimistic about it.
spk10: Could you talk about the Wyoming business? I guess you bought that about a year and a half ago or so. How is that performing on a bottom line basis?
spk09: Yeah, I don't think we've really released much information about that. I mean, what we've seen in Jackson is we combined our two Jackson offices, the one we had there plus the one that we acquired. And the one that we acquired has a beautiful office. at the corner of the metaphorical 1st and Main Street. Interestingly, we had First Republic open across the street from us. And that was a bit of a shocking experience, the aggressiveness that they brought to the market. Of course, that's gone now. So I think that that's going to be a big benefit for us that are the more long-term focused players in the market. And then our other two offices, which we weren't too sure about when we first started looking at this opportunity, which are Pinedale and Rock Springs, they've turned out to be really pleasant surprises. The teams there have been wonderful. The market, obviously, there's still competition for what we do in those markets. And so I think those are going to turn out to be really nice success stories for us for the long term. You know, if you wanted to have a stable base of core deposits that is so desirable today. All of those offices are very added to that. And I think in retrospect, that acquisition was a huge success. You probably recall that it was accretive to capital on day one, the tangible book. And we got more expense save out of that than we thought. And the revenues have been strong. So I think all in all, that's been a really nice success story for us.
spk10: And just one final question. Are you actively looking for more things to buy or fill in? Or if we do see any further growth, it'll be organic like the Bozeman endeavor?
spk09: We do believe that there's going to be opportunities that come out of this cycle. Talking to other bankers, I've heard some stories of some pretty rough exams. And since March now, and I think that the downgrades that may come out of that may put pressure on boards and maybe people that otherwise wouldn't be interested in looking for a bigger, stronger partner maybe will. And so I do think that that's going to create opportunity for us. We do have our list of targets that we talk to and socialize the idea of joining somebody bigger with a bigger toolbox and a bigger footprint that could be a beneficial partnership for them. And I think that that's going to play out here over the next couple of years. It does take time, I think, for that to play out. And what we've seen in prior down cycles is you see these big sort of spectacular events like we saw in March and then, you know, sort of the follow on. take several quarters to play out. And I think we've got that to come still, which I do believe will create opportunity for us.
spk10: And just one last time, I just left one thing out. A number of banks I've seen this quarter have sort of tinkered with their securities, maybe sold some, shortened up the securities or durations. Have you thought about that? on some of yours, or I guess if you did anything with those health and maturities, you would have to move the whole thing to health for sale, and you couldn't just sell a portion of it.
spk09: Our securities portfolio here is relatively small. We made a conscious decision in, was that 2011, truly? not to go out and buy a bunch of one and a half percent yielding bonds with all that cash that we had on the books. And so I just don't feel that we have the need to cause that kind of turmoil in our balance sheet. Total investment portfolio is relatively small. It's performing well. So I think we'll just leave that there. I mean, we certainly have done analysis to look and see if it makes sense to trade it out. But at this point, I think given all the different accounting and economic factors, we're better off leaving it in place and letting it pay off.
spk10: Thanks a lot, guys. I appreciate it. Have a good weekend.
spk09: Yeah, thanks, Russ.
spk26: One moment for our next question. Our next question comes from Brett Rabaton with Havde Group. Your line is open.
spk18: Hey, just one follow-up. I know this call's gone long enough. I guess first, sorry I didn't acknowledge you earlier, David, when I said hi to the crew. Wanted just to ask... Wanted just to ask him, obviously, the stock is down quite a bit today. I think a significant portion of that might be around the MPA formation this quarter. And you know, it feels like you guys are pretty confident that you're not going to have losses around that one relationship. I think what would help if you could give it I know you don't want to talk to specifically about the properties, you know, and get into too much detail, but if you have anything you could share around, you know, any valuations you have, updated appraisals on the building, you know, give us some sense of your comfort, how you get there in terms of not expecting losses on those particular properties. Thanks.
spk09: So, yeah, good question. We have spent a lot of time on this, as you would expect. This is a very large number for us, $42 million. and um and you know we've had a couple of different options about how to deal with it as i talked about before and um yeah i think we've chosen the more painful option that will be much better for our shareholders uh for the short and long term here uh and so you know if we take some lumps uh with the stock price i mean i guess it's a buying opportunity but um But yes, we have taken a close look at it. We have current appraisals on all, are there seven properties, Julie, or six? Six. Six properties. We've looked at them in detail. I was thinking that there's some nice opportunity in here for for collecting on this before I saw this article in the journal. And the article in the journal was just very positive about how strong the high-end market is in Aspen. And again, you're looking at properties in Aspen. You're looking at property in Nantucket and West Palm Beach. I mean, those are all very hot, desirable markets that I think are still trading in premiums. And these aren't people that can't figure out how to pay an 8% mortgage. These are people that are coming in and buying trophy properties for cash. And the article actually talks about that, that that end of the market is really isolated from what's going on in monetary policy and whatnot. So I do think, Brett, I don't want to be overconfident about it, but I do think that we're well positioned there and should be fine.
spk18: To kind of get back to the core of that question, updated appraisals, anything that would give us confidence that the borrower purchased properties at X and it's not going to have to take a, or the appraisals might not come in. much lower than where he purchased them? Any color on that?
spk09: No, we have current appraisals. We already have them in hand.
spk18: Okay. And do they meaningfully exceed the unpaid balance and principal?
spk09: I think we're going to do fine with them.
spk18: Okay. Sorry to push. I just you know, trying to help you get some confidence around that for the market. So, appreciate the follow-up.
spk07: Yeah. Thank you, Brett.
spk26: That concludes the question and answer session. At this time, I would like to turn it back to management for closing remarks.
spk09: Great. Thank you, Abigail. Just a couple of things. Well, the reported numbers this quarter obviously are disappointing. Our core business is performing well in an unprecedented environment. The company has responded well with balance sheet management, higher fees, and well-controlled expenses. Well, our third quarter NPA spike is discouraging. We do expect to collect on these two larger problem relationships. continue our long history of near-zero loan losses. Going forward, even if we only have moderate revenue growth, with continued expense control, we think we can produce nice operating leverage and an improved earnings story. We're very focused on improving current and future earnings while operating with our historic focus on careful risk management. So with that, thanks everybody for dialing in. We really appreciate your interest and support of First Western, and have a great weekend.
spk26: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Thank you. you Thank you. Thank you. Thank you.
spk24: Bye. Thank you. Thank you.
spk26: Good day and thank you for standing by. Welcome to the first Western Financial third quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Tony Rossi at Financial Profile. Please go ahead.
spk25: Thank you, Abigail. Good morning, everyone, and thank you for joining us today for First Western Financial's third quarter 2023 earnings call. Joining us from First Western's management team are Scott Wiley, Chairman and Chief Executive Officer, Julie Korkamp, Chief Operating Officer, and David Weber, Chief Financial Officer. We will use a slide presentation as part of our discussion this morning. If you've not done so already, please visit the events and presentations page of First Western's Investor Relations website to download a copy of the presentation. Before we begin, I'd like to remind you that this conference call contains forward-looking statements with respect to the future performance and financial condition of First Western Financial that involve risks and uncertainties. Various factors could cause actual results to be materially different from any future results expressed or implied by such forward-looking statements. These factors are discussed in the company's SEC filings, which are available on the company's website. I would also direct you to read the disclaimers in our earnings release and investor presentation. The company disclaims any obligation to update any forward-looking statements made during the call. Additionally, management may refer to non-GAAP measures, which are intended to supplement but not substitute for the most directly comparable GAAP measures. The press release available on the website contains the financial and other quantitative information to be discussed today, as well as the reconciliation of the GAAP to non-GAAP measures. With that, I'd like to turn the call over to Scott. Scott?
spk09: Thanks, Tony. Good morning, everybody. The operating environment remained challenging in the third quarter, but we were able to deliver another quarter's strong financial performance by executing well in those areas we can control, which helped us to offset the impact of things we can't control, such as the higher interest rates that have reduced loan demand and created a very competitive deposit pricing environment. We generated net income of 3.1 million, or 32 cents per diluted share, in the third quarter, with 4.6 million in pre-tax, pre-provision income, which was an increase of 17% from the prior quarter. As we've indicated previously, we've increased our focus on core deposit gathering around the organization, and we saw good results from these efforts during the third quarter, with total deposits increasing at an annualized rate of 7.5%. While overall loan demand remains muted due to the higher interest rates, we're still seeing attractive lending opportunities in our markets, which enabled us to generate annualized loan growth of 5.6% while maintaining our conservative underwriting standards and pricing criteria. The higher rates on our new loan production are well above the incremental cost of funding we're seeing, which is making our new loan production accretive to our margin and relieving some of the margin pressure we've seen in prior quarters. With our success in deposit getting, we were able to lower our loan to deposit ratio from the end of the prior quarter, which was one of our near-term priorities. As I mentioned earlier, we've been successful in areas we can control. This includes our disciplined expense management, which resulted in our operating expenses coming in at the lower end of our targeted range in the third quarter. And we continue to have success in our trust and investment management new business development efforts, which continue to offset the impact of lower market values on our assets under management during the third quarter. Broadly speaking, our loan portfolio continues to perform well, although we did have an increase in NPAs this quarter, primarily due to the downgrade of four loans totaling $42 million that are all related to one relationship. These loans consist of a commercial loan, an owner-occupied commercial real estate loan, a residential mortgage, and a personal line of credit. This is a client we've had since 2018 and had good experience with. However, they're currently facing a liquidity crunch and become delinquent on their payments, which resulted in the placement of these loans on non-accrual. Given our conservative underwriting criteria and the multiple sources of repayment we require, these loans are well collateralized with a number of properties. The borrower is planning a number of liquidity events, including the sale of these properties that should result in a full repayment of the loans. It will likely take a few quarters of these loans to be resolved, but given the strong borrower and collateral that we have, we believe the loss potential is minimal. Moving to slide four, we generated net income of 3.1 million or 32 cents per diluted share in the third quarter. And over the past year, Due to our strong financial performance and prudent balance sheet management, we've seen increases in both book value and tangible book value per share, despite the impact of capital resulting from our adoption of CECL at the beginning of the year. Now I'll turn the call over to Julie for some additional discussion of our balance sheet and trust and investment management trends. Julie?
spk12: Thank you, Scott. Turning to slide five, we'll look at the trends in our loan portfolio. Our total loans increased $35 million from the end of the prior quarter. The increase was driven by growth in our commercial, residential mortgage, and construction portfolios, which was offset by a decline in the CRE loans due to an increase in payoffs that we saw during the quarter. As this has been the case over the past few quarters, the increase we are seeing in construction loans are related to draws on credit lines primarily related to residential housing projects. being built by very strong, experienced developers in areas with limited housing supply. As we mentioned on our last earnings call, we saw an increase in loan production during June, and this continued through the third quarter. We had more than $100 million in new loan production, which is our highest quarter so far this year. And with the discipline we are maintaining and our pricing criteria, The average rate on new production increased 51 basis points from the prior quarter to 7.92% and was 8.44% in the month of September. Moving to slide six, we'll take a closer look at our deposit trends. Our total deposits increased by 45 million during the quarter. We continue to have success in new business development and added 26 million in new deposit relationships during the third quarter. The mix of deposits continues to reflect a trend of clients moving money out of non-interest bearing accounts into interest bearing accounts in order to get higher yields on their excess liquidity. Turning to trust and investment management on slide seven, we had 108 million decrease in our assets under management in the third quarter, primarily due to market performance, which is partially offset by inflows from new clients that we added during the quarter. Now I'll turn the call over to David for further discussion of our financial results. David?
spk19: Thanks, Julie. Turning to slide eight, we'll look at our gross revenue. Our gross revenue declined 6.6% from the prior quarter as a decline in net interest income was partially offset by an increase in non-interest income. The non-interest income mix increased to 26.7% from 17.7% in the prior quarter. Turning to slide nine, we'll look at the trends in net interest income and margin. Our net interest income decreased 9.1% from the prior quarter due to an increase in interest expense resulting from a higher average cost of deposits. Our net interest margin decreased 27 basis points to 2.46% driven by an increase in interest bearing deposit costs and slightly lower yields on average earning assets. We did not accrue interest on the loans placed on non-performing status in the quarter, which included the 42 million of loans under one relationship that Scott discussed. These loans accounted for 20 of the 27 basis point decline that we had in our net interest margin in the quarter. Given the current trends we are seeing, we expect pressure on our net interest margin to moderate in the fourth quarter. Turning to slide 10, our non-interest income increased 54% from the prior quarter, primarily due to items that impacted our second quarter non-interest income. Third quarter included $300,000 of losses accounted for under fair value impacting EPS by two cents. Among our larger recurring sources of non-interest income, our trust and investment management fees increased 5.3% due to an increase in our fee structure to bring us more in line with market rates and to reflect the additional value we are providing through enhancements we have recently made to our service level and technology platform. Net gain on mortgage loans decreased to approximately $700,000 as higher rates continue to impact loan demand. Approximately 91% of the mortgage originations were for purchase loans in the third quarter. And we had a slight decline in bank fees due to lower loan prepayment and swap fees relative to the prior quarter. Turning to slide 11 and our expenses. Our non-interest expense decreased 1.1% from the prior quarter with slight declines in most of our major line items as we continue to focus on disciplined expense control. Our salaries and benefits expense in the third quarter included approximately $400,000 of acquisition-related compensation expense that was accelerated due to an early termination. This impacted EPS by three cents. For the fourth quarter, We continue to expect our non-interest expense to range between $18.5 and $19 million. Now turning to slide 12, we'll look at our asset quality. On a broad basis, the loan portfolio continues to perform very well as we had another quarter of minimal losses. The increase in non-performing assets was primarily driven by the downgrade of the $42 million in loans related to a single relationship. These loans are now being individually analyzed and given the strong collateral that we have, we did not require a specific reserve for these loans and the downgrades did not impact our provision expense. We recorded a provision for credit losses of approximately $300,000 in the quarter. The provision recorded this quarter, combined with the modest level of loan growth, increased our level of allowance to adjusted total loans by three basis points to 92 basis points on September 30. Now I will turn it back to Scott. Scott?
spk09: Thanks, David, and congratulations on getting through your first earnings call there. It's great to have you on the call with us. Thank you. Turning to slide 13. we provided an update on our strong track record of value creation for shareholders. This slide shows our trend in tangible book value per share since our IPO in 2018 and the factors that have contributed to our consistent ability to drive the growth in tangible book value per share as we've executed well on the plan that we communicated at the time of our IPO. Following our third quarter performance, we've now increased our tangible book value per share by 144% since our IPO, which includes the 56% decrease that we had due to the adoption of CECL at the beginning of 2023. We're very proud of this track record of value creation and believe that we're well positioned to continue creating additional value for our shareholders in the future. Turning to slide 14, I'll wrap up with some comments about our near-term outlook. Well, there's a high degree of economic uncertainty. We're going to continue to perform, to prioritize prudent risk management and maintain high levels of liquidity, capital and reserves, even if that impacts our level of profitability in the short term. Most importantly, we'll continue to focus on controlling the things that we can control, including our balance sheet management, attracting new clients, particularly those that provide core deposit relationships and trust and investment management assets, providing exceptional service to existing clients, and tightly managing our expenses. By continuing to execute well in these areas, we believe we can continue to offset the impact of a challenging macroeconomic environment and deliver strong financial results for our shareholders in the near term. At the same time, we continue to operate with a long-term approach and make investments that we believe will further enhance our business development capabilities. This includes recently opening our first full-service office in the Bozeman, Montana market, where we previously only had a loan production office. Since entering this market, we've steadily built out the team and clients with now a full-service office. We believe we can accelerate our business development activities in this area. With the strategic investments that we continue to make, We believe we're well positioned to continue capitalizing on the attractive markets that we operate in to consistently add new clients, realize more operating leverage as we increase our scale, generate profitable growth, and further enhance the value of our franchise over the long term. With that, we're happy to take your questions. Abigail, please open up the call.
spk26: Thank you. At this time, we'll conduct the question and answer session. As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. One moment while we compile the Q&A roster. Our first question comes from Brady Gailey with KBW. Your line is open.
spk29: Hey, thank you. Good morning, guys.
spk06: Morning, Brady.
spk29: I just wanted to start with the net interest margin. As I look over the last three quarters, every quarter it's been a pretty big step down. It sounds like that's going to moderate in 4Q, but I'm just wondering where you think the margin finds the bottom. Is that in 4Q? And as we look to next year, do you think the margin – you know, is stable? Do we think it could have some upside from asset repricing? Like, how are we thinking about the margin into 2024?
spk09: Yeah, great question, Brady. So, you know, obviously it's been a difficult year to forecast NIM given the number of variables and the unusual operating environment we've been in. You know, one of the things I looked at is kind of the month-by-month trend line. And we did see in the last quarter on this call that we thought that once the Fed stopped raising short term rates, that our deposit costs would stabilize and our asset yields would improve, which would drive a higher NIM. You know, unfortunately, in July, we had another interest rate increase, which, you know, given the number of deposits we have with kind of 100 percent bait on them, we saw a significant increase in our deposit costs in Q3. So that was not particularly helpful to short-term results. But if you look at this quarter, month by month, you know, we were kind of in the 250s each month. And so I'm hopeful that if we don't see another short-term interest raise by the Fed, which is I think what the market is expecting at this point, that there won't be one, that we can see stabilizing deposit costs for us. Again, I've talked before about the fact that I think our clients are kind of ahead of the typical bank clients because of the fact that they're larger and more sophisticated. And so going into Q4, hopefully we see stabilized deposit costs and improving asset yields So at least we're stable to maybe a little bit of margin compression Q4. Our numbers going into 2014, we're assuming higher for longer, but flat on the short end to where we are today. So if that's the scenario, then I think you see the benefit of the higher asset yields playing out over the course of the year. And I think the interesting thing, this kind of goes back to our IPO too, I think the interesting thing for our business model is if that plays out like that and we can see stable funding costs, higher asset yields, and well-controlled operating expenses, then you see improved earnings, which is what I talked about in my comments.
spk29: Yep. And then a similar question on the expense side. I know you guys are expecting 18.5% to 19%. million of expenses to finish the year. Can you hold those expenses flat next year? Do you think you see some modest creep? How do you think about expense growth in 24?
spk09: You know, our assumption is, you know, to accomplish the things we want to do long term for shareholders, we need to continue to invest. And we have that built into our 18.5 to 19 million. So all other things being equal, we believe we can hold expenses in the ballpark of where they are now. Of course, there's a little bit of seasonality with, you know, what is the FICA bump that you get? Yeah, payroll taxes that you get in the first quarter, stuff like that. But generally, you know, our starting point for our planning for next year
spk29: is uh let's figure out how to hold expenses flat and show some revenue improvement which would drive some operating leverage and improved earnings all right and then finally for me the 42 million dollar relationship that went into non-performing i think you said it was four loans so did did all four of those loans stop paying interest or was it just one
spk09: Yeah, this was an interesting case. You know, we thought that we were going to get this guy current in Q3. And, you know, he's a wealthy guy that has, you know, cash crisis going on right now. But at the end, we decided that what we would have had to give up to get him current wasn't worth it to us. And we would just soon take our lumps here and see the increase in NPAs. which seems to happen to us once every five years where we get a wealthy person gets into trouble and we have to work them out. And so this guy is, we think, still very strong. We think we're going to have a full recovery. The real estate collateral that we have is in some very desirable markets. It's in Aspen. It's in Nantucket. and it's in the West Palm Beach area. So it was just an article in the Wall Street Journal, I think yesterday, talking about how hot the high-end market, the premium market is in Aspen, which is already a premium market, but they're talking about how that continues to be a very desirable market. And so I think as we move to either he or we get liquidity on those properties, I think that that's all going to turn out fine as we work out. It's going to take a while, like I said in my comments. Okay.
spk28: All right, great. Thanks for all the color, Scott.
spk11: Yep, thank you, Brady.
spk26: One moment for our next question. Our next question comes from Brett Rabaton with Havde Group. Your line is open.
spk18: Hey, good morning, Scott and Julie.
spk02: Good morning, Brett.
spk18: I wanted to ask, you know, back on the margin, just obviously that non-accrual relationship was, I think, 20 of the 27 basis points of pressure. When you were giving comments around the margin, How does that relationship play into what you were talking about on the margin? I assume it kind of excludes it. It sounds like it's a few quarters before maybe that gets resolved.
spk09: Well, that will definitely come back to our benefit at some point. It's non-accrual now, so it's going to stay non-accrual as we collect on it. I assume we're going to collect past interest, penalty interest, and That will be a nice benefit in the future at some point, but I don't think that's going to be next week. It's going to be a little while. I think for the short-term quarterly reporting, it's going to be a zero, but depending how it all plays out, I think we will get that back at some point.
spk18: Okay. And then you had some solid loan growth this quarter. Just was hoping for some additional color around, you know, pipelines and, you know, as you think about the environment in 24, if you think there's going to be a lot of opportunities to add some new business or, you know, are you going to be a little more selective and maybe slow the balance sheet growth from here in terms of the loan portfolio? How do you think about that?
spk09: You know, we said that we thought we would... target mid-single-digit growth. On the loan side, well, we worked our floating deposit ratio back down to where it's historically been in the 90s. And so I think that's kind of exactly the way it's played out. We saw, you know, deposit growth in Q3, outpaced loan growth by a couple of percentage points annualized. And I think if that trend continues, which I would expect it to, again, you know, months and months, quarter to quarter, you know, there's going to be some bumpiness. But hopefully we can get that taken care of here the next quarter or two. And then, you know, I think there's adequate loan demand in our markets from the kind of loans and the borrowers that we like to work with to, continue to see mid-single digit for now. I think we can grow deposits to get that loan deposit ratio down. And I think we can do all that while we're managing and improving them the way I talked about. And I think that's fine for now. For where we are in the cycle, I don't know that we need to be doing our normal kind of 15% or 20% organic growth rate. That seems to be not really what we want to do now. So that's how we're thinking about it, Brad.
spk18: Okay. And does the concentrations on C&D or commercial real estate, does that play into anything related to how you think about growth going forward? I know you're, I think you're state FDIC, so maybe you don't have the Fed slash OCC pressure to be below the 100, 300.
spk09: Yeah, we just had an FDIC exam here. We have an excellent regulatory relationship. And, you know, I think for us, our construction loan portfolio numbers are a little higher than where we've traditionally had them, where we'd like to see them. You know, part of that is just stuff funding up and not paying off quite as quickly as we had planned. And so we have gone up above 100%. We're not doing new construction loans right now. And the extent we see any increase in that portfolio. It's just the pace of drawdowns versus the pace of payoffs. But we're going to work that back down under 100%. Anyway, I think that's prudent for us and the way we'd like to see the portfolio mix.
spk18: Okay. And then just lastly for me, Scott, you know, a lot of banks in this environment are looking at 24 versus 23 and just the environment and It's obviously a challenge to grow earnings for the industry, and so a lot of banks are thinking about what they might do operationally or strategically over the next quarter or two to try and improve their earning power. And so I was just curious if you were thinking about anything related to either mortgage banking, a possible securities portfolio restructuring, or anything else that might be a boost to your profitability.
spk09: I think the best thing we can do is stick to our knitting here. I talked a little bit before about the operating leverage in our business. If we control expenses, which we've done, I think, a nice job of this year, we were thinking we were going to spend about $21 million a quarter, and we've been well under that this year. If we hold that number flat for 2024, and we can have the... story that I just talked about play out. We also talked, I think in the last two calls, I know for sure in the last call, about the fact that we were working on a project to raise our fees 10%. And I think Julie or David, I'm not sure which, mentioned in their comments that we had completed the first phase of that in Q2, went into effect on July 1st. I was pretty happy to see, you know, you do these things. You're like, well, I hope it shows up in the numbers. And sure enough, you know, we thought it was going to be $960,000 from phase one, which seems like a little bit too, you know, fine of an estimate to believe. And then, you know, I think we did grow fees, $240,000 in Q3. So kind of a bullseye there. So hopefully... We'll continue to get these other phases done. We're certainly working on it. I think that'll be the largest phase, but we're looking for an overall 10% increase in our trust fees just from the higher service that we're providing and the additional value we're providing to clients. I think we're still very competitive at these higher rates. I think as all that stuff plays out, we should see opportunity for revenue growth in 2024, stable expenses, and therefore improved earnings in the bottom line.
spk16: Okay. Appreciate all the color.
spk26: One moment for our next question. Our next question comes from Adam Butler with Piper Sandler. Your line is open.
spk21: Hey, good morning, everybody. This is Adam on for Matthew Clark. Hi, Adam. Just first touching on a couple questions on the margin. Do you happen to have the average margin in September and the spot rate on deposits in September, either interest-bearing or total?
spk09: You know, I have it, but I'm going to let David take his first earnings call question.
spk19: As CFO, David, you want to answer that question? Yeah, I would love to. Yeah, Adam, the spot rate on deposits was 312 on September 30th, and the NIM for September was 245. And that's inclusive of the negative impacts of the non-accrual loans.
spk21: Okay, got it. Thanks, David. And just moving over to deposits, they were up nicely in the third quarter, and it looks like they were driven mainly by savings and money market, and along with the $26 million in new relationships added. I was wondering if you could provide some commentary on how you were able to attract new deposits and your outlook going forward and where you see the loan deposit trending with your outlook for mid-single-digit loan growth.
spk09: Yeah, good question, Adam, and you're reminding me part of Brett's five-part question that I forgot to answer about pipelines. Pipelines at the end of Q3 for loans were down about 50% from a little over $200 million to a little over $100 million, the way we look at it, which is 90-day probability weighted. And then deposits pipeline were actually up quarter over quarter. So we're actually seeing, you know, I would say positive trends in both ways, right? I mean, I think that if we want to grow deposits faster than loans, that's the setup we'd want to see. So that's a positive. In terms of your question more specifically, how do we do it? You know, we have a very, I call it geocentric-based Distribution model where we focus on client relationships in our markets that are served by teams of relationship bankers. That are providing, you know, local boutique private trust services to that base of clients and so You know what we have said to our relationship bankers is, hey, this is a time for us to focus on existing a new relationships that we think can add more deposits and loans. And so, you know, we're not doing one-off new loans for people that aren't going to bring relationships here. And we are going to take a look. We have reporting that we give each office, which we call OneView reporting, that tells our bankers, you know, who's got what products with us. And so if you see somebody that said they were going to bring over deposits and hasn't done it, then we're calling on them and saying, hey, where's this deposit account? Or why do you have a zero balance account with us? Or are there some other deposits or other trust investment management business that we see on your financials that we could help you with? So that's really been the focus and why we're seeing good results is that we've really refocused these teams in the local offices on more of the deposit and what we call PTAM, the Planning Trust Investment Management side. and less on straight-up loan growth, which I think is a viable strategy. It's a great way to lead into new relationships, but for now, we're more focused on how can we cross-sell deposits, how we can attract new deposits, how can we build relationships with folks that can bring us more stable core deposits that help build our balance sheet and strengthen our financial performance.
spk21: Okay, great. That's good to hear. And it sounds like with the pipeline that the loan to deposit will be trending downward going forward. And then also it looks like the non-interest bearing contribution to total deposits trended downward at a similar rate compared to last quarter. I was wondering if you're seeing that pressure slow and what your outlook is there.
spk09: Yeah, that's just hard to know. You know, I think we've done a really nice job of holding on to our non-interest-bearing deposits. But, you know, again, you have larger, relatively sophisticated depositors here. And I think, you know, when everybody's talking about 5% deposits, they're talking about it too. And so I would say earlier this year, we were hearing a lot more about You know, can you build me a treasury bill ladder? And I think we're hearing less of that today. And I feel like, you know, the moves that we're seeing out of DDAs are more into now accounts and into money market deposit accounts and less into CDs. So that's all positive. But, you know, I hope at some point we've seen the early movers. on the DDA's move and we're going to see a slowdown in the remaining DDA's. Haven't really seen much of that so far, but hopefully that's where we're headed. Certainly we have strengthened our treasury management team and tried to make sure that the clients understand the value that we can provide on the treasury management side, which drives them to keep more non-interest-bearing deposits here or move more non-interest-bearing deposits here. That's a big focus throughout the organization as well.
spk21: Great. I appreciate the commentary there, and I'll step back. Great. Thanks, Adam.
spk26: One moment for our next question. Our next question comes from Bill DeZellum with Titan Capital Management. Your line is open.
spk20: Thank you. First question is asking David, would you please repeat what caused the $0.03 earnings per share impact this quarter that you referenced? I just missed what you said in your comments.
spk19: Yeah, that was in our non-interest expense. It was related to, give me a second, let me pull it up real quick. So that was related to some compensation that was related to a previous acquisition and we had to accelerate that compensation expense. And so that impacted, it was about 400,000 or 3 cents of EPS. It's an accounting.
spk09: Fiction bill that the way that we had to account for the whole Acquisition when we did it was included this compensation expense and then like David says if if the person Leaves earlier gets terminated then you've got to accelerate the remaining tail on that so it's a one-time thing the person's gone the expense is gone the What would that be? A deferred asset is gone, and so that's a one-time thing of $0.03 in the quarter.
spk20: Thank you both for that. And then your interest-earning asset yield, I believe, dropped three basis points sequentially, and yet you are increasing rates on the loans, particularly as Fed funds goes up. Would you discuss that – that difference and what's leading to the three basis point decline?
spk09: I think that's loan mix, isn't it?
spk07: Yeah.
spk09: David's saying that he thinks he knows the answer.
spk19: Also, there was an impact of the non-accrual loans as well. So those loans are generating zero of interest income, as Scott mentioned, through the quarter. And the balances are then still in the denominator. So that's going to have a negative impact on our interest earning asset yields.
spk20: And which asset categories did you see that you had grew that had lower yield that would have contributed to this in addition to the non-accrual?
spk22: We're looking up the answer for you.
spk19: Thank you. Yeah, so we saw in our loan portfolio, we saw yield reduction in the consumer and other bucket and in the commercial real estate buckets as well as CNI. And I'm speaking to spot yields there. Will that data be in the queue, David? Spot yields will not, no. Average yields are. Not at that level.
spk20: And so help us understand either the competitive dynamics or your own individual strategy relative to loan yields in those categories declining when rates are generally upward biased.
spk19: Well, I think generally our loan yields are improving, but the negative impact of those non-accruals is what's really weighing our average loan yields down quarter over quarter.
spk12: And Bill, I think in my comments, we were talking about the rate in September on our loan production, and it was at the highest level at 8.44%. I think we're generally seeing nice increases in new loan production on the rate, as well as loans are renewing and rolling into higher rates. So we are seeing good benefits from that, but we've got some of these nuances with the non-accrual loan that have impacted some of those categories.
spk20: So ultimately, the real key to this comes right back to the non-accrual.
spk01: I think that's the largest driver.
spk20: Okay, great. Thank you. And then final question is, how are you thinking about share buyback given that the stock price is trading roughly 70% of book value? But at the same time, we also recognize the business isn't earning as much as it has in the past. So what's your philosophical thought process here?
spk09: Yeah, so, you know, we discuss it with the board every quarter. And, you know, every time the stock trades down, we're like, well, we should have stock buyback in plan in place right now. But I think, you know, generally what we have thought is, you know, this is a good time to have strong capital. And the extent that there are earnings or credit or acquisition opportunities out there having a stronger capital base is going to be beneficial for the long-term shareholder value creation here. So I think the board measures all those things, Bill, and tries to make the best decision in terms of how to manage our capital. And I think we've talked about our improvements in our tangible book value per share without any significant buybacks. in our improving capital ratios, which are already way above well-capitalized ratios. I just would add to your question about the reporting of our yields and our interest income. I mean, we think we're going to collect the principal and interest on these additional $42 million in loans that we put on non-accrual. That is money that we do expect to see back in the bank in the future in spite of the short-term disappointment here. But we will sure talk about that again at our board meeting in this quarter, and we're mindful of the fact that that's a good way to drive EPS and try to use our best judgment How do you balance that against some of those other factors I talked about?
spk20: That is helpful. Thank you all for the comments.
spk08: Thank you, Bill. Appreciate the support.
spk26: One moment for our next question. Our next question comes from Ross Haberman with RLH Investments. Your line is open.
spk10: Good morning, Scott. Scott, how are you? Could you talk about, are you seeing any other dents or weaknesses in delinquencies or slow payers or anything like that besides this one, hopefully an anomaly in terms of the the bedlam which you referred to today?
spk09: So, good morning, Ross. We are not seeing any other signs of credit deterioration. This is a one-off situation. Unfortunately, in addition to the other one-off situation that we reported last quarter, but But they both are isolated cases, very different from each other. And again, from what we know today, we expect to collect fully on these things. We have now $4 million specific reserve on the $8 million credit. And again, we think we're very well collateralized on this new issue. It's really unfortunate timing for us what 90 days past do at quarter end, but we think we're doing the right thing and the way we've handled that with the borrower and with our accounting and obviously going to cause some short-term pain for us in terms of these conversations, but I think the fundamentals are going to be fine.
spk10: How often do you stress test, I guess, your maturing loans? in terms of, you know, all these or many of these commercial borrowers who have been borrowing at, I don't know, four or five percent, and suddenly their loans come due and they have to pay eight plus. You know, how often do you stress test that, you know, and paying four or five is one thing, paying eight, eight and a half is another thing. You know, do you sort of get ahead of it and say, hey, you know, Is this going to be a viable loan at 8.5%? Can they afford this type of dramatic jump up in rates?
spk09: Yes, so a couple of things we do there. When we're underwriting loans, originally we do stress tests. I would tell you the traditional kind of up and down 300 basis points looks a little different like compared to the 550 basis points or 575 where it's been now over the last 18 months. But that's something we've always looked at is, you know, what would be the scenario for this borrower if we see a rising rate environment. And then, you know, as part of our internal loan review process, we've gone through here over the last few months and looked at where we see risk in the portfolio for this repricing risk you're talking about. And what we've seen is the bulk of the risk is probably a couple of years out and is minimal. I mean, where we've looked at credits that are coming due or going to come due, the borrowers do have adequate coverage to cover higher rates. So we're not seeing that as a fundamental problem in the portfolio or with any individual credits at this point or for the foreseeable future. If rates continue to go higher, I think we'll probably need to do a deeper dive into that. But from where we are today, that seems to be a risk that's well managed in the portfolio.
spk10: I didn't quite tell from your handout Your mortgage business, was that break-even for the quarter? I couldn't quite tell from... I forgot what page it was. Page 10, in terms of your non-interest income. Was the mortgage business at a break-even this quarter?
spk09: No. No, I think we lost... David, is it $200,000 for the quarter? I believe in... in the mortgage segment.
spk10: And from what you're seeing for the fourth quarter, will that probably be as good a guess as any for the fourth quarter as well?
spk09: Unfortunately, you know, we've really cut expense there. And unless we want to close it down, which we don't, you know, I think we're kind of stuck with some minimal contributions coming out of mortgages here, negative contributions. for the short term. We are doing a couple of things to manage that. We've looked to add MLOs, which are all variable cost. And we've also looked to manage spreads in a way that drive more volume. And so we've had some success with that. I think we've added another mortgage loan officer in our resort communities. And we've got a couple more that we're talking to. So, you know, I think the president of that mortgage group is certainly well aware of our focus on that and trying to be responsive. I don't know, Julie, that's all under you. If there's any other color you want to add on that. I do think we've done a nice job over the past three years in bringing the cost down in that area to where revenues look like they're going to be. And unfortunately, it's a little upside down right now. But again, I mean, that's been strategically valuable for us. It's produced assets. It's minimized our risk in mortgages, which I think is no small feat. I think if we're going to be a private bank and have mortgages, you need to have the volume to make sure you've got the compliance and risk well managed. And then, you know, we've just made so much money in the boom part of it that having, you know, some incremental losses here is not the end of the world, I think. You know, at some point that's going to turn around and be a nice profitable business again as it was a couple years ago.
spk10: Could you talk about some of your newer offices? You said you're opening one in Bozeman. Is that going to be a full service? And if it is, what kind of deposits do or timing do you need to hit a break-even?
spk13: You know, could that be, I don't know, could that be a $300 million or $400 million branch in a couple years?
spk14: I think $300 million or $400 million would be an ambitious goal.
spk09: You know, we talk in terms of revenues here when we think about new locations. And so... know we opened that as a lpo and we told them that when they get to a million dollars in revenues that we could give them a full service office we open as a full service office i think actually we moved into that office this week earlier this week and our grand opening is going to be i believe november 9th or something like that and so um you know i think As we build that out and build the business there, I would expect that to grow to be a $2 million business a year, 18 months from now, and then it will ultimately be a $5, $10 million business with a couple million dollars in expenses. So having a nice contribution margin in the relatively near term. And I think it's very additive to what we're doing in western Wyoming. And obviously gives us a nice entree into Montana, which I think is full of opportunities for us as well. So I think that's just part of a longer term strategy to continue to expand in the Rocky Mountain West. We have a really great team there that I think is going to produce great results for us. We're very optimistic about it.
spk10: Could you talk about the Wyoming business? I guess you bought that about a year and a half ago or so. How is that performing on a bottom line basis?
spk09: Yeah, I don't think we've really released much information about that. I mean, what we've seen in Jackson is we combined our two Jackson offices, the one we had there plus the one that we acquired. And the one that we acquired has a beautiful office. at the corner of the metaphorical 1st and Main Street. Interestingly, we had First Republic open across the street from us. And that was a bit of a shocking experience, the aggressiveness that they brought to the market. Of course, that's gone now. So I think that that's going to be a big benefit for us that are the more long-term focused players in the market. And then our other two offices, which we weren't too sure about when we first started looking at this opportunity, which are Pinedale and Rock Springs, they've turned out to be really pleasant surprises. The teams there have been wonderful. The market, obviously, there's still competition for what we do in those markets. And so I think those are going to turn out to be really nice success stories for us for the long term. You know, if you wanted to have a stable base of core deposits that is so desirable today. All of those offices are very added to that. And I think in retrospect that acquisition was a huge success. You know, you probably recall that it was accretive to capital on day one, the tangible book. And we got more expense save out of that than we thought. And the revenues have been strong. So I think, you know, all in all, that's been a really nice success story for us.
spk10: And just one final question. Are you actively looking for more things to buy or fill in? Or if we do see any further growth, it'll be organic like the Bozeman endeavor?
spk09: We do believe that there's going to be opportunities that come out of this cycle. Talking to other bankers, I've heard some stories of some pretty rough exams. And since March now, and I think that the downgrades that may come out of that may put pressure on boards and maybe people that otherwise wouldn't be interested in looking for a bigger, stronger partner maybe will. And so I do think that that's going to create opportunity for us. We do have our list of targets that we talk to and socialized the idea of joining somebody bigger with a bigger toolbox and a bigger footprint that could be a beneficial partnership for them. And I think that that's going to play out here over the next couple of years. It does take time, I think, for that to play out. And what we've seen in prior down cycles is you see these big sort of spectacular events like we saw in March and then, you know, sort of the follow-on. take several quarters to play out. And I think we've got that to come still, which I do believe will create opportunity for us.
spk10: And just one last time, I just left one thing out. A number of banks I've seen this quarter have sort of tinkered with their securities, maybe sold some, shortened up the maturities or durations. Have you thought about that? on some of yours, or I guess if you did anything with those health and maturities, you would have to move the whole thing to health for sale, and you couldn't just sell a portion of it.
spk09: Our securities portfolio here is relatively small. We made a conscious decision in, was that 2011, truly? the 2021 I mean, 2021, not to go out and buy a bunch of one and one and a half percent yielding bonds with all that cash that we had on the books. And so I just don't feel that we have the need to cause that kind of turmoil in our balance sheet. I mean, I think our... Total investment portfolio is relatively small. It's performing well. So I think we'll just leave that there. I mean, we certainly have done analysis to look and see if it makes sense to trade it out. But at this point, I think given all the different accounting and economic factors, we're better off leaving it in place and letting it pay off.
spk10: Thanks a lot, guys. I appreciate it. Have a good weekend.
spk09: Yeah, thanks, Russ.
spk26: One moment for our next question. Our next question comes from Brett Rabaton with Havde Group. Your line is open.
spk18: Hey, just one follow-up. I know this call's gone long enough. I guess first, sorry, I didn't acknowledge you earlier, David, when I said hi to the crew. Wanted just to ask... Wanted just to ask, I mean, obviously, the stock is down quite a bit today. I think a significant portion of that might be around the MPA formation this quarter. And, you know, it feels like you guys are pretty confident that you're not going to have losses around that one relationship. I think what would help if you could give it, I know you don't want to talk too specifically about the properties, you know, and get into too much detail, but if you have anything you could share around, you know, any valuations you have, updated appraisals on the building, you know, give us some sense of your comfort, how you get there in terms of not expecting losses on those particular properties. Thanks.
spk09: So, yeah, good question. We have spent a lot of time on this, as you would expect. This is a very large number for us, $42 million. And we've had a couple of different options about how to deal with it, as I talked about before. And I think we've chosen the more painful option that will be much better for our shareholders for the short and long term here. And so if we take some lumps with the stock price, I mean, I guess it's a buying opportunity. But yes, we have taken a close look at it. We have current appraisals on all, are there seven properties, Julie, or six? Six. Six properties. We've looked at them in detail. I was thinking that there's some nice opportunity in here for for collecting on this before I saw this article in the journal. And the article in the journal was just very positive about how strong the high-end market is in Aspen. And again, you're looking at properties in Aspen. You're looking at property in Nantucket and West Palm Beach. I mean, those are all very hot, desirable markets that I think are still trading in premiums. And these aren't people that can't figure out how to pay an 8% mortgage. These are people that are coming in and buying trophy properties for cash. And the article actually talks about that, that that end of the market is really isolated from what's going on in monetary policy and whatnot. So I do think, Brett, I don't want to be overconfident about it, but I do think that we're well positioned there and should be fine.
spk18: To kind of get back to the core of that question, updated appraisals, anything that would give us confidence that the borrower purchased properties at X and it's not going to have to take a, or the appraisals might not come in much lower than where he purchased them? Any color on that?
spk09: No, we have current appraisals. We already have them in hand.
spk18: Okay. And do they meaningfully exceed the unpaid balance and principal?
spk09: I think we're going to do fine with them.
spk18: Okay. Sorry to push. I just you know, trying to help you get some confidence around that for the market. So, appreciate the follow-up.
spk07: Yeah. Thank you, Brett.
spk26: That concludes the question and answer session. At this time, I would like to turn it back to management for closing remarks.
spk09: Great. Thank you, Abigail. Just a couple of things. Well, the reported numbers this quarter obviously are disappointing. Our core business is performing well in an unprecedented environment. The company has responded well with balance sheet management, higher fees, and well-controlled expenses. Well, our third quarter NPA spike is discouraging. We do expect to collect on these two larger problem relationships. continue our long history of near-zero loan losses. Going forward, even if we only have moderate revenue growth, with continued expense control, we think we can produce nice operating leverage and an improved earnings story. We're very focused on improving current and future earnings while operating with our historic focus on careful risk management. So with that, thanks, everybody, for dialing in. We really appreciate your interest and support of First Western. And have a great weekend.
spk26: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
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