Thank you for standing by, and welcome to the First Western Financial Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are on a listen-only mode. After the speakers' presentations, there'll be a question-and-answer session. To ask a question at that time, please press star 11 on your touchtone telephone. As a reminder, today's call is being recorded. I would now turn the conference to your host, Mr. Tony Rossi of Financial Profiles. Sir, you may begin.
Thank you, Valerie. Good morning, everyone, and thank you for joining us today for First Western Financial's fourth quarter 2022 earnings call. Joining us from First Western's management team are Scott Wylie, Chairman and Chief Executive Officer, and Julie Courkamp, Chief Financial and Chief Operating 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 at First Western Investor Relations website to download a copy of the presentation. Before we begin, I'd like to remind you that this conference call contains forward-looking statements with respect to the future performance and financial condition of First Western Financial that involve risks and uncertainties. Various factors could cause actual results to be materially different from any future results expressed or implied by such forward-looking statements.
These factors are discussed in the company's SEC filings, which are available on the company's website. I would also direct you to read the disclaimers in our earnings release and investor presentation. The company disclaims any obligation to update any forward-looking statements made during the call. Additionally, management may refer to non-GAAP measures, which are intended to supplement but not substitute for the most directly comparable GAAP measures. The press release available on the website contains the financial and other quantitative information to be discussed today, as well as the reconciliation of the GAAP to non-GAAP measures. With that, I'd like to turn the call over to Scott. Scott?
Thanks, Tony. Good morning, everybody. We had a number of objectives that we wanted to accomplish in the fourth quarter. We wanted to increase our focus on deposit gathering in order to improve our liquidity and reduce our loan-to-deposit ratio. We wanted to continue to generate solid loan growth while tightening our underwriting and pricing criteria, given the potential for weakening economic conditions. We wanted to continue to effectively manage our expense levels. I'm pleased to report that we were able to accomplish all these objectives and continue to generate strong financial performance. Although earnings were lower than the prior quarter due to the increase in interest expense that we saw as a result of our strong growth in deposits in the competitive environment, putting pressure on deposit costs.
Even with the tighter underwriting and pricing criteria, we still generated 21% annualized loan growth in the quarter, with increases in each of our major portfolios. The strong loan growth that we continue to generate reflects our success in steadily growing our client base in Colorado, as well as the increasing contributions we're getting from the teams that we've built to increase our presence in Arizona, Wyoming, and the Montana markets. With the strong business development capabilities that we've built, we're able to generate a significant volume of high-quality lending opportunities, enabling us to continue generating strong loan growth while maintaining our prudent approach to risk management. Importantly, the growth rate we saw in total deposits was more than double our loan growth.
We were particularly effective in expanding deposit relationships with a few larger clients, which accounted for a significant portion of the deposit inflows we saw in the fourth quarter. As with our loan production, our increased presence in some of our newer markets was also a contributor to the strong deposit growth in the fourth quarter. As we mentioned on our last call, our near-term objective was to get our loan deposit ratio down near 100%, and we were able to achieve that with our strong growth in deposits during the fourth quarter. Along with our improving liquidity by reducing our loan deposit ratio, during the fourth quarter, we also increased our total capital ratio by 53 basis points, to 12.37%.
Moving to slide four, we generated net income of $5.5 million or $0.56 per diluted share in the fourth quarter, or $0.58 a share with acquisition-related expenses excluded. Our strong profitability, along with effective management of the investment portfolio, has enabled us to continue to drive increases in both book value and tangible book value per share. In the fourth quarter, book value per share increased 2.5% from the prior quarter, while tangible book value increased 3%. During 2022, a year when most banks saw significant declines, both metrics increased by more than 9%, reflecting the strong value we're creating for shareholders. Turning to slide five, we'll look at the trends in the loan portfolio. We had another strong quarter of loan growth, originating $182 million in loans.
While this was down from the prior quarter, the average rate on new loan production increased by more than 100 basis points, so we're still generating strong production without compromising on pricing. Payoffs are also continuing to moderate, so more of our loan production is translating into net loan growth, and our total loans held for investment increased $121 million from the end of the prior quarter. The growth was primarily driven by increases in our residential mortgage construction C&I portfolios, which offset a decline in our CRE portfolio, which is an area we're limiting new production as part of our overall approach to risk management ahead of a potential recession.
As with the prior quarter, most of what we're adding to one to four family residential portfolio are jumbo ARMs that provide attractive risk-adjusted yields. Moving to slide six, we'll take a closer look at our deposit trends. The success we had in deposit gathering resulted in 44% annualized growth in total deposits during the fourth quarter. We had a decline in non-interest-bearing deposits, which was largely attributable to some clients deciding to move a portion of their excess liquidity into interest-bearing accounts to capitalize on the higher rates now being offered. We also made the decision to add some time deposits in order to lock in longer-term fixed-rate funding that we believe will enable us to more effectively manage our deposit costs going forward. Turning to slide seven, trust and investment management.
Our total assets under management increased by $189 million from the end of the prior quarter, which was primarily due to an increase in market values during the fourth quarter of 2022. I'll turn the call over to Julie for further discussion of our financial results. Julie?
Thank you, Scott. Turning to slide eight, we'll look at our gross revenue. Our total gross revenue was relatively consistent with the prior quarter as an increase in non-interest income offset most of the decrease we saw in net interest income. On a year-over-year basis, our gross revenue increased 23.8% from the fourth quarter of 2021, largely due to higher net interest income resulting from both organic and acquisitive growth on our balance sheet. Turning to slide nine, we'll look at the trends in net interest income and margin. Our net interest income decreased 4.6% from the prior quarter due to the increase in interest expense resulting from our strong growth in total deposits and an increase in our average cost of deposits.
With our strong growth in deposits, we reduced our level of FHLB advances. We continue to make adjustments to our level of wholesale borrowings going forward based on the trends we are seeing in loan production and deposit flows. Excluding the impact of PPP fees and accretion on acquired loans, our net interest margin decreased 47 basis points to 3.31. The net decline in our net interest margin was due to an increase in our average cost of funds resulting from the higher rate environment and very competitive environment for deposit gathering. Given the competitive environment for deposit pricing, we believe it is likely that we will continue to see some pressure on our net interest margin in the first quarter.
As we exited the year, due to the changes in the composition of the balance sheet, we have moved to a more neutral position in terms of interest rate sensitivity. We have indicated in the past, we do not make bets in future direction of interest rates. Changes in our interest rate sensitivity are a function of the trends we see in loan production and deposit flows at any given point in time, with our primary focus being on generating growth in net interest income. Over the past few years, as the growth in our commercial banking platform resulted in more commercial deposit relationships and an increase in non-interest-bearing deposits, we became more asset sensitive and saw significant expansion in our net interest margin.
We are seeing a shift back to a more neutral position, which will serve us well in protecting our net interest margin when the Fed eventually starts to lower interest rates. Turning to slide 10, our non-interest income increased 3.4% from the prior quarter, primarily due to higher bank fees and risk management and insurance fees. The higher bank fees was partially attributed to an increase in prepayment penalty fees, while the increase in risk management and insurance fees primarily reflects the seasonal bump that we typically see in the fourth quarter. The growth in these areas offset minor declines in trust and investment management fees and net gain on mortgage loans, both of which are starting to stabilize relative to the larger declines we experienced earlier in 2022.
The volume of locks on mortgage loans originated for sale declined 32% from the prior quarter. Approximately 95% of the originations were purchase loans, and we are seeing very little demand for refinancing given the rise in mortgage rates. Turning to slide 11 and our expenses. Our non-interest expense increased 3.3% from the prior quarter, primarily due to an increase in data processing costs resulting from non-recurring implementation charges relating to enhancements we have made to our trust and investment management platform. During 2022, we made significant investments in both new banking talent and technology that will contribute to our future growth in revenue and improvement in efficiencies. Following these investments, we expect the growth rate of non-interest expense to moderate in 2023, with most of the growth coming from annual salary increases.
For the first quarter of 2023, we expect non-interest expense to be in the range of $20 million-$21 million. Turning now to slide 12, we'll look at our asset quality. On a broad basis, the loan portfolio continues to perform very well with another quarter of minimal losses, although we did see an increase in non-performing loans in the fourth quarter. The increase in non-performing loans was primarily attributed to one commercial loan. As we have indicated in the past, our underwriting criteria requires multiple sources of repayment. In this particular case, we have the assets of the business, a commercial property, and a personal guarantee from a high net worth client. As a result, we believe the loan is well secured and there was no specific reserve required.
We record a provision for loan losses of $1.2 million, which was driven by the growth and changes in the mix of the loan portfolio. This puts our ALL to adjusted total loans at 78 basis points, which was relatively consistent with the end of the prior quarter and reflective of our strong credit quality and the low level of losses that we have experienced in the portfolio. On January 1st, we adopted the CECL standard for allowance for credit losses. Our preliminary estimate is that our ACL to total loans ratio will be in the range of 75-90 basis points and a 30-45 basis point coverage on off-balance sheet commitments. I will turn this call back to Scott.
Thanks, Julie Courkamp. Turning to slide 13, I'll wrap up with some comments about our outlook and priorities for 2023. While it appears that the macroeconomic environment will be challenging this year, we believe we're well-positioned to effectively manage through an economic downturn while continuing to generate profitable growth, particularly when economic conditions improve. With our conservatively underwritten, well-diversified loan portfolio and the strength of clients that we serve, we expect to maintain strong asset quality as we have during prior periods of economic stress. In each of the past three years, we've further tightened our already conservative underwriting criteria. As a result, the credits we've added to the portfolio over that time have a substantial cushion in their debt coverage ratios and loan to values to absorb any deterioration that occurs in cash flows or collateral values.
We also have little or no exposure to the areas that are most likely to be impacted by a recession such as office CRE, retail CRE, SBA, or subprime consumer. We feel very comfortable with the small amount of office CRE that we have in the portfolio. These properties aren't in major metropolitan areas where the work from home trend has been most pronounced. They largely consist of smaller properties in high-end suburban areas with tenants in more recession-resistant industries like medical practices. In terms of new business development, we're going to continue to place an increased focus on core deposit gathering to fund our loan production. Our relationship bankers are focused on developing full relationships with both loans and deposits from clients. We expect this to result in better alignment between loan and deposit growth going forward.
While we continue to be conservative and highly selective in our new loan production until economic conditions improve, we expect to be able to continue generating solid loan growth as new teams that we've added in Arizona, Wyoming, and Montana continue to gain traction and increase our market share. One of our priorities for 2023 is increasing our business development in the trust and investment management area. We've made some adjustments in how this business operates, which will free up our business development officers to spend more time meeting with potential new clients. We're also going to be adding a few new business development officers in various markets.
We believe these efforts will not only help drive a higher level of growth in assets under management and fee income, but also contribute to balance sheet growth given our consistent success in expanding relationships with wealth management clients to include loans and deposits as well. Our investment we're making in this area will not have a meaningful impact on our overall expense level as we're reallocating resources from other parts of the business. As Julie mentioned, now that our near-term investment in talent and technology to support our long-term growth are largely completed, we expect to keep our expense growth rate well below our revenue growth rate this year, resulting in increased operating leverage. We believe our increasing operating leverage should result in further earnings growth in 2023, with the second half of the year likely being stronger than the first half.
It's now been about 4.5 years since our initial public offering, and I think we've successfully delivered on the strategy we outlined at that time for enhancing the value of our franchise. While navigating through a multiyear pandemic, we've generated strong organic growth by taking market share in our existing markets and expanding into new markets, and complemented that with disciplined, well-priced, and well-executed acquisitions. The balance sheet growth we've generated has resulted in greater operating leverage and higher level of earnings and improved profitability. With our strong execution since the IPO, we've created significant value for the shareholders with our tangible book value per share increasing by nearly 140%. We've built a strong, high-performing culture and a very talented team that delivers exceptional client service and effectively communicates our value proposition to consistently bring in new relationships.
With the strong team we've built, the attractive markets that we operate in, and the highly productive business development capabilities we've developed, we believe we're well-positioned to deliver another strong year in 2023 and create additional value for our shareholders. With that, we're happy to take your questions.
Thank you. Again, ladies and gentlemen, if you'd like to ask a question, please press star one one on your touch-tone telephone. Again, to ask a question, please press star one one. One moment, please. Our first question comes from Brett Rabatin of Hovde Group. Your line is open.
Good morning. I wanted to talk about first the growth in deposits linked quarter. I think, Scott, you mentioned some fairly sizable clients adding funds to the deposit mix. Can you talk maybe about the larger deposits this quarter and then the efforts to continue growing that? Would we expect that to continue in terms of the acceleration of the linked quarter beta?
Yes. We talked a little bit about this, I think, in the last two calls. You know, historically, we've seen that we've been able to operate the bank in a kind of a 90%-95% loan to deposit ratio. We've always kind of wondered, we know where the next loan's coming from. We always kind of wonder where the next deposit's coming from. I think what we've seen over the years is that our clients have liquidity, and they're willing to bring it here if we want it. We don't need to carry a bunch of excess liquidity on our balance sheet that we're not making money with. I think that's exactly what we saw in the fourth quarter.
We told our relationship bankers, "Hey, you know, we're not gonna operate this thing with a 108% loan to deposit ratio," where we were in Q3. We went out and increased our deposits at a rate that was double our loan growth rate in Q4. I mean, I do think that we really had nice success with that. As we said in the prepared comments, you know, a lot of that came from existing clients, which is exactly what we've seen over the prior, you know, 18 years here, and in my prior private banking operation. Yes, I do think that that will continue into 2023.
The comment you made towards the end of your question, though, I just wanna draw some attention to that. You know, if you look at kind of quarter by quarter last year at our deposit beta, you know, we did a pretty nice job, I think, as an organization in holding our deposit beta down in the first half of the year. As we talked about last quarter, you know, it's really been an unprecedented environment. I mean, in the 30 something years I've been doing this, we've certainly never seen Fed funds rates go up as fast, as quickly, you know, by as much, as quickly as what we saw, you know, through the middle and latter parts of this year.
I feel like, you know, the relationship based focus that we have here has really served us well. You know, of course, that came back in Q4 in an interesting way where, you know, we really saw a big spike in our cost of funds to the point where our net interest margin really came down, which we said we thought was going to happen in the last call. Sure enough, it did. You know, I think we guided in our, in our comments that we're gonna see, you know, continued pressure in Q1 of 2023.
You know, you look at where our NIM is, for example, in Q4 at 3.32%, and you compare that to historic NIMs at First Western or compared to other high fee banks like us, and 3.32% is a very strong number. You know, just looking forward, I think the interesting question and, you know, I don't really know that we wanna give guidance on this, but I guess, you know, my feeling is we should plan for the worst, but we can hope for something better than the worst. You know, I do think that, you know, if you look further into the year, we had a lot of pressure in Q4 to catch up on some of the deposit beta that we had kept low through the year.
I don't personally think that's gonna continue. I don't think we're gonna see, you know, a half a dozen or whatever it's been 75 basis point increases from the Fed this year. I don't think that these headline numbers are gonna be in the media all the time, and our clients are gonna be saying, "Hey, how come, you know, I'm getting zero when Fed funds are five?" Which, you know, we're hearing throughout the industry. I mean, it's just gonna be a different environment this year, I think. If that's true, and I don't know if it is, or if we're in a recession or whatever, you know, we may get dealt. I mean, we know from page, is it six that has our loan stuff on it? I think it's page six of our slide deck.
Um-
Five.
Page five. Thank you. We have something like $100 million or $200 million in loans that pay off every quarter. We produce something like $200 million or $300 million a quarter, at least last year. You just look at the impact of, you know, loans rolling off at 3% or 4% and either renewing or new loans coming on at 7% or 8%. It just feels to me like we're pretty well positioned from an already, you know, competitively high net interest margin compared to high fee bank peers, private banking peers. I think we're well positioned to see some growth later in the year. You know, we're gonna see that come down in Q1, and I don't know what's gonna happen the rest of the year.
Just the dynamics that seem apparent today, leave room for upside later in the year. That was a little bit of a long-winded answer, to your question, Brett, but I hope it was helpful.
Scott, that was very helpful. You know, I would agree, you obviously did a good job last year managing the deposit cost. It's just gotten, you know, so competitive and essentially your competition's the treasury curve. You know, it sort of is what it is. My follow-up question, wanted to ask about the loan portfolio growth from here. You know, 4Q was construction and residential. You know, obviously, you have slow growth from 21% linked quarter annualized in the fourth quarter. Wanted to get a sense of what the pipeline looked like, what you think you might grow this year, and then, you know, any magnitude that you're expecting from a pipeline perspective.
Yeah. You know, we've historically said that we think we can grow loans in the mid-teens. You know, I think again, if you stand back a little further than just the quarterly look, we've kind of grown loans pretty consistently organically, at least in the mid-teens. You know, with tighter standards, with higher spreads, could we grow loans in the mid-teens in 2023? Well, I think so. You know, we have the infrastructure in place. We've got some strong, you know, the machine, I call it, in our existing offices. Then we've added some more, you know, high-quality, lenders in some of these new markets that we're in, Arizona, Western Wyoming and Montana. So yeah.
I mean, I think we're well positioned to see growth in deposits and loans in those markets in relationships. you know, it's just hard to tell right now. I think, you know, we're seeing clients that were thinking about doing something that makes sense at 4% and maybe doesn't make sense at 8%. you know, these are sophisticated people, and they've been through cycles and they don't need to do something. you know, maybe they will, maybe they won't. I would say right now our pipelines are down, but they're sure not empty. There's plenty of activity going on, and people are doing things, and we're closing on new loans.
Then I would just add, Brett, for the kind of the mix comment that you added into that question of we did see quite a bit of mortgage offering, mortgage production last year. For us, it continues to be very strategically important to us. Like we've always said, it's a good new acquisition of clients and retaining existing clients tool for us to use. We continue to be, you know, cognizant of generating appropriate risk-adjusted returns on our capital. You'll probably see us dial back our residential mortgage production from what we did, at least in the prior year, for the first couple quarters this year as we look at our competitors and what they're pricing those loans at. They're not quite as attractive as what we would wanna put on our portfolio.
I don't think you'll see that same level of growth for us, at least in the first part of this year, unless things change.
Okay. That's very helpful. Thanks for all the color.
Thank you.
Good. Thank you, Brett.
One moment, please, for our next question. Our next question comes from the line of Brady Gailey of KBW. Your line is open.
Hey, thanks. Good morning, guys.
Morning, Brady.
The $20 million of sub-debt that was raised intra-quarter, is that solely just for growth purposes, or was there any other thing you were thinking about when you raised that sub-debt? I'm not sure if there's anything else that's expiring or maturing. What's the any color behind why the sub-debt raise?
Well, we thought that, you know, going into a potential recession, more capital is better than less capital, and we didn't want to do a common raise. We don't need to, because we've been able to generate good earnings here over these last few years, to support the growth we've had. We saw a window for an attractive, non-rated, raise. You know, the one that was done before us, I think, closed at 8% of a regional bank. The one that was done after was 8.5%. We got ours done at 7%, 5-year fixed. Gives us $20 million of surplus Tier 2 capital at the holding company that can be pushed down to the bank for additional, you know, common.
It can be additional cash for the, for the holding company. I mean, you know, we said general corporate purposes, which is exactly what we plan to use it for. Just seems opportunistic and of course, it's non-dilutive. The impact on future EPS is minimal. I think, you know, we don't know what's in the future and, you know, when the windows like that is there, I think it makes sense to take advantage of it.
All right. The new commercial loan that entered into NPAs, it sounds like it's not a huge risk, given the dynamics y'all talked about. Just a little more color, what type of loan is that? When do you expect to have that loan resolved and back out of the NPA bucket?
I think three weeks from Thursday. No. You know, these things are a process. You know, a couple points on that. It's a producer of a consumer product that probably got a little over their skis. They, that's a metaphor. They, I think are an indication of the strength of our credit process and of our borrowers here, as Julie said in her prepared comments that, you know, we always underwrite to resource or repayment. We've got the business assets. We've got the buildings. We've got some other commercial buildings, and we have a personal guarantee from a very strong borrower client. We don't anticipate a loss there. I do expect that it's gonna take a little time to work out just 'cause it always seems to.
It didn't feel to us or it doesn't seem to us to be indicative of anything. Like, it's not some systemic problem that we have three other loans just like it that are all gonna have problems or something like that. I mean, it's, it's just I think a one-off thing that we felt better putting on non-accrual in Q4.
Okay. Then the commentary about the margin coming down in Q1. Any idea the magnitude of how much it could come down or any idea where the margin exited the quarter in December?
Julie, you wanna talk about-
Yeah. In December, our NIM, just for the month of, was 3.06%. If that's a little bit helpful to you to see where that might lead us. You know, Scott touched on a lot of the NIM comments and the net interest income and market for deposits, I think that'll help you out.
Okay. Last one for me. $20 million-$21 million of expenses in Q1. Should we expect a little bit of growth beyond that for the rest of the year or do you think they'll be able to hold that flat for the rest of the year? How should we think about kind of full year expenses?
Well, we think this is a good time to be managing expenses. We talked about. Well, we talked before that our path to success is not cost cutting. We talked in the prepared comments about the fact that, you know, if we can keep our costs in line this year with last year and the only real cost increase that we'll see would be related to salary increases 'cause we do an annual merit adjustment for people, I think that that would be a successful expense control year for us. I do think, you know, we're at a place in the cycle where we wanna be careful about growth. We wanna be careful about expense growth in particular.
You know, I think what we're trying to show you in the numbers here is if we see continued revenue growth like we have seen over the past few quarters, especially in our core earnings, and then, like, net interest income by itself is up. Is it up 49% year-over-year for the fourth quarter, Julie? Some number like that. Then, you know, we have these kind of hideous headwinds from on the fee income side, and I keep thinking at some point it's not gonna go lower. You know, if it goes higher and then you've got good expense control, I mean, that's all a formula for nice earnings acceleration. That's where we're thinking on expense discipline.
Okay, great. Thanks, guys.
Thank you. One moment please. Our next question comes from the line of Matthew Clark of Piper Sandler. Your line is open.
Hey, good morning.
Good morning, Matthew.
Just first one for me, around the margin, if you had the spot rate on deposits, deposit costs or interest bearing deposit costs at the end of the year?
Spot rate for the cost of deposits at December was 1.99%, so just about 2%.
That's total? Okay.
Mm-hmm.
Okay. Then the risk management and insurance fees, the, you know, the seasonal step up this quarter a little bit higher than a year ago, fourth quarter. Anything, I guess, about this rate environment or just general macro environment that, you know, might have lifted that a little more than usual or is that a kind of a reasonable level of activity for next year's fourth quarter?
We can't seem to predict that. You know, it seems to produce a pretty consistent amount year in, year out. Through the first three quarters of this year was below our expectation, and we thought we were gonna have a strong fourth quarter, and we did. I think, you know, higher fourth quarters than the prior three quarters is a good expectation. Whether we're gonna hit the number next year like we did this year, I don't know. I mean, we've got a bigger platform we're operating off, a bigger client base, more folks out there helping our clients with wealth planning. That's what really drives the risk and the life insurance business. You know, hopefully, that trends up over time.
It will be cyclical, where you're gonna see more in the fourth quarter.
Okay, got it. Great. kind of big picture, I think a number of banks have kind of suffered from generating probably stronger loan growth than they should have, and not funding it with deposits or low cost deposits. You guys obviously had excess deposit growth this quarter, but you know, it came at a price. I guess, what are your thoughts around kind of maybe tapping the brakes a little bit on loan growth, unless you can fund it with, you know, truly low cost deposits and not price sensitive type balances?
Well, honestly, we're not really thinking in terms of, you know, how to best manage NIM. We're thinking about how to grow the business with the clients that we want given the economic and competitive environment that we're handed. You know, we've talked about tightening credit standards. We've talked about raising margins. We've talked about the relationship focus. You know, if you look at the actual trend line for loan production, you know, it's gone from a little under $350, to a little under $300, to a little under $200 over the last three quarters. You know, I think that that is all indicative of, you know, how we're approaching loans.
I, you know, I think sometimes with banks that turn this spigot off all the way, and certainly in our market, we're seeing some of that, then, you know, you've got a problem turning it back on when the economy turns around. I think, you know, the extent we can keep our bankers focused on finding the relationships that we want, growing the relationships with existing clients, making sure that our clients and referral sources and our prospects are, see us as being in business and willing to do things that make sense, albeit under more stringent terms and more expensive, I think that's where we wanna be. You know, if that slows our growth rate down the balance sheet in the interim here, I think that's fine.
As I said, you know, we're gonna see a lot of lift. I expect, I don't, again, wanna give guidance to this, but I expect that we're going to see a nice lift in our NIM going through this year if the Fed does in fact slow down rate increases, so we don't see all this deposit pressure, and as we reprice our loan portfolio. I think the math on that stuff works pretty nicely for us. You know, as Julie was talking about, you know, we're not trying to make a big interest rate bet here. We're trying to run a balanced portfolio. I think that that's gonna play out nicely over the course of 2023, as it has historically here.
Great. Thank you.
Thank you.
Thank you. Thank you. One moment please. Our next question comes from the line of Bill Dezellem of Tieton Capital. Your line is open.
Thank you. It's Tieton Capital Management. I have a group of questions. First of all, would you please expand further on the comment that you just made relative to some competitors are shutting off their lending machine and what opportunity that may create for you all with market share?
I don't know really what else to add. I mean, I think we're seeing, you know, some banks are approaching this part of the cycle by saying, you know, we're not gonna lend. I think that that does create opportunities for us with prospects that aren't here yet or clients that have things that are away that we can bring here. I, I would tell you, we are in very desirable markets, and so we continue to see new entrants to the markets. Julie Courkamp talked in her comments a little bit about people doing, I won't say stupid pricing, but pricing certainly we wouldn't do on, resis, for example, on residential mortgages. You know, we're just seeing things that are head scratchers to us.
You know, the beauty of our business model is we don't have to do those things. You know, we can focus on a different area when one area looks like, you know, a competitive position we don't wanna be in. You know, of course, with mortgages, we're able to use the secondary market capabilities that we have to still support clients without having to put, you know, low priced stuff on our books that we don't want.
Maybe, Scott, the one thing that would be helpful is how prevalent are you finding the just pulling back dramatically on lending by competitors?
I don't know how to answer that either, Bill. You know, we're in some very different markets from each other. You know, what we see in Denver is different than what we see in the other Front Range markets. You know, obviously the resort markets are different. Western Wyoming, you know, continues to be a really interesting dynamic market. I would say we've had more success early in Montana than we expected. Then, you know, if you look at Arizona, you know, we've been able to take advantage there of attracting new lenders in. A lot of the reason that the really high quality people that you wanna attract to First Western, the reason they wanna join us is they see us as a growth-oriented company and not somebody that's, you know, turning it on, turning it off, turning it on.
I mean, it does spell opportunity for us. I just think that I wanna be clear, I've said it two or three times already, that, you know, this is not the time to be, you know, pedal to the metal on growing loans. I mean, this is a great time to be bringing in great relationships, fine, but we have been tightening credit standards. We've been tightening our underwriting standards and the terms. We've been expanding our NIM, expanding our credit spreads that we're charging clients, and we've been disciplined about that. I think that's gonna pay off for us in 2023 and beyond.
Okay. Thank you. Two additional questions, if I may. Acquisition pipeline, would you please provide an update in terms of what you're seeing given all of the macro factors that you're talking about, and whether that's causing some to decide now would be a good time to sell? Secondarily, the trust and investment management and systems enhancements. I know there was a one-time cost in the quarter.
More importantly, trying to understand what is it that you would anticipate those enhancements to do for that business, please?
Yeah. Great. Two small questions. Let me start with the acquisition pipeline. I think, you know, what you hear out there is what we see, which is that it's a difficult time for acquisitions. You know, I think with challenges with AOCI and with credit uncertainty, whatever, it's the hard time to get things done. We continue to spend time and effort on our corporate development program. You know, I've explained many times before that we think that that's a core competency here, and that we have a process for doing that, and we continue our process. People that we're interested in know we're interested in them. We call on them and visit with them and work on opportunities, and we continue to do that.
I would say there have been 2 or 3 deals in the latter half of last year that were of interest to us and were just priced in a range that didn't make any sense to us. They did ultimately find a buyer at a price much higher than we would have paid. I, you know, I wish them well. I think that's interesting, but, you know, we don't need to do those things. We don't need to stretch on those things. I hope as investors, you guys see that we're disciplined about that stuff.
You know, if you look at our last three or four or all 13 for that matter, acquisitions here, you know, they've had very happy stories because we're disciplined about how we look at it, how we price them, and we don't stretch on these things and do things that can come back and bite the shareholders. You know, are we gonna do something this year? I don't know. We don't have anything that we'll be announcing tomorrow, but we continue to do our corporate development efforts. If the right thing at the right price makes sense, we would love to include that as part of our growth story going forward. The second question, I think about PTM systems.
I don't know how far, Julie, we should go with this whole thing, but let me try a specific answer and a general answer, and maybe if you want to add some more color to it, you would.
Mm-hmm.
You know, as an industry, private banking has a really difficult problem, which is we need our trust and our investment and our mortgage and our banking systems to talk to each other, and they just don't. There's no vendor out there that has provided that in the 40 years that I've been doing this, even though some of them promise it, they don't work. So what we've done historically here at First Western is we've taken those four core systems and pulled the data out and then used the data to do the things that we need, like, you know, client profitability and, you know, relationship pricing and stuff like that. You know, cross-selling, knowing, you know, the different products that individual relationship has with us, those sorts of things.
Now, if we can get comfortable with security, we think that there's an opportunity to migrate these core systems into cloud-based systems that are much more accessible for fintech solutions that are not just stuck in a core system ecosystem, right? That you can use the core as just the core, and then you can build systems around them that provide a lot better efficiency and effectiveness for internal use for our associates and for the client experience. What we've done this year. Well, 2 years ago, we converted our loan processing system to a up-to-date system that, you know, is kind of next generation that we think can support that sort of loan process efficiency.
Two years ago, three years ago, we did that with our platform trading system that we use for investment management, which has all kinds of advantages internally and externally. This year, what we did in the fourth quarter is we took our trust core and our investment core and replaced the incumbents with a new vendor that has a cloud-based solution that's integrated. It's one solution for both of those cores.
For this year, we're hoping to do that with a banking core, so that we've got ourselves in a place where, you know, all these things, even though they may not be able to talk to each other, they'll be able to talk to our overlays much more effectively and efficiently, and we can get away from being stuck in a single vendor's ecosystem and have a lot more flexibility for our system going forward. The nice thing is, with this trust and investment vendor, you know, we're ending up. Julie Courkamp, are we finally breakeven? I mean, we're hoping for some cost saves. I think for sure we can break even.
From a vendor perspective, we're breakeven, yes.
Yeah. We'll see how, you know, once the dust settles and everything, if there's some cost saves to be had there. My point is, they're not costing us more. There are some one-time conversion costs to it and obviously some pain to the conversion as there always is. That would be kind of my short-term and long-term answer to that. Julie, what did I miss in there?
No, I think you got it. I was gonna touch on the efficiency for our processes and simplification for our associates, client experience improvement, and then more accessible data.
Yeah.
those are kind of the key points for what we are hoping to accomplish out of this one.
Yeah. Did that answer your question, Bill?
It does. That really sounds fantastic. Good luck pulling all that together and thank you both.
Yep. Thanks for the questions.
Thank you. One moment, please. It looks like we do have a follow-up question from Brett Rabatin. Your line is open.
Hi. Just wanted to follow back up on fee income and make sure I understood the expectations for the year. You know, kind of seasonality maybe of the risk management and insurance fees. And then just thinking about mortgage banking. You know, some folks have made some hard decisions on that business line, but my guess is you're gonna continue to try and work that business. I just wanted to hear any thoughts around the mortgage expectations given obviously low levels at current times. Thanks.
Obviously we've had some pretty tough headwinds in our fee businesses, as an industry and here at First Western, that's true as well. You know, the two big headwinds for our fee business has been on the mortgage side, and obviously that was a big disappointment this year. You know, we know it's cyclical, we know it's strategic for us, like you said, so we're not gonna go out of it. What we can do is manage expenses, which we've done. We've cut expenses now, Julie, two times or three times?
Three times. Mm-hmm.
Over the past 18 months.
We'll continue to assess that as, you know, production. We're typically slower this season, so we're definitely going to be assessing it as the months come in.
Then we've added some MLOs in Arizona in particular. I think, you know, our production, you know, our market share should improve. The MLOs are 100% commission, so there's no expense associated with that if they're not producing, and they are. You know, I think that's kind of the best you can do with that given what the market gives you. If the consensus assumption, I mean, you look at the MBA numbers for this year, and they seem pretty aggressive to me, but if those come true, I mean, we should see a better year at least or at least flat to last year in mortgages. If we have good expense control or when we have good expense control there, I mean, that they're not gonna get worse.
It's either gonna be flat or get better, I think. Then on the fee incomes on the, you know, the asset management side, the trust investment management side, you know, we think there's a ton of opportunity there. It's a really interesting time right now because when everybody's doing well and, you know, you're not paying much in fees compared to, you know, the 20% or 30% gains you're making or whatever, you know, it's hard to get people to move. It's hard to get people to admit that they need help because everything they bought into their Schwab account or whatever went up. In markets like this, they're not feeling so confident when their spouse says to them, "Hey, how come you lost all this money?" You know, it's nice to have a professional advisor that's helping them.
We think it's an interesting time. We're actually very focused as a company right now on how we can strengthen our planning, trust, and investment management, which are really kind of three different businesses. They're all very much, you know, integrated and, and overlapping, but they're three different things. We're doing some pretty significant things internally to upgrade that 'cause we think it's a really good time right now to be out telling our story, which is a very powerful, differentiated, unique story that fits nicely into the banking story we talk about all the time of, you know, delivering this team-based, integrated private bank and trust service locally. I think, I mean, I think that there's it's hard to imagine they're gonna go down much from where we are. I think there's opportunity on the upside.
Whether we realize that in 2023 or not, I don't know. You know, you go back to where we've come from, and we've come a long way in those businesses and our revenues have shown nice growth. I think that this is an interesting time for us to be able to capitalize on the market environment.
Okay. That's great color, Scott. Appreciate it.
Thank you. I'm showing no further questions at this time. Let's turn the call back over to management for any closing remarks.
I did have a couple of closing points I wanted to make if I could. You know, I think, I mentioned in our prepared comments is if you have, if you step back a little and look at the broader context, you know, 5 years ago, pre-IPO, First Western was a $970 million bank with about $50 million in tangible book value. Today, we're approaching $3 billion, and we have over $200 million in tangible book value. We've done that without dilutive capital raises.
In the meantime, you know, we've built out an infrastructure that can produce and support $ billions more in organic expansion, acquisition growth, and we're producing strong operating leverage and growth into the future, just as we have proven in these interim years here since the IPO. I also wanna recognize the hard work of our 365 First Westerners. You know, I feel like in a pretty challenging year, we've managed to produce another great year of solid organic growth in revenues and core earnings. In spite of some significant headwinds, you know, we're well positioned for the challenges that 2023 may bring, and especially if some of those 2022 headwinds turn to tailwinds and these challenges that we've seen become opportunities for us, I think we have a really terrific future here.
Thank you so much for dialing in and for your interest and support for First Western. We really appreciate it.
Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect. Have a great day.