Q3 2023 First Western Financial Inc Earnings Call
Okay.
Speaker 1: 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.
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 one.
One on your telephone you will.
Then here an automated message advising your hand is raised to work.
Speaker 1: 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.
All your question. Please press Star one 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 of financial profile. Please go ahead.
Speaker 2: Thank you, Abigail. Good morning, everyone, and thank you for joining us today for First Western Financial's third quarter 2023 earnings call.
Thank you Abigail and good morning, everyone and thank you for joining us today for first Western Financial's third quarter 2023 earnings call.
Speaker 2: Joining us from First Western's management team are Scott Wiley, Chairman and Chief Executive Officer.
Joining us from first Western's management team are Scott Wylie, Chairman and Chief Executive Officer, Julie Core Kamp, Chief Operating Officer, David Weber, Chief Financial Officer.
Speaker 2: Julie Corkamp, 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.
Speaker 2: If you've not done so already, please visit the events and presentations page of First Westerns Investor Relations website to download a copy of the presentation.
Speaker 2: 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 risk and uncertainty.
Before we begin I'd like to remind you that this conference call contains forward looking statements with respect to the future performance.
Condition of first western financial that involve risks and uncertainties.
Speaker 2: Various factors could cause actual results to be materially different from any future results expressed or implied by such forward-looking statements.
Various factors could cause actual results to be materially different from any future results expressed or implied by such forward looking statements.
Speaker 2: These factors are discussed in the company's SEC filings, which are available on the company's web site.
These factors are discussed in the company's SEC filings, which are available on the company's website I would I'll shoot direct you to read the disclaimers in our earnings release and Investor presentation.
Speaker 2: I would also direct you to read the disclaimers in our earnings release and investor presentation.
Speaker 2: The company disclaims any obligation to update any forward-looking statements made during the call.
The company disclaims any obligation to update any forward looking statements made during the call.
Speaker 2: Additionally, management may refer to non-getmeasures, which are intended to supplement but not substitute. For the most directly...
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.
Speaker 2: 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 Gapjin on GAAP measures . With that, I'd like to turn the call over for Scott. Scott?
Thanks, Tony Good morning, everybody.
Speaker 3: The operating environment remained challenging in the third quarter, but we were able to deliver another quarter strong financial performance by executing well in those areas we can control, which helped us offset the impact of things we can't control, such as the higher interest rates that have reduced loan demand, and creates a very competitive deposit pricing environment.
The operating environment remains challenging in the third quarter, but we were able to deliver another quarter of strong financial performance by executing well in those areas, we can control, which helped us to offset the impact of the things we can't control such as the higher interest rates that have reduced loan demand created a very competitive deposit pricing environment.
Speaker 3: 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-p provision income, which was an increase of 17% from the prior quarter.
We generated net income of $3 1 million or 32 cents per diluted share.
In the third quarter with $4 6 million of pretax pre provision income, which was an increase of 17% from the prior quarter.
Speaker 3: As we've indicated previously, we've increased our focus on court deposit gathering around the organization, and we saw good results from these efforts during the third quarter, with total deposits increasing in an annualized rate of 7.5%.
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 seven 5%.
Speaker 3: Well, overall loan demand remains muted to the higher interest rates. We're still seeing attractive lending opportunities in our markets, which enable us to generate annualized loan growth of 5.6% while maintaining our conservative underwriting standards and pricing criteria.
Well 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 five 6%, while maintaining our conservative underwriting standards and pricing criteria.
Speaker 3: 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 a creative to our margin in relieving some of the margin pressure we've seen in prior quarters.
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 at relieving some of the merger pressure we've seen in prior quarters.
Speaker 3: With our success and 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.
With our success in deposit gathering 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.
Speaker 3: 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 low end of our targeted range in the third quarter.
As I mentioned earlier, we have 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.
Speaker 3: We continue to have success in our trust and investment management new business development efforts, which continued offset the impact of lower market values on our assets and on our assets under management.
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.
On our assets under management during the third quarter.
Speaker 3: Broadly speaking, our loan portfolio continues to perform well, although we did have an increase in NPA's this quarter, primarily due to the downgrade of four loans totaling 42 million that are all related to one relationship.
Broadly speaking our loan portfolio continues to perform well, although we did have an increase in NPA. This quarter, primarily due to the downgrade of four loans totaling $42 million that are all related to one relationship.
Speaker 3: These loans consist of a commercial loan, an owner occupied commercial estate loan, a residential mortgage and a personal loan and credit.
These loans consist of a commercial loan and owner occupied commercial real estate loan.
Our residential mortgage and our personal line of credit.
Speaker 3: This is a client we've had since 2018. It 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-aggrol.
This is a client we've had since 2018 it had good experience with however, they are currently facing a liquidity crunch and become delinquent on their payments, which resulted in the placement of these loans on non accrual.
Speaker 3: Given our conservative underwriting criteria, in the multiple sources of repayment we require, these loans are well-collateralized with a number of properties.
Given our conservative underwriting criteria and the multiple sources of repayment, where you acquire these loans are well collateralized with the number of properties.
Speaker 3: The buyer is planning a number of liquidity events, including the sale ease properties that should result in a full repayment of the loan.
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.
Speaker 3: It will likely take a few quarters of these loans to be resolved, but given the strong buyer and collateral that we have, we believe the loss potential is minimal.
It will likely take a few quarters for these loans to be resolved.
But given the strong borrower and collateral that we have we believe the loss potential is minimal.
Speaker 3: Moving to slide four, we generated net income of 3.1 million or 32 cents per deluded share in the third quarter. And over the past year, due to our strong financial performance and brewed balance sheet management, we've seen increases in both book value and tangible book value for share, despite the impact of capital resulting from our adoption of CSL at the beginning of the year.
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 accruals, resulting from higher adoption of <unk> at the beginning of the year.
Speaker 3: Now I'll turn the call over to Julie for some additional discussion of our balance sheet and trust investment management trends. Julie?
Now I'll turn the call over to Julie for some additional discussion of our balance sheet and trust and investment management trends Julien.
Speaker 4: Turning the 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.
Scott turning to slide five well 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 loan due to an increase in payoffs that we saw during the quarter.
Speaker 4: If this has been the case over the past few quarters, the increase we are seeing in construction loans are related to draw up on credit lines primarily related to residential housing projects. Being built by very strong experience to develop developers in areas with limited housing supply.
And 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 available developers I'm curious with limited housing supply.
Speaker 4: As we mentioned 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.
As we mentioned on our last earnings call.
An increase in loan production during Q 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.
Speaker 4: And with the discipline we are maintaining in 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 .
And with the discipline, we are maintaining in our pricing criteria. The average rate on new production increased 51 basis points from the prior quarter to 792% and was eight 4% in the month of September .
Speaker 4: Moving to slide six, we'll take a closer look at our deposit trend.
Moving to slide six.
Take a closer look at our deposit trends.
Speaker 4: 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.
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.
Speaker 4: The mix of deposits continues to reflect a trend of clients moving money out of non-intersparing accounts and to intrasparing accounts in order to get higher yields on their excess liquidity. Turning to trust and the best.
The mix of deposits continues to reflect the trend of clients moving money out of noninterest bearing accounts.
Interest bearing accounts in order to get higher yields on their excess liquidity.
Turning to trust and investment management on slide seven.
Speaker 4: We had 108 million decrease in our asset center management in the third quarter, primarily due to market performance, which is partially offset by influx from new clients that we added during the quarter.
We had $108 million decrease in our assets under management in the third quarter, primarily due to market performance.
<unk>, partially offset by inflows from new clients that we added during the quarter.
Speaker 5: Now I'll turn a call over to David for further discussion of our financial results. David. Thanks Julie. Turning this slide 8, we'll look at our gross revenue.
Now I will turn the call over to David for further discussion of our financial results David Thanks, Julie.
Turning to slide eight we'll look at our gross revenue.
Speaker 5: Our gross revenue declined 6.6% from the prior quarter as they declined in net interest income was partially offset by an increase in non-interest income.
Our gross revenue declined six 6% from the prior quarter as a decline in net interest income was partially offset by an increase in noninterest income.
Speaker 5: The non-interest income mix increased to 26.7% from 17.7% in the prior quarter.
The noninterest income mix increased to 26, 7% from 17, 7% in the prior quarter.
Speaker 5: Turning the slide on, we'll look at the trends in that interest income and margin.
Turning to slide nine we'll look at the trends in net interest income and margin.
Speaker 5: 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 the pod.
Our net interest income decreased nine 1% from the prior quarter due to an increase in interest expense, resulting from a higher average cost of deposits.
Speaker 5: Our net interest margin decreased 27 basis points, the 2.46 percent driven by an increase in interest bearing deposit costs, and slightly lower yield on average earning assets.
Our net interest margin decreased 27 basis points to 246% driven by an increase in interest bearing deposit costs and slightly lower yields on average earning assets.
Speaker 5: 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.
We did not accrue interest on the loans placed on nonperforming status in the quarter, which included a $42 million of loans under one relationship that Scott discussed.
Speaker 5: These loans accounted for 20 of the 27 basis point decline that we had in our net interest margin in the quarter.
These loans accounted for 20 of the 27 basis point decline that we had in our net interest margin in the quarter.
Speaker 5: Given the current trends we are seeing, we expect pressure on our net interest margin to moderate in the fourth quarter. We are seeing the current trends we are seeing, we expect pressure on our net interest margin to moderate in the fourth 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.
Speaker 5: Our non-interest income increased 54% from the prior quarter, primarily due to items that impacted our second quarter, non-interest income.
Our noninterest income increased 54% from the prior quarter, primarily due to items that impacted our second quarter noninterest income.
Speaker 5: Third quarter included $300,000 of losses accounted for under fair value impacting EPS by two cents.
Third quarter included $300000 of losses accounted for under.
Fair value impacting EPS by <unk> <unk>.
Speaker 5: Among our larger recurring sources of non-interesting come, 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 plan.
Among our larger recurring sources of noninterest income our trust and investment management fees increased five 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 for enhancements. We have recently made to our service.
Level and technology platform.
Speaker 5: Net gain on mortgage loans decreased to approximately 700,000 as higher rates continue to impact loan demands.
Net gain on mortgage loans decreased to approximately 700000 as higher rates continue to impact loan demand.
Speaker 5: approximately 91% of the mortgage originations were for purchase loans in the third quarter.
Approximately 91% of the mortgage originations were for purchased loans in the third quarter.
Speaker 5: and we had a slight decline in bank fees due to lower loan prepayment and swap fees relative to the prior 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.
Speaker 5: 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 discipline expense control.
Our noninterest expense decreased one 1% from the prior quarter with slight declines in most of our major line items as we continue to focus on disciplined expense control.
Speaker 5: 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.
Our salaries and benefits expense in the third quarter included approximately 400000 of acquisition related compensation expense that was accelerated due to an early termination.
This impacted EPS by <unk>.
Speaker 5: For the fourth quarter, we continue to expect our non-interess expense to range between 18.5 and 19 million.
For the fourth quarter, we continue to expect our noninterest expense to range between $18 five and $19 million.
Speaker 5: Now turning the slide 12, we'll look at our asset quality.
Now turning to slide 12, we'll look at our asset quality.
Speaker 5: On a broad basis, the loan portfolio continues to perform very well as we had another quarter of minimal loss.
On a broad basis the loan portfolio continues to perform very well as we had another quarter of minimal losses.
Speaker 5: The increase in non-performing assets was primarily driven by the downgrade of the 42 million in loans related to a single relation.
The increase in nonperforming assets was primarily driven by the downgrade of the $42 million in loans related to a single relationship.
Speaker 5: These loans are now being individually analyzed and given the strong collateral that we have, we did not require specific reserve for these loans and the downgrades did not impact our provision.
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.
Speaker 5: We recorded a provision for credit losses of approximately 300,000 in the quarter.
We recorded a provision for credit losses of approximately 300000 in the quarter.
Speaker 5: 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 30th. Now, I will turn it back to...
The provision recorded this quarter combined with a modest level of loan growth increased our level of allowance to adjusted total loans by three basis points to 92 basis points on September 30th.
Now I will turn it back to Scott Scott.
Speaker 3: 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.
Thanks, David and congratulations on getting through year first.
Earnings call there, it's great to have you on the call with us. Thank you.
Speaker 3: Turning to slide 13, we provided an update on our strong track record of valuation for share of older.
Turning to slide 13, we provided an update on our strong track record.
Value creation for shareholders.
Speaker 3: 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 and tangible book value per share as we've executed well in the plan that we communicated at the time of our IPO.
This slide shows our trend intangible 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.
Speaker 3: Following our third quarter performance, we've now increased our tangible book value per share by 144% since our IPO, which includes the 56th decrease that we had due to the adoption of CESL at the beginning of 2023.
Following our third quarter performance, we have now increased our tangible book value per share by 144% since our IPO, which includes the 50 50.
56% decrease that we had.
Due to the adoption of seasonal at the beginning of 2023.
Speaker 3: 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.
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.
Speaker 3: 30 to slide 14. I'll wrap up with some comments about our near term outlook.
Turning to slide 14, I'll wrap up with some comments about our near term outlook.
Speaker 3: 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.
Well there is 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.
Speaker 3: Most importantly, we'll continue to focus on controlling the things that we can control, including our balance sheet management, attracting new clients.
Most importantly, we will continue to focus on controlling the things that we can control, including our balance sheet management, attracting new clients.
Speaker 3: Particularly those that provide court-apositive relationships and trust and investment assets, providing exceptional service to existing clients and tightly managing our expenses.
Particularly those that provide core deposit relationships and trust and investment management assets.
Providing exceptional service to existing clients and tightly managing our expenses.
Speaker 3: By continuing to execute well in these areas, we believe we can continue to offset the impact of the challenging macroeconomic environment and deliver strong financial results for our shareholders in the near term.
By continuing to execute well in these areas. We believe we can continue to offset the impact of a challenging macroeconomic environment.
Deliver strong financial results for our shareholders in the near term.
Speaker 3: At the same time, we continued to operate with the long-term approach and the investments that we believe will further enhance our business development capabilities.
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.
Speaker 3: This includes recently opening our first full service office.
This includes recently opening our first full service office.
Speaker 3: the Boseman Montana market where we previously only had a loan production of.
The Bozeman, Montana market, where we previously only had a loan production office.
Speaker 3: Since entering this market, we steadily build out the team and clients with now full service office. We believe we can accelerate our business development activities in this area.
Since entering this market, we steadily build out the team and clients with now a full service office. We believe we can accelerate our business development activities in this area.
Speaker 3: With the strategic investments that we continue to make, we believe we're well positioned to continue capitalizing the attractive markets 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 the strategic investments that we continue to make we believe we are 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.
Further enhance the value of our franchise over the long term.
Speaker 3: With that, we're happy to take your questions. Abigail, please open up the call.
With that we're happy to take your questions Abigail Please open up the call.
Speaker 1: 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 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. One moment while we compile the...
Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.
One moment, while we compile the Q&A roster.
Yes.
Speaker 1: Our first question comes from Brady Galey with KBW. Your line is open.
Our first question comes from Brady Gailey with <unk>. Your line is open.
Hey, Thank you good morning, guys.
Speaker 3: I just wanted to start with the net interest margin. You know, as I look at the last three quarters.
Good morning Brady.
I just wanted to start with the net interest margin.
As I look over the last three quarters.
Speaker 6: You know, 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. And it is that in 4Q. And as we look to next year, do you think the margin, you know, is stable? Do you think you could, do we think it could have some upside from asset repricing? Like how are we thinking about the margin into 2024?
Every quarter, it's been a pretty big step down it sounds like thats going to moderate and for Q.
I'm, just wondering where you think the margin.
Find the bottom.
Is that in <unk> and as we look to next year do you think the margin.
Stable do you think you could do.
Do we think a good have some upside from asset repricing.
How are we thinking about the margin in 2024.
Speaker 3: Great question, Brady. So obviously it's been a difficult year to forecast, and then given the number of variables and the unusual operating environment we've been in.
Yeah, Great question.
Brady so.
Obviously, it's been a difficult year to forecast NIM, given the number of variables and the unusual.
Operating environment, we've been in.
Speaker 3: 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.
One of the things I looked at is kind of a month by month trend line.
And we did say in the last quarter on this call that we thought that once the fed stop raising short term rates.
Speaker 3: that are deposit costs would stabilize and our asset yield would improve, which would drive a higher NEM. You know, unfortunately in July , we had another interest rate increase, which you know, given the number of deposits we have with kind of a hundred percent beta on them, we saw a significant increase in our deposit cost in Q3. So that was not particularly helpful to short term results.
That our deposit costs stabilize and our asset.
Yields would improve which would drive a higher NIM.
Unfortunately in July we had another interest rate increase which given the number of deposits, we have with kind of a 100% beta on them.
We saw a significant increase in our deposit costs in Q Q3, so that was not particularly helpful to short term results.
Speaker 3: But if you look at this quarter, month by month, you know, we're kind of in the two, 50s each month.
But if you look at this quarter month by month.
Kind of in the 250 <unk> each month.
Speaker 3: 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.
And so I'm hopeful that if we don't see another short term interest rates by the fed which is I think what the market is expecting at this point that there won't be one.
Speaker 3: that we can see stabilizing the positive cost 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 their fact that they're larger and more sophisticated. And so, you know, going into Q4, hopefully, we see stabilized the positive cost and improving assets.
That.
We can see stabilizing deposit cost for us again, I've talked before about the fact that I think you know our clients are kind of ahead of the typical bank clients because of their back that they are larger and more sophisticated and so.
Going into Q4, hopefully we see stabilized.
<unk> cost and improving asset yields.
Speaker 3: So at least we're stable to maybe a little bit of margin compression Q4. Our numbers going into 2014, we're assuming.
So at least were stable.
Maybe a little bit of margin compression in Q4, our numbers going into 2014.
We're assuming.
Speaker 3: you know, 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
Higher for longer but flat on the short end to where we are today. So if that's the scenario then I think you'll see the benefit of the higher asset yields playing out over the course of the year.
I think the interesting thing just kind of go back to our IPO to I think the interesting thing for our business model is.
Speaker 3: If that plays out like that, and we can see just stable funding costs, higher asset yields, and well-controlled operating expenses, then you see improved earnings, which is what I talked about in this.
If that plays out like that and we can see a stable funding costs higher asset yields and well controlled operating expenses than you see improved earnings which is what I talked about in my comments.
Operator: Good day and thank you for standing by.
Operator: Welcome to the first Western Financial Third Quarter 2023 earnings conference call. At this time, all participants are in a listen only mode.
Speaker 6: Yep. And then a similar question on the expense side. Got it, you guys.
Operator: 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 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again.
And then a similar question on the expense side.
Speaker 6: or expecting 18 and a half to 19 million of expenses to finish the year.
Guys.
Our expected 18 $5 million to $19 million of expenses.
To finish the year.
Speaker 6: You know, can you hold those expenses flat next year? Do you think you see some modest creeps? How do you think about expense growth in 24?
Can you hold those expenses flat.
Operator: Please be advised that today's conference is being recorded.
Next year do you think you see some modest creep how do you think about expense growth and 24.
Tony Rossi: I would now like to hand the conference over to your speaker today, Tony Rossi, at Financial Profile. Please go ahead. Thank you Abigail.
Speaker 3: You know, our assumption is, you know, to accomplish the things we wanna do long term for shareholders, we need to continue to invest. And we have that built into our 18 and a half 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...
Our assumption is to accomplish the things we wanted to do long term for shareholders, we need to continue to invest and we have that built into our 18 $5 million to $19 million. So although other things being equal we believe we can hold expenses in the ballpark of where they are.
Scott Wylie: Good morning everyone and thank you for joining us today for First Western Financial Third Quarter 2023 Earnings Call.
Scott Wylie: Joining us from First Western's management team are Scott Wylie, Chairman and Chief Executive Officer, Julie Courkamp, Chief Operating Officer, and David 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.
Now.
Of course, there is a little bit of seasonality with.
Speaker 3: You know what it would is the like a Peralta Yeah payroll taxes as you get in the first quarter stuff like that, but 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 improve them
Yeah.
What is the like of that.
Okay.
Payroll taxes as you get in the first quarter and stuff like that but but but generally.
Scott Wylie: 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 to the disclaimers in our earnings release and investor presentation. The company disclaims any obligation update any forward-looking statements made during the call.
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.
Speaker 6: 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?
Alright, and then finally for me the $42 million relationship that went into non performing I think you said it was for loans. So did that all four of those loans stop paying interest or was it just one.
Speaker 3: Yeah, this was an interesting case. You know, we thought that we were gonna get this guy current.
Yes. This one is an interesting case, we thought that we were going to get this guy Curran.
Scott Wylie: Additionally, management may refer to non-get measures which are intended to supplement but not substitute for the most directly comparable gap 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 gap to non-get measures.
Speaker 3: in Q3 and 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.
In Q3.
He said he is a wealthy guy that has.
<unk> cash crisis going on right now, but at the end, we decided that while we would have had to give up to get them current wasn't worth it to us and we would just soon take our lumps here and see the increase in NPA, which.
Tony Rossi: With that, I'd like to turn the call over for Scott. Thanks, Tony.
Speaker 3: and we would just soon take our lumps here and see the increase in NBAs, which you know, 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, you know, this guy,
Scott Wylie: Good morning, everybody. The operating environment remained challenging in the third quarter but we were able to deliver another quarter strong financial performance by executing well in those areas we can control, which helped us offset the impact of things we can't control, such as the higher interest rates at a reduced loan demand and created a very competitive deposit pricing environment. We generated net income of $3.1 million or $0.32 per diluted share in the third quarter with $4.6 million in pre-tax prepovision income, which was an increase of 17% from the prior quarter.
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.
As we.
Speaker 3: We think, but still very strong. We think we're going to have a full recovery. The real estate collateral that we have, it is a very desirable market. It's in Aspen, it's in Nantucket, and it's in the West Palm Beach area.
We think the <unk>.
Still very strong.
We think we're going to have a full recovery.
Our real estate collateral that we have is a very desirable market sits in.
Aspen, it's in Nantucket and it's in the West Palm Beach area.
Speaker 3: So it was just an article in the Wall Street Journal, I think yesterday talking about how hot the high end market of the premium market is, which in Aspen was 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...
Scott Wylie: As we've indicated previously, we've increased our focus on quarter-posit 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%. Well, 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.
It is just that an article in the Wall Street Journal I think yesterday talking about how hard the high end market. The premium market is which at Aspen, which is already a premium market, but they are talking about.
How that continues to be a very desirable market and so I think you know.
As we move to <unk>.
Speaker 6: either he or we get liquidity on those properties, I think that that's all gonna turn out fine. And as we work through workout, it's gonna take a while, like I said, in my image on a bench. All right, great. Thanks for all the colors, Scott.
Either here, we get liquidity on those properties.
Think that that's all going to turn out fine.
And as we work through workout it it's going to take a while like I said in my comments.
Scott Wylie: 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 a creative through our margin in relieving some of the margin pressure we've seen in prior quarter. With our success and 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.
Okay, Alright, great. Thanks for all the color Scott.
Yes, Thank you Brady.
One moment our next question.
Okay.
Speaker 7: Our next question comes from Brett Roberton with How They Group. Your line is open. Hey, good morning, Scott and Julie.
Our next question comes from Brett Robinson with Holiday Group. Your line is open.
Hey, good morning, Scott and Julie.
Scott Wylie: 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. We continue to have success in our trust and investment management new business development efforts, which continued offset the impact of lower market values on our assets and 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 NPA's this quarter, primarily due to the downgrade of four loans totaling 42 million that are all related to one relationship.
Speaker 8: Wanted to ask 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. What, it sounds like it's a few quarters before, maybe that gets resolved.
Good morning, Brett.
I wanted to ask.
Back on the margin just obviously the debt.
Non accrual relationship was I think 20 of the 27 basis points of pressure when you were giving comments around the margin. How does does that relationship play into what you were talking about on the margin I assume that kind of excludes it.
And it sounds like it's a few quarters before maybe that gets gets resolved.
Speaker 3: Well, that will definitely come back to our benefit at some point. You know, it's not a cruel now, so just stay not a cruel. As we collect on it, I assume we're going to collect past interest, penalty interest.
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.
Scott Wylie: These loans consist of a commercial loan, an owner occupied commercial 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 under 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.
As we collect on it I assume we're going to collect.
Past interest.
Penalty interest.
Speaker 3: and that will be a nice benefit in the future at some point, but I don't think that's gonna be next week. It's gonna be a little while.
Scott Wylie: The buyer 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 buyer 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 deluded share in the third quarter.
And that will be a nice benefit in the future at some point, but I don't think thats going to be next week, it's going to be it's going to be a little while.
Speaker 3: So I think for the short term quarterly reporting, it's going to be a zero.
So.
I think for the short term quarterly reporting it's going to.
B a zero.
Speaker 3: But, you know, depending how it all plays out, I think, we will get that back.
But.
Depending how it all plays out I think we will get that back at some point.
Speaker 8: And then you had some solid lung growth this quarter. This was hoping for some additional color around, pipelines and as you think about the environment in 24, if you think there's gonna be a lot of opportunities to add some new business or are you gonna be a little more selective and maybe slow the balance sheet growth from here in terms of the lung portfolio. How you think about that?
Okay.
And then you had some solid loan growth this quarter just was hoping for some additional color around.
Pipelines and as you think about the.
The environment in 'twenty four if you think theres going to be a lot of opportunities to add some some new business or.
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 you think about that.
Scott Wylie: In over the past year, due to our strong financial performance and brewed 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 CSL at the beginning of the year.
Speaker 3: You know, we said that we thought we would target mid-single digit growth.
We said that we thought we would target mid single digit growth.
Speaker 3: on the loan side, well we worked our on photodiposite 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, um,
On the loan side well we worked are.
Floating deposit ratio back down to where it's historically been in the 90 days and so I think thats kind of exactly the way. It's played out we saw.
Julie Courkamp: Now I'll turn the call over to Julie for some additional discussion of our balance sheet and trust investment management trends. Julie? Thank you, Scott.
You know.
Speaker 3: The 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, months and month, quarter to quarter, there's gonna be some bumpiness, but hopefully, we can get that taken care of.
Julie Courkamp: 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. If this has been the case over the past few quarters, the increase we are seeing in construction loans are related to draw up on credit lines, primarily related to residential housing projects, being built by very strong experience developed developers and areas with limited housing supply.
Deposit growth in Q3 outpaced loan growth by a couple of percentage points annualized.
Yes.
I think if that trend continues which I would expect it to again.
Month to month quarter to quarter, there can be some bumpy this but.
Hopefully, we can get that taken care of.
Speaker 3: here the next quarter or two and then
Here in the next quarter or two and then.
Speaker 3: Then, you know, I think there's adequate loan demand in our markets for 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.
Then.
I think theres adequate loan demand in our markets from the kind of loans and the borrowers that we like to work with too.
We continue to see mid single digit for now.
Julie Courkamp: 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 in 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.
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 improved NIM. The way I've talked about and I think thats fine for now for where we are in the cycle I don't know that we need to be doing.
Speaker 3: And I think we can do all that while we're managing, you don't improve 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, you know, our normal kind of 15 or 20% organic growth rate. That seems to be, you know, not really what we want to do now. So that's how we're thinking.
Normal kind of 15 or 20% organic growth rate that seems to be not really what we want to do now so thats.
That's how we're thinking about it Brent.
Speaker 8: 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? And I know you're, I think you're state FDIC, so maybe you don't have the FAD, so I obviously see pressure to be below the 100, 300.
Julie Courkamp: 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.
Okay.
And then.
Concentrations on CND or commercial real estate does that play into anything related to how you think about growth going forward.
I think Youre state FDIC so.
Maybe you don't have to.
Slash OCC pressure to be below the 100 or 300.
Julie Courkamp: The mix of deposits continue to reflect a trend of clients moving money out of non-interest bearing accounts into an interest bearing account in order to get higher yields on their excess liquidity.
Speaker 3: Yep, 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.
Yes, we just had an FDIC exam here, we have an excellent regulatory relationship and.
Julie Courkamp: Turning to trust and investment management on slide seven, we had 108 million decrease in our asset center management in the third quarter, primarily due to market performance, which is partially offset by influence from new clients that we added during the quarter.
I think for us.
Our construction loan portfolio numbers are a little higher than where we've traditionally had and where we'd like to see them.
That is the stuff funding up and not paying off.
Speaker 3: quite as quickly as we had planned and so we have gone up above 100 percent. We are 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 payoff.
Not quite as quickly as we had planned and so we have gone up above a 100% we are not doing new construction loans right now.
David Weber: Now I'll turn a call over to David for further discussion of our financial results. David? Thanks, Julie.
David Weber: Turning this slide eight, we'll look at our gross revenue. Our gross revenue declined 6.6% from the prior quarter as they 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.
The extent, we see any increase in that portfolio. It's just the pace of drawdowns versus the pace of pay offs.
Speaker 3: 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.
But we're going to work that back down under 100%.
Anyway, I think thats prudent for us.
The way, we'd like to see the portfolio mix.
Speaker 8: And then just lastly, from me Scott, a lot of banks in this environment are looking at 24 versus 23 and just the environment and obviously a challenge to go earnings for the industry. And so a lot of banks are thinking about what they might do operationally or strategically in 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.
Okay and then just lastly for me Scott a lot of banks in this environment or are looking at 24 versus <unk> 23 in this new environment and it's obviously a challenge to grow earnings for for the industry and so a lot of banks are thinking about what they might do operationally or strategically over the <unk>.
David Weber: 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, the 2.46% driven by an increase in interest bearing deposit costs and slightly lower yields on average earning assets.
Quarter, two to try and improve there.
Green power and so I was just curious if you were thinking about anything related to either mortgage banking, a possible securities portfolio restructuring or or anything else that might be a boost to your to your profitability.
Speaker 8: We're led to either mortgage banking, you know, a possible security portfolio restructuring or anything else that might be a boost to your profitability.
David Weber: 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.
Speaker 3: I think the best thing we can do is stick to our knitting here. You know, I talked a little bit before about, you know, the offering 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.
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.
We hold that number flat for 2024.
David Weber: 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.
Speaker 3: and we can have the name story that I just talked about play out. We also talked...
And we can have.
NIM story that I, just talked about play out.
Speaker 3: I think in the last two calls, I know for sure in the last call about the fact that we were working a project to raise our fees 10% and I think
<unk>.
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 Julia David I'm, not sure which mentioned in their comments that we had completed the first phase of that.
David Weber: 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.
Speaker 3: Julia David, I'm not sure which mention in there comments.
Speaker 3: 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.
In Q2 went into effect on July one.
And I was pretty happy to see you do these things like well I hope it shows up in the numbers.
And sure enough.
Speaker 3: We thought it was going to be $960,000 from Phase 1, 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 thought it was going to be $960000 from phase, one, which seems like a little bit too fine of a estimate to believe and then I think we did grow fees $240000 in Q3 so.
Kind of a bull's eye there so hopefully.
Speaker 3: 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.
David Weber: Center. And we had a slight decline in bank fees due to lower loan prepayment and swap fees relative to the prior quarter.
We will 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.
Speaker 3: trustee is 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 is all that stuff plays out. We should see opportunity for revenue growth in 2024.
Trust fees, just from the higher service that we're providing and the.
David Weber: Turning to slide 11 in 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 discipline and 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.
Additional value, we're providing to clients and I think we're still very competitive at these higher rates. So.
I think as all of that stuff plays out.
We should see opportunity for revenue growth in 2024.
Speaker 3: stable expenses and therefore improved earnings in the bottom line. Okay.
Stable expenses, and therefore improved earnings and.
And in the bottom line.
Okay. Appreciate all the color.
David Weber: This impacted EPS by 3 cents. For the fourth quarter, we continue to expect our non-interest expense to range between 18.5 and 19 million.
One moment for our next question.
David Weber: 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.
Speaker 1: Our next question comes from Adam Butler with Piper Sandler. Your line is open.
Our next question comes from Adam Butler with Piper Sandler Your line is open.
Speaker 9: Hey, good morning everybody. This is Adam on from Matthew Clark.
Hey, good morning, everybody. This is Adam on for Matthew Clark.
Hi, Adam.
Speaker 9: 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 the deposits in September either intersparing or total?
Just just first touching on a couple of questions on the margin do you happen to have the average margin in September .
David Weber: The increase in non-performing assets was primarily driven by the downgrade of the 42 million and 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 specific reserve for these loans and the downgrade 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 30th.
And the spot rate on <unk>.
Deposits in September either interest bearing or total.
Speaker 5: You know, I have it, but I'm going to let David take his first earnings call question. As CFO , David, you want to answer questions? Yeah, I would love to. Yeah, Adam, the spot rate on deposits was 312 on September 30th. And the NIM for September was 245.
I have it but I'm going to let David take it.
This call question.
CFO , David do you want to answer that question, Yes, I would love to hear.
Adam the spot rate on deposits was $3 12.
September 30th and the.
The NIM for September was $2 45.
Speaker 5: And that's inclusive of the negative impacts of the non-accrual loans.
And that's inclusive of the negative impacts of the non accrual loans.
Okay got it thanks, and just moving over to deposits stay where they were up nicely in the third quarter and it looks like they were driven mainly by savings in money market and along with the $26 million.
Speaker 9: 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 loans deposit trending with your outlook for mid-single-digit loan growth.
Scott Wylie: Now I will turn it back to Scott. Thanks David and congratulations on getting through your first earnings call there. It's great to have you on the call with us.
Scott Wylie: Thank you.
New relationships added I was wondering if you could provide.
Scott Wylie: 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.
Provide some commentary on how you were able to.
Attracts new deposits in.
Your outlook going forward, and where you see the loan to deposit trending with your outlook for mid single digit loan growth.
Speaker 3: Yeah, good question, Edmund. You're reminding me part of Brett's five part question. I forgot the answer about pipelines. Pipelines at the end of...
Yes. Good question, Adam you're reminding me part of breath five part question I forgot to answer about pipelines.
Pipelines at the end of <unk>.
Scott Wylie: Following our third quarter performance, we've now increased our tangible book value per share by 144 percent since our IPO which includes the 56th decrease that we had due to the adoption of CSL 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.
Speaker 3: Q3 for loans were down about 50% from little over 200 million, a little over over 100 million, the way we look at it, which is 90 day probability weighted.
Q3 for loans were down about 50% from little over $200 million little over over $100 million. The way, we look at it which is 90 day.
Probability weighted and then.
Speaker 3: deposits pipeline were actually up, quarter over quarter. So.
Deposits pipeline, we're actually up.
Quarter over quarter.
So we're actually seeing.
Speaker 3: 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 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 base.
I would say positive trends in both ways right I mean, I think that if we want to grow deposits faster than loans thats. The setup, we'd want to see so so that's a positive.
Scott Wylie: 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 the prioritized prudent risk management and maintain high levels of liquidity, capital and reserves. Even if that impacts our level of profitability in the short term. Both 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 court-aposite relationships and trust and investment management assets, providing exceptional service 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 the challenging macroeconomic environment and deliver strong financial results for our shareholders in the near term.
Scott Wylie: At the same time, we continue to operate with the long-term approach and make investments that we believe will further enhance our business development capabilities.
In terms of your question more specifically, how do we do it.
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 local boutique private bank and trust services to that base of clients.
Speaker 3: distribution model where we focus on client relationships in our markets.
Speaker 3: that are served by teams of relationship bankers that are providing local boutique private and trust services to that base of clients. And so what we have said to our relationship bankers is, hey, this is a time for us to focus on existing and new relationships that we think can add more deposits than loans.
So.
What we have said to our relationship bankers is hey, this is a time for us to focus on existing and new relationships that we think can add more deposits and loans and so you know we're not doing one off.
Speaker 3: 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.
New loans for people that arent going to bring relationships here.
And we are going to take a look we have reporting.
Reporting that we give each office.
Speaker 3: which we call one view 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.
Which we call one view reporting that tells our bankers who's got what products with us and so if you see somebody that said they were going to bringing over deposits and hasnt done. It then we're calling on them and saying Hey.
Scott Wylie: This includes recently opening our first full service office in the Boseman Montana market, where we previously only had loan production office.
Speaker 3: 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 and investment management business that we see on your financials that we could help you with? So that's really been...
Scott Wylie: Since entering this market, we steadily build out the team and clients with now 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 the attractive markets 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.
Whereas 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.
We could help you with so that's.
That's really been.
Speaker 3: The focus and why we're seeing good results is that we've really refocused these teams in the local offices on more the deposit and what we call PTEM the planning.
The focus on why we are seeing good results is that we've really refocused these teams and the local offices on.
More of the deposit and the what we call P Timna planning.
Speaker 3: trust and as a management side, and less on straight up loan growth. What you know, I think is a viable strategy. It's a great...
Trust and investment management side and less on.
Scott Wylie: With that, we're happy to take your questions.
Straight up loan growth.
Operator: Abigail, please open up the call. Thank you.
Which I think is a viable strategy, it's a great.
Operator: At this time, we'll conduct the question-and-answer session. As a reminder to ask a question, you will need to press the star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. One moment while we compile the Q&A roster.
Speaker 3: way to lead into new relationships, but for now, you know, we're more focused on how can we cross-sell deposits, how 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.
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 helped build our balance sheet and strengthen our financial performance.
Speaker 9: Okay, great. That's good to hear. And it sounds like with the pipeline that the London deposit will be trending downward going forward. And then also it looks like the nonintersparing contribution to total deposits.
Brady Galey: Our first question comes from Brady Galey with KBW. Your line is open. Hey, thank you. Good morning, guys. Good morning, Brady.
Okay, great that's good to hear and it sounds like with the pipeline that.
Our loan to deposit will be trending downward going forward.
And then also.
Scott Wylie: I just wanted to start with the net interest margin. As I look at 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 do you think the margin finds the bottom? Is that in 4Q? And as we look to next year, do you think the margin is stable? Do we think it could have some upside from asset repricing? Like, how are we thinking about the margin into 2024?
It looks like the noninterest bearing contribution to total deposits.
Speaker 9: Trying to 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.
Trended downward at a similar rate.
Compared to last quarter I was wondering if youre seeing that.
That pressure slow and what your outlook is there.
Speaker 3: Yeah, that's just hard to know. I think we've done a really nice job of holding on to our non-interestering deposits.
Yes, that's just hard to know.
I think we've done a really nice job of holding on to our noninterest bearing deposits.
Speaker 3: But again, you have larger, relatively sophisticated depositors here. And I think when everybody's talking about 5% deposit.
<unk>.
But you know again, you have larger relatively sophisticated.
Depositors here and I think when everybody is talking about 5% deposits there.
Scott Wylie: Yeah, great question, Brady. So obviously, it's been a difficult year to forecast, and then 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 trendline. And we did see in the last quarter on this call that we thought that once the Fed stopped raising short-term rates that are deposit costs would stabilize, and our asset yields would improve, which would drive a higher NEM.
Speaker 3: They're talking about it too. And so I would say earlier this year, we were hearing a lot more about, can you build me a Treasury Bill ladder? And I think we're hearing less of that today. And I feel like.
They are talking about it too and so.
I would say earlier this year, we were hearing a lot more about.
<unk> can you build me a treasury bill ladder.
And.
And I think we're hearing less of that today.
And I feel like.
Speaker 3: you know, the moves that we're seeing out of DDAs are more into now accounts and into money market deposit accounts and less than the CD. So that's all positive. But you know, I hope at some point we've seen the early movers on the DDAs move and we're going to see a slow down in the
The moves that we're seeing out of DDA are more into.
<unk> now accounts and money market deposit accounts and less of the CD. So so that's all positive.
But.
Hope at some point, we've seen the early movers on the DDA is move and we're going to see a slowdown in.
Scott Wylie: 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% bid 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're kind of in the two-fifty 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, you know, we can see stabilizing deposit costs for us.
Speaker 3: the remaining DDAs haven't seen much of that so far but
Sure.
The remaining dda's.
Haven't really seen much of that.
So far but hopefully that's where we're headed.
Speaker 3: where we're headed. Certainly we have strength in our Treasury management team and try 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-intersparing deposits here or move more non-intersparing deposits here. That's a big focus throughout the organization as well.
Certainly we have strengthened our treasury management team and try to make sure that the clients understand the value that we can provide on the treasury management side, which drives them to keep more noninterest bearing deposits here or move more noninterest bearing deposits here thats.
Our big focus throughout the organization as well.
Speaker 9: Great, I appreciate the commentary there and I'll step back. Great, thanks Adam.
Okay, Great I appreciate the commentary there and I'll step back.
Great. Thanks, Adam.
Scott Wylie: Again, I've talked before about the fact that I think, you know, our clients are kind of ahead of the typical bank clients because of their fact that they're larger and more sophisticated. And so, you know, going into Q4, hopefully, we see stabilized deposit costs and improving asset yields. So at least we're stable to, you know, maybe a little bit of margin compression Q4. Our numbers going into 2014, we're assuming, you know, 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.
One moment our next question.
Okay.
Speaker 1: Our next question comes from Bill DeZellam with Titan Capital Management. Your line is open.
Our next question comes from Bill <unk> with Titan Capital Management. Your line is open.
Speaker 10: Thank you. First question is asking David, would you please repeat what caused the three three cent earnings per share impact this quarter that you referenced? I just missed what you said in your comments.
Thank you first question is.
Asking Dave David would you. Please repeat what caused the three three cent earnings per share impact this quarter that you referenced I just missed what you said in your in your comments.
Speaker 5: Yeah, that was in our non-interest expense. It was related to, let me give you a second money, pull it up real quick.
Yes that was.
And our noninterest expense.
It was related to.
Scott Wylie: 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 is if that plays out like that, and we can see just stable funding costs, higher asset yields, and well-controlled operating expenses, then you see improved earnings, which is, you know, what I talked about in the comments. Yep.
Let me give me a second let me pull it up real quick.
So that was related to.
Speaker 5: some compensation that was related to an previous acquisition. And we do accelerate that compensation expense.
Some compensation that was.
Related to enact a previous acquisition and we had to accelerate that compensation expense and so that impacted it was about 400000 or <unk>.
Speaker 5: so that impacted is about 400,000 or three cents of EPS.
<unk> <unk> of EPS.
Scott Wylie: And then a similar question on the expense side, 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? 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.
It's an accounting.
Speaker 3: fiction, Bill, that the way that we had to count for the whole.
Fiction Bill that.
The way that we had to account for the whole.
Speaker 3: acquisition when we did it was included this compensation expense and then like David says if if the person
The.
When we did it was that included this compensation expense and then like David says if if the person.
Speaker 3: 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? The furt asset is gone. And so that's a one time thing of free sense in the court.
Leaves earlier gets terminated then you've got to accelerate the remaining tail on that so it's a onetime thing that person is gone and expenses gone the what would that be a deferred asset is gone.
So that's a onetime thing or <unk> in the quarter.
Speaker 10: 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 difference and what's leading to the three basis point decline?
Thank you both for that and then your.
Interest, earning okay.
Scott Wylie: Of course, there's a little bit of seasonality with, you know, what is the flaky pump that you can handle? Yeah, payroll taxes, as 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 improve earnings. All right. And then finally, for me, the $42 million relationship that went into non-performing, I think you said it was four loans.
Asset yield.
We've 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 in and what's leading to the three three basis point decline.
Speaker 5: That's long mix, isn't it? Yeah. They would say that you think he knows the answer. Also, there was an impact of the nonacrull 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 intercerning asset yields. His
Okay.
Long mix isn't it.
David saying that he thinks he knows the answer.
There was an impact.
The non accrual loans as well.
So those loans are generating zero of interest income is as Scott mentioned through.
During 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.
Scott Wylie: So did all four of those loans stop paying interest, or was it just one? Yeah, this was an interesting case. You know, we thought that we were going to get this guy current in Q3, and 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 NBAs, which, you know, 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 which asset categories.
Speaker 10: Did you see that you had a grue that had lower yield that would have contributed to this in addition to the non-accrual?
Did you see that you had grew.
That had lower yield that would have contributed to this in addition to the non accrual.
We're looking at the answer for you Phil Thank you.
Speaker 5: Yeah, so we saw in our in our loan portfolio, we saw yield reduction in the consumer and other bucket.
Scott Wylie: And so, you know, this guy is, we think, but 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, which in Aspen was already a premium market, but they're talking about how that continues to be a very desirable market. And so, I think, you know, as we move to either he or we get liquidity on those properties, I think that that's all going to turn out fine.
Yes.
We saw in our in our loan portfolio, we saw yield reduction.
Consumer and other bucket.
Speaker 5: and in the commercial real estate pockets, as well as C&I, that, and I'm speaking the spy yields there. here.
And in the commercial real estate buckets as well as C&I.
And I'm speaking the spa yields there.
So that AWP in the queue David.
Yields will not now average yields are.
No not at not at that level.
Speaker 10: And so help us understand either the competitive dynamics or your own individual strategy to relative to loan yields in those categories declining when rates are generally upward biased.
Yeah.
So.
Help us understand either the competitive dynamics or your own individual strategy.
To relative to loan yields in those categories declining when when rates are generally upward biased.
Brady Galey: And as we work through work out, it's going to take a while, like I said in my image, for a minute. All right, great. Thanks for all the colors, Scott. Yep, thank you, Brady.
Okay.
Alright.
I think.
Speaker 5: Generally, our 11 yields are improving, but the negative impact of those non-acruals is what's really weighing our average loan yields down. Whatever.
Generally.
Our loan yields are improving but the negative impact of those non accruals.
Operator: One moment for our next question.
Is is what's really weighing or our average loan yields down quarter over quarter.
Speaker 4: And though I think in my comment who were talking about the rate in September on our loan production and it was at the highest level at 8.44%. So I think we're generally seeing nice.
Brett Rabatin: Our next question comes from Brett Rabatin, with Howdy Group. Your line is open. Hey, good morning Scott and Julie. Morning Brett. I wanted to ask, you know, back on the margin, just, you know, obviously the, that non-accrual relationship was, I think, 20 of the 27 basis points of pressure. When you were giving comments around the margin, how, how does this, does that relationship play into what you were talking about on the margin?
And Bill I think.
My comments you were talking about the rate in September .
On our loan production.
At the highest level.
Black rock burst that I think we're generally seeing nice.
Speaker 4: increases in new loan production on the rate, as well as as loans are renewing and rolling into higher rate. So we are seeing good benefits from that, but we've got some of these nuances with the nonocrol loan that have impacted some of those categories.
Increases in new loan production on the rate as well as as loans are renewing and rolling into higher rate. We are seeing good benefit from that we've got some of these nuances with the non accrual loan that have been.
That said some of those category.
Brett Rabatin: I assume it kind of excludes it. What, you know, and it sounds like it's a few quarters before maybe that gets, gets resolved. Well, that will definitely come back to our benefit at some point. You know, it's, it's not a cruel now. So we're going to stay not a cruel as we collect on it. I assume we're going to collect past interest, bounty interest, and that will be, you know, a nice benefit in the future at some point.
Speaker 10: So ultimately the real key to this comes right back to the nonic rule.
So ultimately the real key to this comes right back to the to the nonaccrual.
I think that's the largest driver.
Speaker 10: 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 businesses and earning as much as it has in the past. So what's your philosophical...
Okay, great. Thank you and then final question is how are we 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.
Brett Rabatin: But I don't think that's going to be next week. It's going to be, it's going to be a little while. So, you know, I think for the short term quarterly reporting, it's going to be a zero. But, you know, depending how it all plays out, I think we will get that back at some point.
It has in the past so what what's your.
Philosophical thought process here.
Speaker 3: Yeah, so we discuss it with the board every quarter and every time the stock trades down, we're like, well, we should have stocked my back in place right now.
Yes, so we.
We discuss it with our board every quarter.
And.
Every time the stock trades down we're like well, we wish at a stock buyback implant plan in place right now but.
Scott Wylie: Okay. And then you had some solid lung growth this quarter. This 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 one portfolio?
Speaker 3: But I think generally what we have thought.
But I think generally what we have thought.
Speaker 3: This is a good time to have a strong capital and the extent that there are
This is a good time to have a strong capital.
And the extent that there are.
Speaker 3: earnings or credit or acquisition opportunities out there, having a stronger capital base gonna be beneficial for the long-term cheerholder value creation here. So, do I think?
Earnings or credit or acquisition.
Acquisition opportunities out there, having a stronger capital base is going to be beneficial for the long term shareholder value creation here. So yes.
Scott Wylie: How you think about that? 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, you know, I think if that trend continues, which I would expect it to, again, you know, months and month quarter to quarter, you know, it's going to be some bumpiness, but hopefully we can get that taken care of.
Scott Wylie: 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, you don't improve 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, you know, our normal kind of 15 or 20% organic growth rate.
I think the board.
Speaker 3: 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.
Measures all of those things spill and tries to make the best decision in terms of.
How to manage our capital and I think we've talked about.
Speaker 3: our improvements in our tangible book value per share without any significant buybacks.
Our.
Improvements in our tangible book value per share without any significant buybacks.
<unk>.
Speaker 3: and our improving capital ratios, which are already way above well-capitalized ratios. I just would add,
And our improving capital ratios, which are already.
Way above well capitalized ratios.
Hum.
I just would add.
Speaker 3: You know, you're to your question about the reporting of our
To your question about the reporting of our.
Speaker 3: yields in our interesting come. I mean, we think we're gonna collect the principle and interest on these additional $42 million in loans that we put on non-accruals. So I mean, that is money that we do expect to see back in the bank in the future, in spite of, you know, sort of short term disappointment here.
Yields in our <unk>.
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. So I mean that that is money that we do expect to see back in the bank in the future.
In spite of the short term disappointment here.
Speaker 3: But we will share 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.
But yes.
We will share 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.
Speaker 10: I'm trying to use our best judgment on how to balance that against some of those other factors I talked about. That is helpful. Thank you all for the comments.
I think you know trying to use our best judgment on.
Scott Wylie: That seems to be, you know, not really what we want to do now, that's how we're thinking about it, Brett. 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 the FAD, so I obviously see pressure to be below the 100 300. Yeah, we just had an FDIC exam here.
How do you balance that against some of those other factors I talked about.
That is helpful and thank you all for the comments.
Thank you Bill I appreciate the support.
One moment for our next question.
Speaker 1: Our next question comes from Ross Haberman with RLH investments. Your line is open.
Our next question comes from Ross Haberman with R. L. H investments your line is open.
Speaker 6: Good morning Scott. Scott, how are you? Um, could you talk about, are you seeing any other dense or weaknesses in the link with seeds or slow payers or anything like that besides this one hopefully and anomaly in terms of the bad, bad knowledge you would prefer to today.
Good morning, Scott Scott how are you.
Scott Wylie: 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 the stuff funding up and not paying off quite as quickly as we had planned. And so we have gone up above 100 percent. 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 pay off. But we're going to work that back down under 100 percent anyway.
Could you talk about are you seeing any other.
Dan or weaknesses in.
Delinquencies are slow payers or anything like that besides this one.
Fully an anomaly in terms of the.
Yeah.
Ben Batten I'll, let you referred to today.
Speaker 3: So, the morning Ross, we are not seeing any other signs of credit deterioration. This is a one off.
So good morning, Ross, we are not seeing any other signs of credit deterioration. This is a one off.
Situation.
Speaker 3: Unfortunately, in addition to the other one-off situation that we reported last quarter, but
Unfortunately in addition to the other one off situation that we reported last quarter, but.
Speaker 3: but they both are isolated cases, very different from each other. And again, from what we know today, we expect to collect.
Scott Wylie: I think that's prudent for us and the way we'd like to see the portfolio mix. Okay.
But they both are isolated cases are 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 spin.
Speaker 3: 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.
Scott Wylie: 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 obviously a challenge to go earnings for the industry. And so, you know, a lot of banks are thinking about what they might do operationally or strategically, you know, over the next quarter or two to try and improve their earning power. And so, you know, I was just curious if you were thinking about anything related to either mortgage banking, you know, a possible security portfolio restructuring or anything else that might be a boost to your profitability.
Specific reserve on the $8 billion credit.
And again, we think we're very well collateralized on.
This new issue it's.
Really unfortunate.
Speaker 3: timing for us at what 90 days passed to a quarter end. But we think we're doing the right thing in the way we've handled that with the borrower and with our accounting. And obviously gonna cause some short term pain for us in terms of...
Timing for us at.
With 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 borrowing with our accounting.
And obviously going to cause some short term pain for us in terms of.
Speaker 3: of these conversations, but I think the fundamentals are going to be
Of these conversations but I think the fundamentals are going to be fine.
Speaker 6: How often do you stress tests against your maturing loans?
How often do you do your stress test I guess youre maturing loans.
Scott Wylie: I think the best thing we can do is stick to our knitting here. You know, I talked a little bit before about, you know, the offering 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 name story that I just talked about, play out.
Speaker 6: in terms of, you know, all these, or many of these commercial borrowers who have been borrowing it, I don't know, four, four, or five percent, and suddenly, your loans come due and they have to pay eight plus.
In terms of.
All these are many of these commercial borrowers or had been borrowing at I don't know, 445% and suddenly your loans come due and they have to pay eight plus.
Speaker 6: You know, how often do you stress test that? And you know, and paying four or five is one thing, paying eight and a half to another thing.
How often do you stress test that.
Paying for a $5 one thing paying eight $8 has to do other things.
Speaker 11: You know, do you sort of get ahead of it and say, hey, you know, is this gonna be a viable loan at 8.5% cash? Can they afford this type of dramatic jump up in rate?
Scott Wylie: 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 Julia, David, I'm not sure which mentioned in there 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.
Do you sort of yes.
Get ahead of it and say Hey, you know.
Is this going to be.
It's just going to be a viable loaded at eight 5% cash can they afford this.
Type of dramatic jump up in rate.
Speaker 3: 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...
Yes, so couple of things we do there.
When we're underwriting loans originally we do stress tests.
I would tell you.
You know the traditional kind of up and down 300 basis points.
Scott Wylie: And sure enough, you know, we thought it was going to be $960,000 from phase 1, which seems like a little bit too, you know, 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 additional value or providing the clients.
Looks a little.
Speaker 3: like compared to the 550 basis points, if I said if I were to have been now over the last 18 months. But that's something we've always looked at is, is what would be the scenario for this borrower if we see a rising rate environment? And then, and then.
Light compared to the 550 basis points or 575 words have been now over the last 18 months.
But that's something we've always looked at is.
Just what would be the scenario for this borrower if if we see a rising rate environment.
And then and then.
Speaker 3: 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...
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 youre talking about and what we've seen is the bulk of the.
Scott Wylie: And I think we're still very competitive at these higher rates. So I think as all that stuff plays out, you know, we should see opportunity for revenue growth in 2024, for Stable Expenses, and therefore improved earnings in the bottom line.
Speaker 3: The risk is probably a couple of years out and is not, is not,
<unk>.
The risk is probably a couple of years out and is not.
<unk> is not.
Speaker 3: minimal, I mean where we've looked at credit.
Is minimal I mean, where are we.
We've looked at credits that are coming due or going to come due.
Speaker 3: that are coming due or going to come due, you know, the borrowers do have adequate coverage to cover higher rates. So we're not...
<unk> do have adequate coverage to cover higher rates. So we're not seeing that.
Operator: Okay, for Charlotte Collar. One moment for our next question.
Speaker 3: That is a fundamental problem in the portfolio or with any individual credit at this point or for the foreseeable future. You know, rates continue to go higher. I think we'll probably need to do deeper dive into that. But you know, from where we are today, that seems to be a risk that's well managed in the portfolio.
That is a fundamental problem in the portfolio or with <unk>.
Any individual credits at this point or are there for the foreseeable future if.
Rates continue to go higher I think we'll probably need to do deeper dive into that but from where we are today that seems to be a risk that well manage it in the portfolio.
Adam Butler: Our next question comes from Adam Butler with Piper Sandler. Your line is open. Hey, good morning, everybody. This is Adam on from Matthew Clark. 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 the deposits in September, either intersparing or total?
Speaker 11: I didn't quite tell from your handout, your mortgage business, was that great? Break even for the quarter, I couldn't quite tell from...
I didn't quite catch.
Tell from your handout your mortgage business was that great.
Great breakeven for the quarter quite sales trends.
Speaker 11: I forgot what page it was.
From.
I forgot what page was.
Page 10.
Speaker 11: in terms of unon interest income. What's the mortgage business that had to break even this quarter?
In terms of your non interest income was the mortgage business at breakeven this quarter.
David Weber: You know, I have it, but I'm going to let David take his first earnings call question as CFO, David, you want to answer questions?
No.
Speaker 3: I think we lost David as a 200,000.
I think we.
<unk>.
David is a 200000.
David Weber: 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.
Speaker 3: For the quarter, I believe in the mortgage segment.
For the quarter I believe in.
The mortgage segment.
Speaker 3: 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? Unfortunately, we've really cut expense there. And unless we want to close it down, which we don't, I think we're kind of...
And from what Youre seeing for the fourth quarter will probably be as good a guess as any for the fourth quarter as well.
Unfortunately, we've really cut expense there.
Unless we want to close it down which we don't.
David Weber: Okay, got it. Thanks. And just moving over to deposits, they were 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 dollars in new relationships added, I was wondering if you could come provide some commentary on how you were able to attract new deposits and your outlook going forward. And where you see the loans to deposit trending with your outlook for mid single digit loan growth.
I think we're kind of stuck with.
Speaker 3: minimal contributions coming out of mortgages here, negative contributions for
Some.
Minimal contributions coming out of mortgages here negative contributions for.
Speaker 3: the short term. You know we are doing a couple things to manage that. We've looked to add MLOs which are all variable costs.
The short term, we are doing a couple of things to manage that.
We look to add.
<unk>, which are all variable cost.
Speaker 3: And it would also look 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 will also look to.
Managed spreads in a way that drive more volume.
David Weber: Yeah, good question, Adam. And you're reminding me part of Brett's five part question. I forgot the answer about pipelines. Pipelines at the end of Q3 for loans were down about 50% from little over 200 million, little over 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?
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 were talking to so.
Speaker 3: and we've got a couple more that we're talking to. So, you know, I think the president, that mortgage group is working.
I think the.
President that mortgage group has worked.
Speaker 3: Certainly well aware of our focus on that and trying to be responsive.
Certainly well aware of our focus on that.
And trying to be.
Speaker 3: I don't know, Julie, that's all under you if there's any other color you want to add on.
Responsive.
Julie Thats all under you if there's any other color you want to add on.
Speaker 3: I do think we've done a nice job over the past three years.
On that I do think we've done a nice job over the past three years in.
David Weber: I mean, I think that if we want to grow deposits faster than loans, that's the setup we 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 local boutique private and trust services to that base of clients.
Speaker 3: bringing the cost down in that area to where revenues look like they're gonna 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 a no small feat. I think if we're gonna 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.
Bringing the costs down in that area to where revenues look like they're going to be unfortunately, its a little upside down right now, but again I mean thats been strategically valuable for us.
It's produced assets.
It's minimized our risk in mortgages, which I think is.
No small feat and 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 managed.
Speaker 3: And then we just made so much money in the boom part of it that having some incremental losses here's not the end of the world, I think. At some point, that's going to turn around and be a nice profitable business again, as it was a couple of years ago. times.
And then we've just made so much money in the boom part of it that having some incremental losses here.
David Weber: And so, you know, what we have said to our relationship bankers is, hey, this is a time for us to focus on existing and 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 one view reporting that tells our bankers, you know, who's got what products with us.
At the end of the World I think at some point, that's going to turnaround and B a.
A nice profitable business again.
As it was a couple of years ago.
Could you talk about some of your <unk>.
Speaker 11: Some of your newer offices, you said, I think I read your opening one in Boseman. Is that gonna be a full service? And if it is, what kind of...
Some of your newer offices, you said I think I read you're opening up one in Bozeman.
Is that going be a false or a full service.
And if it is what kind of.
Speaker 11: closets do or time and do you need to hit a break even
Deposits do or timing do you need to hit a breakeven.
Speaker 11: You know, could that be, I don't know, could that be a three, four hundred million dollar branch in a couple of years?
<unk>.
Could that be I don't know because that would be a three or $400 million branch and a couple of years.
David Weber: 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 and 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 the deposit and what we call PTEM, the planning trust and investment side, and less on straight up loan growth.
Speaker 3: I think 300 or 400 million would be an ambitious goal. 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 open as a full service office.
I think 300 or $400 million would be an ambitious goal. We talk in terms of revenues here when we think about new locations.
So.
We opened that is a L. P O.
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.
Speaker 3: I think actually we moved into that office this week, earlier this week, and our grand opening is gonna be, I believe November 9th or something like that. And so, no...
I think actually we moved into that office. This week earlier this week.
Our Grand opening is going to be I believe November 9th or something like that.
So.
David Weber: 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? It's how 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?
I think.
Speaker 3: As we build that out and build a business there, I would expect that to grow to be $2 million business a year, 18 months from now, and then you'll tell me be a $5, $10 million in our business with a couple million dollars and 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.
As we build that out and build the business there I would expect that to grow to be $2 million business.
A year 18 months from now and then you'll ultimately be.
$5 million to $10 million business with a couple of million dollars of expenses, so having a nice contribution margin.
In the relatively near term.
I think it's very additive to what we're doing in western Wyoming.
Scott Wylie: Okay, great, let's get to here and it sounds like with the pipeline that the London deposits will be trending downward going forward. And then also it looks like the nonintersparing contribution to total deposits, trying to 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. Yeah, that's just hard to know. You know, I think we've done a really nice job of holding on to our nonintersparing deposits, but you know, again, you have larger, relatively sophisticated depositors here.
Speaker 3: 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, you know, 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 gonna produce great results for us. We're very optimistic about that.
So it gives us a nice entre into Montana, which I think is full.
Full of opportunities for us as well so.
I think thats part of our longer term strategy to continue to expand in the Rocky Mountain West we have.
Really great team there that I think is going to produce great results for us are very optimistic about it.
Speaker 11: Could you talk about the Wyoming business? I guess would you put that about a year and a half ago or so? How is that performing on a bottom line base?
Could you talk about the Wyoming.
Business. So I guess, when you bought that about a year and a half ago or so how is that performing on a bottom line basis.
Yeah.
Speaker 3: Yeah, I don't think we 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.
Yes, I don't think we've really released much information about that I mean, what we've seen in Jackson as we combined our two.
Scott Wylie: 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 into money market deposit accounts and less of the CD.
Jackson Office is the one we had there plus the one that we acquired.
Speaker 3: and the one that we acquired had, it has a beautiful office.
And the one that we acquired had a has a beautiful office.
Speaker 3: at the corner of the metaphorical first and main street. Interestingly, we had first republic open across the street from us.
At the corner of the metaphorical first and main street.
Interestingly.
We had first Republic open across the street from Us.
Speaker 3: And that was a bit of a shocking experience, the aggressiveness that they brought to the market. Of course, that's some...
And that was a bit of a shocking experience the aggressiveness that they brought to the market of course that some.
Scott Wylie: So that's all positive. But you know, I hope at some point we've seen the early movers on the DDAs move and we're going to see a slowdown in the remaining DDAs. I haven't really seen much of that so far, but hopefully that's where we're headed. Certainly we have strength in our Treasury management team and try to make sure that the clients understand the value that we can bride on the Treasury management side, which drives them to keep more nonintersparing deposits here or move more nonintersparing deposits here that's a big focus throughout the organization as well.
Speaker 3: 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.
Gone now so.
Scott Wylie: Great. I appreciate the commentary there and I'll step back. Great. Thanks, Adam. One moment for our next question.
So I think that that's going to be a big benefit for us that are more.
Long term focused players in the market.
Speaker 3: And then our other two offices, which we weren't too sure about when we first started looking at this.
And.
And then our other two offices, which we weren't too sure about when we first started looking at this.
Speaker 3: opportunity which are pine-dale and in rock springs. They've turned out to be really pleasant surprises. The teams there have been wonderful. The market obviously there's 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.
Opportunity, which our pinedale and in rock Springs.
It turned out to be really pleasant surprises the teams there have been wonderful.
The market obviously, there is 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.
Speaker 3: for the long term. You know, if you wanted to have a stable base of core deposit.
For the long term if you wanted to have a stable base of core deposits.
Speaker 3: 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 a creative decapital on day one detangible book.
That is so desirable today.
All of those offices that are very additive to that and I think.
In retrospect that that acquisition was a huge success you probably recall that it was accretive to capital on day, one to tangible book.
Speaker 3: And we got more expensive 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.
In <unk>.
We got more expensive 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.
Bill Dezellem: Our next question comes from Bill Dezellem with Titan Capital Management. Your line is open. Thank you.
Speaker 11: 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.
David Weber: First question is asking David, would you please repeat what caused the three cent earnings per share impact this quarter that you referenced? I just missed what you said in your comments. Yeah, that was in our non-interest success. It was related to, let me give you a second, let me pull it up real quick, so that was related to some compensation that was related to an previous acquisition, and we had to accelerate that compensation expense, and so that impact it was about 400,000 or three cents of EPS.
And just one final question are you actively looking for more things to buy or fill in or if we do see any further.
Further growth it'll be.
Organic like.
Like the Bozeman.
Endeavour.
Speaker 3: We do believe that there's going to be opportunities that come out of this cycle. Talk and 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.
We do believe that there's going to be opportunities that come out of this cycle.
David Weber: Incident accounting 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 the person leaves earlier gets terminated, then you've got to accelerate the remaining tail on that.
Talking to other bankers.
I've heard some stories of some pretty rough exams.
And.
Since 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.
Speaker 3: and looking for a bigger stronger partner, maybe will. And so I do think that that's gonna create opportunity for us. We do have our list of targets that we talk to and socialize the idea of...
Maybe we'll see.
So I do think that thats going to create opportunity for us we do have our list of targets that we.
Talk to an.
Socialize the idea of joining <unk>.
Speaker 3: 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
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.
Speaker 3: a couple of years. It does take time, for I think, for that to play out of it. What we've seen in prior down cycles, you see these big.
A couple of years. It does take time for I think for that to play out and what we've seen in prior down cycles as you see these big.
Scott Wylie: 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 three cents in the quarter.
Speaker 3: So spectacular events like we saw in March and then, you know, so the follow on, take several quarters to play out. And I think we've got that to come still, which do believe we'll create opportunity for us.
Spectacular events like we saw in March and then so the follow on take several quarters to play out.
David Weber: 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 difference and what's leading to the three basis point decline? That's long mix, isn't it? Yeah. David's saying that he thinks he knows the answer. 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.
And I think we've got that to come still which I do believe will create opportunity for us.
Speaker 11: And just one last round, I just left one thing out. Another bank that seemed this quarter have...
And just one last sorry.
One thing out.
Thanks, I have seen this quarter.
Speaker 11: sort of tinkered with their securities, maybe sold some, shortened up to the securities or remits or durations. Have you thought about that?
<unk>.
Sort of tinkered with their security maybe saw some shortened up the maturities.
Our durations have you thought about that.
Speaker 11: on some of yours or I guess if you did anything, but the tells the maturity, you would have to move the whole thing to...
On.
On some of your.
On some of yours or I guess, if you did anything but theres held to maturities you would have to you have to move the whole thing too.
Speaker 11: to help for sale and you couldn't just sell a portion.
To help for sale then.
And you couldn't you sell a portion of it.
Speaker 3: You know, our security portfolio here is relatively small. We made a conscious decision in was that 2011 truly?
Our securities portfolio here is relatively small we made a conscious decision.
And was that 2011 shortly.
Speaker 3: that 2021 I mean, 2021. Not to go out and buy a bunch of one and one and one half percent yielding bonds with all that cash that we had on the book.
The 2021, I mean 2021.
David Weber: And in which asset categories did you see that you had a group that had lower yield, that would have contributed to this in addition to the non-accrual? Yeah. We're looking at the answer for you. Bill, 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 bucket, as well as C&I. And I'm speaking to spot yields there.
Not to go out and buy a bunch of <unk>.
101, 5%, yielding bonds with all that cash that we had on the books.
Speaker 3: And so I just don't feel that we have the need to...
And.
And so I just don't feel that we have the need to.
Speaker 3: to cause that kind of turmoil in our balance sheet. I mean, I think our...
To cause that kind of turmoil in our balance sheet I mean, I think our.
Speaker 3: total investment portfolios relatively small and performing well so I think we'll just
Total investment portfolio is relatively small it's performing well so I think we'll just.
Speaker 3: leave that there. I mean, we certainly have done analysis to look and see if it makes sense to...
Leave that there I mean, we certainly have done an analysis to look and see if it makes sense to.
Speaker 3: traded out, but at this point, I think, given all the different accounting and economic factors were better off, leaving it in place and letting it pay off.
Trade it out but at this point I think.
Given all the different accounting and economic factors were better off.
Leaving <unk> in place and letting it pay off.
David Weber: Let me be in the queue, David. Spot yields will not know. Average yields are not at that level. So, help us understand either the competitive dynamics or your own individual strategy to relative to loan yields in those categories declining when rates are generally upward biased. 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 for our reporter.
Speaker 11: Thanks a lot guys, I appreciate it, have a good weekend. Yeah, thanks for us. One moment.
Thanks, a lot guys I appreciate it and have a good weekend.
Yes, Thanks Ross.
One moment for our next question.
Speaker 1: Our next question comes from Brett Rapiton with Havdjeg Group. Your line is open.
Our next question comes from Brett Robinson with poverty Group. Your line is open.
Speaker 8: Hey, just one follow up another call's gone long enough. I, I, I guess, first, or I didn't know what you earlier, David, when I said hi to the crew. Wanted to start out.
Hey, just one follow up on this call has gone long enough.
I guess first sorry, I Didnt analogy earlier, David when I said.
The group.
Wanted to just ask.
Speaker 8: Wanted just to ask, I mean obviously the stock is down quite a bit today, I think.
Wanted just to ask I mean, obviously the stock is down quite.
Quite a bit today I think.
Speaker 8: significant portion of that might be around the MPA formation in this quarter and you know, it feels like You guys are pretty confident that you're not gonna 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
A significant portion of that might be around the NPA formation this quarter end.
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.
David Weber: So, I think in my comments who are 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 as, you know, 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. So, ultimately, the real key to this comes right back to the non-accrual. I think that's the largest driver.
<unk>.
Speaker 8: Get into too much detail, but if you have anything you could share around
Get into too much detail, but if you have anything you could share around.
David Weber: Okay, great. Thank you.
Speaker 8: any valuations you have updated appraisals on the building, give us some sense of your comfort, how you get there in terms of not expecting losses on those particular properties.
Any valuations you have updated appraisals on the building.
Give us give us some sense of your comfort how you get there in terms of not expecting losses on those particular properties.
So yes.
Speaker 3: Yeah, good question. We have spent a lot of time on this, as you would expect, 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...
Yes, good question.
We have spent a lot of time on this as you would expect with 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.
Scott Wylie: And then the 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 businesses and earning as much as it has in the past. So, what's your philosophical process here? Yeah, so, you know, we discuss it with the board every quarter, and every time the stock trades down, we're like, well, we should have stocked buyback in plan and place right now, but I think generally what we have thought is, you know, this is a good time to have a strong capital.
And.
Yes, I think we've chosen the more painful option.
It will be much better for our shareholders.
Speaker 3: short-hand long-term here. And so if we take some lumps with the stock price, I mean, it's a buying opportunity, but.
For the.
Short and long term here.
And so if we take some lumps with the stock price I mean it.
Yes, it's a buying opportunity but.
Speaker 3: But yes, we have taken a close look at it. We have current appraisals on all the seven properties Julia here.
But yes, we have taken a close look at it we have current appraisals on all seven properties Julien.
Six okay.
Speaker 3: six properties. We've looked at them in detail.
Six properties.
We've looked at them in detail.
Okay.
Speaker 3: I was thinking that there's some...
I was thinking that.
That there is some.
Speaker 3: Nice opportunity in here for
Nice opportunity in here for.
Speaker 3: 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 in property in Nantucket and West Palm Beach. I mean, those are all very hot desirable markets. It was where I saw this article, something, and I was just awesome. Fanfundomatic representative. There was no jitter of knowledge of the art movement at this point as we tried toend
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 Youre looking at properties in and ask when Youre looking at property and.
Scott Wylie: And the extent that there are earnings or credit or acquisition opportunities out there having a stronger capital base going to be beneficial for the long term cheerholder 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 proving capital ratios, which are already way up well capitalized ratios.
Nantucket and West Palm Beach, I mean, those are all very hot desirable markets.
And I think our.
Speaker 3: 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. The article actually talks about that end of the market is.
Still trading at premiums and these are 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.
And the article actually talks about that that.
That that enter the market as is.
Speaker 3: is really isolated from what's going on in monetary policy and whatnot. So I do think, Brett, I don't want to be over confident about it, but I do think that...
Is really isolated from what's going on in monetary policy.
Scott Wylie: I just what he had. You know, to your question about the reporting of our yields and our interesting come, I mean, we think we're going to collect the principle and interest on these additional $42 million in loans that we put on non-accruals. So, I mean, that is money that we do expect to see back in the bank in the future, in spite of, you know, so the short term disappointment here, but, you know, we will share talk about that again at our board meeting in this quarter and, you know, we're mindful of the fact that that's a good way to drive EPS and, you know, trying to use our best judgment on how do you balance that against some of those other factors I talked about.
And whatnot. So so I do think Brett I don't want to be overconfident about it but I do think that.
Speaker 3: You know, we're well positioned there and should be fun.
We are well positioned.
<unk>, there and should be fine.
Speaker 8: But you can't get back to the core of that question.
But.
To kind of get back to the core of that question.
Speaker 8: updated appraisals anything that would give us confidence that you know they did the Bar or purchase properties at X and it's not
Updated appraisals any anything that would give us confidence in that.
Okay.
The borrower purchase properties that it acts in its not.
Speaker 8: not going to have to take a or the appraisals might not come in. Low and much slower than where he purchased any color on that. Nope.
Not going to have to take.
Or the appraisals might not come in lower much lower than where he purchased any any color on that.
No we have current appraisals, we already have them in hand.
Speaker 8: Ja, Junclapping I can't accidentally exceed the run to balance in principle.
Okay and then.
Do they meaningfully exceed the.
<unk>.
Bill Dezellem: That is helpful. Thank you all for the comments. Thank you, Bill. Appreciate the support.
Unpaid balance in principle.
Speaker 8: I think we're going to do fun with them. Okay, sorry to push. I just, you know, trying to help you get some confidence around that. So for the market, so appreciate to follow up.
I think we're going to do fine with them.
Okay, so sorry to push on this.
Ross Haberman: One moment for our next question. Our next question comes from Ross Haberman with our L.H, investments. Your line is open. Good morning, Scott. How are you?
Im trying to help you get some confidence around that so for them for the market. So I appreciate the follow up.
Yes.
Yeah. Thank you Brett.
Speaker 1: That concludes the question and answer session. At this time, I would like to turn it back to management for closing remarks.
That concludes the question and answer session. At this time I would like to turn it back to management for closing remarks.
Scott Wylie: Can you talk about, are you seeing any other dense or weaknesses in the link and seeds or slow payers or anything like that besides this one, hopefully, and anomaly in terms of the bad, the bad knowledge you would start to do today. 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.
Speaker 3: Great, thank you Abigail. Just a couple of things, you know, well, the reported numbers is quarter obviously are disappointing. Our core business is performing well in an unprecedented environment. The company has responded well with balance management, higher fees and well controlled expenses. You know, well, our third.
Great. Thank you Abigail.
Just a couple of things.
The reported numbers this quarter, obviously, a disappointing our core business is performing well in a unprecedented environment. The company has responded well with balance sheet management higher fees and well controlled expenses.
Speaker 3: quarter and P.A. spike is discouraging. We do expect to collect on these two larger problem relationships and continue our long history of near zero low losses.
While our third quarter.
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.
Speaker 3: Going forward, even if we only have moderate revenue growth, with continued expense control, we think we can produce nice, offering leverage and improve their new story. You were very focused on improving current future earnings while operating with our historic focus on careful...
Going forward.
Even if we only have moderate revenue growth with continued expense control. We think we can produce nice operating leverage and improved earnings story.
Scott Wylie: 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 that went 90 days past to a quarter end, but we think we're doing the right thing in 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.
Very focused on improving current and future earnings while operating with our historic focus on careful risk management.
Speaker 3: So with that, thanks everybody for dialing in. We really appreciate your interest and support of First Western and have a great weekend.
With that thanks, everybody for dialing in we really appreciate your interest and support of first western.
Have a great weekend.
Speaker 1: Thank you for your participation in today's conference. This does include the program. You may now disconnect.
Thank you for your participation in today's conference. This does conclude the program you may now disconnect.
Scott Wylie: How often do you stress tests against your maturing loans in terms of, you know, all these or many of these commercial borrowers that have been barring it on a four or five percent. And suddenly, your loans come doing they have to pay eight plus, you know, how often do you stress test that and, you know, and paying four or five is one thing, paying eight and a half to 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% cash?
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Scott Wylie: Can they afford this type of dramatic jump up and rate? Yes, so a couple of things we do there. When we're underwriting loans originally we do stress tests. I would tell you, you know, the traditional kind of up and down 300 basis points looks a little light compared to the 550 basis points. 75 words have 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.
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Scott Wylie: 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 not, is not, is minimal. I mean, where we've, where we've looked at credits that are coming due or going to come due, you know, the borrowers do have adequate coverage to cover higher rates.
Scott Wylie: So we're not seeing that as a fundamental problem in the portfolio or with any individual credits at this point or the foreseeable future. You know, rates continue to go higher. I think we'll probably need to do deeper dive into that. But, you know, from where we are today, that seems to be a risk that's well managed in the portfolio.
David Weber: I didn't quite tell from your handout, your mortgage bit business. Was that great break even for the quarter? I couldn't quite tell from, from, I forgot what page was, page 10 in terms of your non interest income. What's the mortgage business that break even this quarter? No. No, I think we lost David is a 200,000. For the quarter, I believe in the mortgage segment. And, 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?
David Weber: Fortunately, 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. You know, 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.
David Weber: And so, you know, 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, the president mortgage group is working. He's certainly well aware of our focus on that. And, and trying to be responsive.
Scott Wylie: 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 a 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.
Scott Wylie: In mortgages, which I think is a no small fee, you know, 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 mismanaged. 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's 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 of years ago.
Scott Wylie: Could you talk about some of your some of your newer offices you said you, I think I read you're opening up one embossment. Is that going to be a full service and and if it is what kind of deposits do or timing do you need to hit a break even. You know, could could that be, I don't know, could that be a three or four hundred million dollar branch in a couple of years.
Scott Wylie: I think 300 or 400 million would be an ambitious goal, you know, we 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.
Scott Wylie: And so, you know, I think as we build that out and build the business there, I would expect that to grow to be, you know, two million dollar business. A year, 18 months from now and then you will tell me be a, you know, five, 10 million dollar business with a couple million dollars and expenses. So, having a nice contribution margin in the relative linear term. And you know, 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.
Scott Wylie: So, I think that's just, you know, 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.
Scott Wylie: Could you talk about the Wyoming business? I guess would you put that about a year and a half ago or so? How is that performing? Yeah, you know, on a bottom line basis? 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 had a beautiful office at the corner of, you know, the metaphorical first and main street.
Scott Wylie: 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 some... Go on now. So I think 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 in Rock Springs, they've turned out to be really pleasant surprises.
Scott Wylie: The teams there have been wonderful. The market, obviously, there's 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. 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.
Scott Wylie: You know, you probably recall that it was accreted to capital on day one to tangible book. And we got more expensive 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.
Scott Wylie: And just one final question.
Scott Wylie: 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? We do believe that there's going to be opportunities to 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, you know, 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.
Scott Wylie: 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.
Scott Wylie: What we've seen in prior down cycles is you see these big spectacular events like we saw in March, and then, you know, so the follow-on takes several quarters to play out. And I think we've got that to come still, which I do believe will create opportunity for us.
Scott Wylie: And just one last hi, and 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 to the securities, or durations. Have you thought about that? On some of yours, or I guess if you did anything, but those health maturities, you would have to move the whole thing to help for sale, and you couldn't just sell a portion of it, of it.
Scott Wylie: You know, our our security portfolio here is relatively small. We made a conscious decision in was that 2011, truly in that 2021 I mean, 2021, not to go out and buy a bunch of one and 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 to cause that kind of turmoil in our balance sheet.
Scott Wylie: I mean, I think our total investment portfolio is relatively small and 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 were better off leaving it in place and letting it pay off.
Scott Wylie: Thanks a lot guys. I appreciate it. Have a good weekend. Yeah, thanks for us.
Brett Rabatin: One moment for our next question. Our next question comes from Brett Rapidin with object group. Your line is open. Hey, just one follow up. I know this calls gone long enough. I guess first I didn't know what you earlier, David, when I said hi to the crew. I wanted just to ask, I mean, obviously the stock is down quite a bit today. I think a significant portion of that might might be around the NPA formation in this quarter.
Brett Rabatin: 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 give us some sense of your comfort, how you get there in terms of not expecting losses on those particular properties. Thanks.
Scott Wylie: So yeah, good question. We have spent a lot of time on this as you would expect is a very large number for us, 42 million dollars. And you know, 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, you know, if we take some with the stock price, I mean, I guess it's a buying opportunity.
Scott Wylie: But yes, we have taken a close look at it. We have current appraisals on all the seven properties, Julia, six properties. We've looked at them in detail. I was thinking that that there's some A nice opportunity in here 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 in property in Nantucket and West Palm Beach.
Scott Wylie: I mean, those are all very hot desirable markets that I think are still, you know, trading in premiums. And these aren't people that, you know, can't figure out how to pay an 8% mortgage. These are people that are coming in and buying trophy properties for cash. And you know, the article actually talks about that, that end of the market is really isolated from what's going on in monetary policy and whatnot. So I do think, you know, Brett, I don't want to be over confident about it, but I do think that, you know, we're well positioned there and should be fine.
Scott Wylie: But you can't get back to the core of that question. Updated appraisals, anything that would give us confidence that, you know, they did the borrower purchase properties at X and it's not going to have to take or the appraisals might not come in lower, much lower than where he purchased from any color on that. You know, we have current appraisals. We already have an end. Okay. And they, do they meaningfully exceed the, the, um, unpaid balance in principle?
Scott Wylie: I think we're going to do fun with them. Okay. Sorry to push. I just, you know, trying, trying to help you get some confidence around that. So for the market, so appreciate to follow up. Yeah. Thank you, Brett.
Operator: That concludes the question and answer session.
Scott Wylie: At this time, I would like to turn it back to management for closing remarks. Great. Thank you, Abigail.
Scott Wylie: Just a couple of things, you know, well, the reported numbers is quarter obviously are disappointing. Our core business is performing well in a unprecedented environment. The company has responded well with bouncy management, higher fees and well controlled expenses. You know, well, our third quarter and P.A, spike is discouraging. We do expect to collect on these two larger problem relationships and 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, offering leverage and improved earnings story. You know, we're very focused on improving current and future earnings while operating with our historic focus on careful risk management.
Operator: So with that, thanks everybody for dialing in. We really appreciate your interest and support of First Western and have a great weekend. Thank you for your participation in today's conference. This does include the program.
Operator: You may now disconnect.