Q4 2022 First Western Financial Inc Earnings Call
Okay.
Thank you for standing by and welcome to the first Western financial fourth quarter 2022 earnings Conference call. At this time, all participants are listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question at that time. Please press star one one on your touch tone telephone.
As a reminder, today's call is being recorded I would now.
Mr. Tony Rossi of financial profiles, Sir you may begin.
Thank you Valerie good morning, everyone and thank you for joining us today for first Western Financial's fourth quarter 2022 earnings call joining.
Joining us from first Western's management team are Scott Wylie, Chairman and Chief Executive Officer, Julie Core Campbell, Chief financial and Chief operating Officer.
We 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.
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.
These factors could cause actual results to be materially different from any future results expressed or implied by such forward looking statements.
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.
Management may refer to non-GAAP measures, which are intended to supplement but not substitute for the most directly comparable GAAP measures. The press release available on the website contains the financial and other quantitative information to be discussed today as well as the reconciliation of the GAAP to non-GAAP measures and with that I'd like to turn the call over to Scott Scott.
Thanks, Tony and 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 of 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 most 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 for the teams.
That we built to increase our presence in Arizona in Wyoming in the Montana markets.
With the strong business development capabilities that we 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.
Near term objective was to get our loan deposit ratio down.
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 to deposit ratio.
During the fourth quarter, we also increased our total capital ratio by 53 bps.
Pieces point 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 mandatory 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 two 5% from the prior quarter, while tangible book value increased 3%.
During 2022, a year when most banks are 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.
We had another strong quarter of loan growth originating $182 million in loans.
Well 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 a 121 million for the end of the prior quarter.
The growth was primarily driven by increases in our residential mortgage construction CNI portfolios, which offset a decline in our CRE portfolio, which is an area where liberty 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 the one to four.
Family residential portfolio were 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 noninterest bearing deposits, which was largely attributable to some clients decided 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.
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 2022.
Now I'll turn the call over to Julie for further discussion of our financial results Julie Thank.
Thank you Scott turning to slide eight we'll look at our gross revenue.
Gross revenue was relatively consistent with the prior quarter and 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.
'twenty one.
Largely due to higher net interest income, resulting from both organic and acquisitive growth on our balance sheet.
Turning to slide nine we will look at the trends in net interest income and margin.
Our net interest income decreased four 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 <unk> 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 trends.
Excluding the impact of the PPP fees and accretion on acquired loans.
Net interest margin decreased 47 basis points to 3.31.
The net decline in our net interest margin was due to an increase in our average cost of funds, resulting from the higher rate environment.
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.
And we have indicated in the past, we did not make bets and future direction of interest rates changes in our interest rates 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 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 three 4% from the prior quarter Pri.
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 a 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.
<unk>, 95% of the originations were purchase land 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 three 3% from the prior quarter, primarily due to an increase in data processing costs, resulting from nonrecurring implementation charges.
Adding 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 noninterest expense to moderate in 2023 with most of the growth coming from annual salary increases.
And for the first quarter of 2023, we expect noninterest expense to be in the range of $20 million 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 nonperforming loans in the fourth quarter.
The increase in nonperforming loans is primarily attributed to one commercial loan.
As we have indicated in the past our underwriting criteria requires multiple sources of repayment.
And this particular case, we have the assets of the business, our commercial property and a personal guarantee from a high net worth clients.
As a result, we believe the loan is well secured and there was no specific reserve required.
We recorded a provision for loan losses of $1 2 million, which was driven by the growth and changes in the mix of the loan portfolio.
Let's touch on our <unk>.
It took a L to adjusted total loans at 78 basis points, which was relatively consistent with the end of the prior quarter and reflective of our strong credit quality and the low level of losses that we have experienced in the portfolio.
On January one we adopted the seasonal standard for allowance for credit losses are.
Our preliminary estimate is that our ACL to total loans ratio will be in the range of 75 to 90 basis points.
30 to 45 basis point coverage on off balance sheet commitments.
Now I will turn the call back to Scott.
Thanks Julie.
Turning to slide 13, I'll wrap up with some comments about our outlook and priorities for 2023.
Well 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.
Prior periods of economic stress.
And each of the past three years, we further tightened our already conservative underwriting criteria.
As a result of credits we've added the portfolio over that time have a substantial question in there 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 sub prime consumer.
We feel very comfortable with this small amount of office CRE that we have in the portfolio. These properties arent in major metropolitan areas, where the work from home trend has been most pronounced.
It consists of smaller properties and high end suburban areas with tenants and more recession.
This 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 their loan production.
Our relationship bankers are focused on developing full relationships with both loans and deposits from clients. We expect this to result in better alignment between loan and deposit growth going forward.
Well, we continue to be conservative and highly selective in our new loan production until economic conditions improve we expect to be able to generate 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 contributed balance sheet growth given our consistent success in expanding relationships with wealth management clients to include loans and deposits as well.
Our vessel oriented 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 Julian mentioned now that our near term investment in talent and technology to support our long term growth are largely completed we expect to keep our expense growth rate.
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 have successfully delivered on the strategy, we outlined at that time for enhancing the value of our franchise.
While navigating through a multiyear pandemic, we've generated strong organic growth by taking market share in our existing markets and expanding into new markets and complemented that with discipline, well priced and well executed exit acquisitions.
The balance sheet growth. We've generated has resulted in greater operating leverage and higher level of earnings and improve profitability.
With our strong execution since the IPO, we've created significant value for the shareholders of 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.
Thank you again, ladies and gentlemen, if you'd like to ask a question. Please press star one one on your Touchtone telephone again to ask a question. Please press star 111 moment. Please.
Our first question comes from Brett Robinson Humphrey Your line is open.
Hey, good morning, I wanted to talk about first the growth in deposits linked quarter and I think Scott you mentioned, some fairly sizeable clients, adding funds too.
The deposit mix can you talk maybe about the larger deposits this quarter and then the efforts to.
To continue growing that would we expect that to continue in terms of.
Acceleration of the linked quarter beta.
Okay.
Yes.
We talked a little bit about this I think in the last two calls you know 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 loans coming from we always kind of wonder where the next deposits 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 thats 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.
Loans or deposits at a rate that was double our loan growth rate in Q4. So I do think that we really had a nice success with that and and as we said in the prepared comments.
A lot of that came from existing clients, which is <unk>.
Exactly what we've seen over the prior you know 18 years here.
And then my prayer.
Private banking operation. So, yes, I do think that that will continue into 2023.
The comment you made.
Towards the end of your question no I just wanted to draw some attention to that.
If you look at kind of quarter by quarter last year.
Our deposit beta.
We did a pretty nice job I think as an organization in and holding our deposit beta down in the first half of the year.
And as we talked about last quarter.
Really been an unprecedented environment.
30, something years I've been doing this we certainly never seen.
Deposit or excuse me fed fund rates go up as fast as quickly.
By as much as quickly as what we saw.
Through the middle and latter parts of this year and I feel like you know the relationship based.
Our focus that we have here has really served us well.
Now of course that came back in Q4.
In our.
Interesting way, where we really are.
<unk> saw a big spike in <unk>.
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.
I think we guided in our in our comments that we're going to see.
Continued pressure in Q1 of 2023, but you know you look at where our NIM is.
For example, in Q4 of $3 32, and you compare that to historic Nims at first western or compared to weather high fee banks like us.
332, so a very strong number.
No.
Just looking forward.
I think the the interesting.
Question.
I don't really know.
That we want to give guidance on this but I guess my feeling is we should.
<unk> for the worst, but we can hope for something better than the worst and.
Do think that.
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.
A half a dozen or whatever its been 75 basis point increases from the fed this year.
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.
<unk> zero, when fed funds or five or which 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.
We may get dealt.
We know from page.
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 every quarter and we produce something like two or $300 million a quarter at least last year and so you didn't look at the impact of your loans rolling off a three or 4%.
And either renewing or new loans coming on at seven or 8% and it just feels to me like we're pretty well positioned.
From an already already competitively high.
Net interest margin compared to high fee bank peers, probably banking peers.
We are 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 whats 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.
Yes, Scott that was a that was very helpful.
Would agree you obviously did a good job last year managing the deposit cost has just gotten so competitive and essentially your competition is the treasury curve.
Yeah. Good morning, guys wanted to ask.
I wanted to.
And my follow up question I wanted to ask about the loan portfolio growth from here.
<unk> was construction and residential.
Obviously, you have slow growth from 21% linked quarter annualized.
In the fourth quarter, but wanted to get a sense of what the pipeline looks like what you're thinking might grow.
This year, and then any magnitude that you're expecting from a pipeline perspective.
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 a 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 of them I think so we have the infrastructure in place we've got some strong.
Uh huh.
The machine I call it in our existing offices and then we've added some more.
High quality lens.
Lenders and some of these new markets that we're in Arizona, Western Wyoming and Montana.
So, yes, I mean, I think we're well positioned to see growth in.
Deposits and loans in those markets and relationships, but but it's just hard to tell right now I think.
We're seeing clients that were thinking about doing something that makes sense at 4% and maybe it doesn't make sense at 8%.
And these are sophisticated people and they've been through cycles, and they don't need to do something.
And maybe they will maybe they won't I would say right now our pipelines are down but the share not empty. There is plenty of activity going on and people are doing things and where.
Closing on our new loans.
And then I would say okay.
Brent for that kind of that mix comment that you added into that question.
We did see quite a bit of.
Mortgage offering mortgage production last year and fell through.
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 you that 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 <unk>.
Just in the prior year for the first couple of quarters. This year as we.
Look at our competitors and what they are pricing those loans out there.
Not quite as attractive as what we would want to put on our portfolio. So I don't think youll see that same level of growth for us.
In the first part of this year unless things change.
Okay. That's very helpful. Thanks for all the color.
Thank you good thank you Brad.
One moment please for our next question.
And our next question comes from the line of Brady Gailey of <unk>. Your line is open.
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.
Was there any other thing you were thinking about when you raise debt sub debt I'm not sure. If there's anything else that's expiring are maturing, but what's the any color behind why the sub debt raise.
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 year over these last few years to support the growth we've had.
But we saw a window for an attractive.
Non rated.
<unk> raised the one that was done before us I think closed at 8% of our regional bank. The one who was on afterwards, the eight 5% we got ours done at 7%, a five year fixed and gives us $20 million of.
Surplus tier two capital at the holding company that can be pushed down to the bank for additional.
Sure.
Comment it can be additional cash for the for the holding company.
We sat general corporate purposes, which is.
Exactly what we plan to use it for so just seemed opportunistic in and of course, it's non dilutive impact on <unk>.
Future EPS is minimal and I think we don't know what's in the future and you know when the window windows like that is there I think it makes sense to take advantage of it.
Alright.
And the new commercial loan.
<unk> entered into NPA is it sounds like it's not a huge risk given the dynamics you talked about just a little more color on 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.
No.
All of these things are a process a couple of points on that its a.
Producer of a consumer product that probably got a little over their skis.
They that's a metaphor.
They are.
Thank you are an indication of the strength of our credit process and of our borrowers here as Julie said in her.
Prepared comments yet.
We always underwrite to three sources of repayment we've got the.
The business assets, we've got there.
The buildings.
We've got some other commercial buildings and we have.
Personal guarantee from a very strong borrower clients.
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 doesn't feel to us or it doesn't seem to us to be indicative of anything like it's not some systemic problems that we have three other loans just like it that are all going to have problems or something like that.
It's just I think a one off thing that.
That we felt.
Better putting on non accrual in Q4.
Okay, and then the commentary about the margin coming down in Q1.
The magnitude of how much it could come down or any idea where the margin exited the quarter in December .
Do you want to talk about yet in December our NIM just for the month of was three out of six so thats.
A little bit helpful to you to see where that might lead us.
You know Scott touched on a lot of them. The NIM comments in the net interest income and market for deposits I think that will help you out.
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 there'll be able to.
Hold that flat for the rest of the year, how should we think about kind of full year expenses.
Well, we think this is a good time to be managing expenses and so we talked about what we've talked before that our path to success is not cost cutting.
But we talked in our 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 adjustments for people I think that that would be a successful.
<unk> control year for us.
I do think we're at a place in the cycle, where we won't 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.
Specialty and our core earnings.
And then net net interest income.
By itself.
Is it is it up 49% year over year for the fourth quarter, Julie some number like that.
And then we have these kind of hideous headwinds from.
On the fee income side and I keep thinking at some point does that going to go lower so.
If it goes higher and then you've got good expense control I mean, thats all a formula for a nice earnings acceleration so.
So that's.
Where we're thinking on expense discipline.
Okay, great. Thanks, guys.
Thank you one moment please.
Our next question comes from the line of Matthew Clark of Piper Sandler Your line is open.
Hey, good morning.
Yes.
Just first one for me.
Around the margin if you have the spot rate on deposits deposit costs on interest bearing deposit costs at the end of the year.
Spot rate for the cost of deposits at December was 199 of just about 2%.
That's total okay.
Okay.
And then the the risk management and insurance fees, the seasonal step up this quarter, a little bit higher than a year ago fourth quarter or anything I guess about this rate environment or.
Just general macro environment.
Might have lifted that a little more than usual or is that a kind of a reasonable level of activity.
For the for next year's fourth quarter.
Okay.
We can't seem to predict that you know, it's it seems to produce a pretty consistent amount year end year out through the first three quarters of this year was below our expectation and we thought we were going to have a strong fourth quarter and we did so I.
I think you know.
Higher fourth quarters than the prior three quarters, 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 a wrapper around their client base more folks out there, helping our clients with.
The risk and the life insurance business so.
So hopefully that trends up over time.
And it will be cyclical where youre going to see more in the fourth quarter.
Okay got it.
Great and then just.
Kind of Big picture, and I think a number of banks have.
Kind of.
Suffered from generating probably stronger loan growth than they should have.
Funding it with deposits our low cost deposits you guys, obviously had excess deposit growth this quarter.
But it was 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.
Low truly truly low cost deposits and not price sensitive type balances.
Well honestly, we're not really thinking in terms of how to best manage NIM, we're thinking about how to grow their business with the clients that we want given the economic and competitive environment that were handed.
We've talked about.
Credit standards, we've talked about raising margins.
We've talked about that.
The relationship focus.
If you look at the actual trend line for loan production.
Gone from little under $3 50, a little under 300, a little under 200 over the last three quarters.
You know I think that that.
Yes.
All indicative of.
How we are approaching loans.
I think sometimes with banks that turned 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 our relationships with existing clients, making sure that our clients and referral sources and our prospects are.
Yes, as being in business and willing to do things that make sense, albeit under more stringent terms and more expensive.
Think thats, where we want to be in.
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 again want to give guidance on 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 slowdown rate increases. So we don't see all of this deposit pressure and as we reprice our loan portfolio.
I think the math on that stuff works pretty nicely for us and you always Julie was talking about 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.
Great. Thank you.
Thank you.
Thank you one moment please.
Okay.
Our next question comes from the line of Bill <unk> of Needham Your line is open.
Thank you, it's Titan 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 and what opportunity that may create for you all with market share.
Well I don't know really what else to add I mean, I think we're seeing.
Some some banks are approaching this part of the cycle by saying, we're not going to land.
And I think that that does create opportunities for us with prospects that aren't here, yet or clients that have things that are way 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 market 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 an <unk> for.
For example in 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.
Our competitive position, we don't want to be in.
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.
<unk> on our books that we don't want.
Maybe Scott the one thing that.
It would be helpful is how prevalent are you finding.
Yeah.
Just pulling back dramatically on lending by competitors.
I don't I don't know how to answer that either Bill you know we're in.
Some very different markets from each other you know what we see in Denver is different than what we see in the other front range markets.
The resort markets are different western Wyoming.
<unk> 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 the Arizona, we've been able to take advantage there of attracting new lenders and in a lot of the reason that the really high quality people that you want to attract the first western.
The reason they want to join us as they see us as a growth oriented company and not somebody that's.
Turning it on turning it off turning on so it does spell opportunity for us I just think that.
And then I want to be clear I've said, it two or three times already but this is not the time to be 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 have been tightening.
Our underwriting standards and the terms, we've been expanding our NIM.
Spending our credit spreads that were charging clients and we've been disciplined about that and I think thats going to pay off for us in 2023 and beyond.
Thank you and two additional questions if I may.
The acquisition pipeline would you. Please provide an update in terms of what youre seeing given given all of the macro factors that you are talking about and whether that's.
Causing some to decide now would be a good time to sell and then secondarily.
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.
That business please.
Yeah.
Eight.
Two small questions.
Let me start with <unk>.
Acquisition pipeline.
I think what you hear out there is what we see which is that it's a difficult time for acquisitions I think with the challenges with the OCI and with credit uncertainty or whatever it's the hard time to get things done.
We continue to spend time and effort on our corporate development program.
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 were interested in no. We're interested in and when we call on them and visit with them.
And we're kind of 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.
Of interest to us and were just priced in.
A range of them make any sense to us and they did ultimately.
Find a buyer at a price much higher than we would have paid and so I wish them well I think thats.
Interesting, but we don't need to do those things, we don't need to scratch on those things.
Hope is as investors you guys see that we are disciplined about that stuff.
You look at our last three or four or <unk> for that matter.
Acquisitions here.
They've had.
Very happy stories, because we're disciplined about how we look at at 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.
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 think about Peter Tim systems.
I don't know how far.
Julie we should go with this whole thing, but let me let me try a specific answer in a general answer and then 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 are.
Our trust and our investment in our mortgage and our banking systems talk 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 are promising.
At work and so what we've done historically here at first western as we've taken those four core systems and pulled the data out and then use the data to do the things that we need like.
Client profitability and relationship pricing and stuff like that.
Cross 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 is 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 where you can use the core is 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.
It's kind of next generation net 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 as we took our trust core in our investment Corps and replace the incumbent's with a new vendor that has a cloud based solution that integrates.
<unk> is one solution for both of those cores and then for this year, we're hoping to do that with our banking core.
So that we've got ourselves in a place where.
All of these things.
Even though they may not be able to talk to each of them and ill talk to our overlay is much more effectively 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.
Ending up.
Julie's.
Finally breakeven is that we are hoping for some cost saves I think for sure we've seen breakeven a breakeven yet.
See how once the dust settles and everything.
Cost savings to be had there, but my point is they're not costing us more there are some one time conversion cost 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.
I've been sitting there no I think you got it.
To touch on the efficiency of our processes simplification for our associates.
Client experience improvement and then more accessible data since.
Since you are kind of the key points.
We are hoping to accomplish out of this one.
Did that answer your question Bill It does that.
Really it sounds fantastic good luck pulling all that together and thank you both.
Yes, thanks for the questions.
Thank you.
One moment please.
And it looks like we do have a follow up question from Brett <unk>. Your line is open.
Hi, I just wanted to follow back up on fee income and make sure I understood the expectations for the year.
What kind of 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 on that business line, but my guess is youre going to.
To try and.
Mark that business I'm, just just wanted to hear any thoughts around the mortgage.
Expectations, given up obviously low levels.
Current times.
Yes, 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.
Two big headwinds for our fee business has been on the 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 time and.
Over the past 18 months continue to assess that.
Production, but typically for this season so.
It's not only going to be assessing it as the months come in.
And then we've added some msos in Arizona in particular.
So I think our production.
Market share should improve the MLR was higher.
100% Commission. So there is no expense associated with that if they are not producing.
They are so.
So I think thats whats 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.
The numbers for this year and it seemed pretty aggressive to me, but if those come through 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'm not going to get worse.
They're going to be flat or get better I think.
And then on the fee income.
The asset management side of 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 youre not paying much in fees compared to the 20 or 30% gains you're making or whatever it is hard to get people to move its 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 spouses them Hey, how come you lost.
All this money.
Nice to have a professional advisor that's helping them and so we think it's an interesting time, where actually very focused.
A company right now and how we can strengthen.
Our <unk>.
Planning Trust and investment management, which are really kind of three different businesses. They are all very much.
Integrated and overlapping but the 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.
Delivering this team based.
Integrated private bank and Trust service locally so I think.
I mean I.
I think there is.
It's hard to imagine they're going to go down much from where we are and I think there is opportunity on the upside whether we realize that in 2023 or not I don't know, but.
You go back to where we've come from and we've come a long way in those businesses and our 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.
Okay, that's great color Scott appreciate it.
Thank you.
Im showing no further questions at this time I will turn the call back over to management for any closing remarks.
Yes. It did have a couple of closing points I wanted to make if if I could.
I think.
I mentioned in our prepared comments.
<unk>.
If you step back a little look at the broader context.
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 intangible book value.
And we've done that without.
Dilutive capital raises.
In the meantime, we 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 in the proven in these interim years here since the IPO.
I also want to recognize the hard work of our 365 first Westerners I feel like in a pretty challenging year, we managed to produce another great year solid organic growth in revenues and core earnings in spite of some significant headwinds, we're well positioned for the challenges of 2023 may.
Bring and especially if some of those 2022 headwinds turn to <unk> 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.
Thank you ladies and gentlemen, this does conclude today's conference. Thank you all for participating you may now disconnect have a great day.
Okay.
The conference will begin shortly to raise and lower Johan during Q&A, you can dial star one one.
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