Good day. Thank you for standing by. Welcome to First Western Financial Q1 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 this session, you will need to press star one one on your telephone. You will hear an automated message advising your hand is raised. To withdraw your question, please press star one 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 Profiles. Please go ahead.
Thank you, Amy. Good morning, everyone, and thank you for joining us today for First Western Financial's Q1 2023 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 of First Western's Investor Relations website to download a copy of the presentation. Before we begin, I'd like to remind you that this conference call contains forward-looking statements with respect to the future performance and financial condition of First Western Financial that involve risks and uncertainties. Various factors could cause actual results to be materially different from any future results expressed or implied by such forward-looking statements.
These factors are discussed in the company's SEC filings, which are available on the company's website. I would also direct you to read the disclaimers in our earnings release and investor presentation. The company disclaims any obligation to update any forward-looking statements made during the call. Additionally, management may refer to non-GAAP measures, which are intended to supplement but not substitute for the most directly comparable GAAP measures. The press release available on the website contains the financial and other quantitative information to be discussed today, as well as the reconciliation of the GAAP to non-GAAP measures. With that, I'd like to turn the call over to Scott. Scott?
Thanks, Tony. Good morning, everyone. Because of the prudent approach we've always taken to risk management, First Western's been a consistent source of strength and stability for our clients, and that was never more true than over the past couple months. At the same time, we never benefited more from the strong relationships we've built with our clients. As part of the ordinary course of business, we're in regular contact with our clients so that we can stay appraised of any changes in their business or personal lives and ensure that we continue to meet their financial needs. When the recent bank failures occurred, we didn't have to do anything other than what we usually do, which is continue to remain in regular contact with our clients.
Our clients know that we're a conservatively managed financial institution. There was essentially no concern expressed by our clients. Due to the deep relationships we've built and the value our clients place on the service and expertise that we provide, the stickiness of deposit base we've built was never more apparent. Earlier in the quarter in January, we had some liquidity events among our clients that resulted in some meaningful but routine deposit outflows. In both February and March, we had net deposit inflows, which speaks to the stability of the deposit base we've built. In fact, we've been the beneficiary of the recent turmoil in the bank industry, with many new clients coming to First Western as they wanted to move their banking relationship to a stronger financial institution.
During March, we added $42 million in new deposit relationships, while only $5 million of deposit relationships left the bank. While we saw good stability in the deposit base, we took some balance sheet management actions that had an impact on our level of profitability in the Q1, but we believe were prudent from a risk management standpoint. This included holding a higher level of cash on the balance sheet. Our level of FHLB borrowings also increased, but this was not related to issues being experienced in the banking industry. We had already decided to increase our borrowings as they provided a less expensive source of funding given the extremely competitive deposit pricing environment that we're seeing.
As I indicated earlier, on a short-term basis, we've chosen to hold most of the increase in borrowings in cash rather than deploy them into loan fundings or some new purchases of investment securities. We also chose to sell some non-relationship loans, most of which were added through acquisitions. These were loans where we had no deposit relationships, and they were relatively low yielding. While the sale of these loans did have an impact on our profitability this quarter, we felt that the benefit we would get in terms of capital and liquidity was more important in the current environment, while also improving the risk profile of the loan portfolio. Because of our prudent approach to risk management and the conservative manner in which we run the company, the fundamentals of our franchise remain extremely strong.
We have one and a half billion dollars available in liquidity, which is 1.7 times our level of uninsured deposits, which represents just 37% of our total deposits. We have a diverse client base with no meaningful industry concentrations. Our asset quality remains exceptionally strong with an immaterial level of losses. We have a well-diversified CRE loan portfolio with minimal exposure to non-owner occupied office properties where there's a broader concern. I'll provide some additional information about our CRE portfolio later in the call. We also have a relatively small investment portfolio, so we don't have anywhere near the high level of unrealized losses that some banks have experienced. At the end of the Q1, our held and maturity securities represented just 2.7% of total assets, and unrealized losses were less than 3% of our total shareholder equity.
Moving to slide four, we generated net income of $3.8 million, or $0.39 per diluted share in the Q1, in spite of some significant industry headwinds. There are small non-operating items every quarter, the combination of the loan fair value mark, severance payments, and the small loss on loans sold add about 6% per share in impact in Q1. Over the past year, we've seen increases in both book value and tangible book value per share, despite the impact to capital resulting from our adoption of CECL at the beginning of the year. Turning to slide five, we'll look at the trends in our loan portfolio. Our total loans were about flat with the prior quarter, this includes the $41 million of non-relationship loans that we sold in the Q1.
Excluding those loan sales, our total loans would have increased at an annualized rate of about 6%. The largest increase came from our CRE portfolio. Most of those are multifamily properties in markets where there's supply constraints and high demand for housing, and we believe they're very strong credits. Given our more selective approach in light of the economic uncertainty, our total volume of loan production was quite a bit lower than what we had generated in recent quarters. Most of what we're generating now are C&I and residential mortgage loans that we believe present the most attractive risk-adjusted yields in the current environment. With our discipline on loan pricing, we continue to see higher rates on new loan production, with the average rate on new loan production increasing by 125 basis points from the prior quarter.
Moving to slide 6, we've provided some additional information about our CRE loan portfolio. This portfolio is well-diversified and conservatively underwritten. Multifamily loans represent the largest percentage of any property type in that portfolio at 16% of total CRE loans and only 5% of total loans. We've never been a big lender for office properties. As a result, office loans comprise just 11% of the CRE portfolio and only 3% of total loans. Within that office portfolio, we have no exposure to properties in major metropolitan areas, including downtown Denver, no exposure to buildings over seven stories. The majority of the properties are located in suburban areas with tenants in recession-resistant industries like medical practices. Our average loan size among the office loans is just $2.3 million.
Over the past 10 years, we've not incurred any losses in our office loans. We have a minimal amount that are maturing through the end of 2024. We're also very proactive in our approach to portfolio management. We review current cash flows, vacancy rates, and rental rates at least on an annual basis, more frequently if warranted, so that we can identify any deteriorating trends at the earliest possible time. Due to the conservative underwriting and our proactive approach to portfolio management, our CRE portfolio continues to perform very well. At this point, we've not seen any concerning trends. Moving to slide seven, we'll take a closer look at our deposit trends.
Our total deposits were down just slightly from the end of the quarter, but were about 5% higher than the prior quarter on an average basis. As I indicated earlier, the liquidity events experienced by our clients resulted in our total deposits declining $71 million during the month of January, and then we had net inflows in February, March, and again in April. The mix of deposits continues to reflect a trend of clients moving money out of non-interest-bearing accounts and into interest-bearing accounts in order to get a higher yield on their excess liquidity. We also continue to add some time deposits in order to lock in fixed rate funding that we believe will enable us more effectively to manage our deposit costs going forward.
Turning to trust investment management on slide eight, we indicated in our last earnings call we've allocated some additional resources to business development in trust and investment management. We're seeing the positive impact from these efforts in the combination of inflows from new clients, market performance, which resulted in $275 million increase in assets under management during the Q1. Notably, we had increases in all five of our product categories. I'll turn the call over to Julie for further discussion of our financial results. Julie?
Thank you, Scott. Turning to slide nine, we'll look at our gross revenue. Our gross revenue declined 10% from the prior quarter due to lower levels of both net interest income and non-interest income. However, due to the higher average asset yields and the growth we have had in our balance sheet on a year-over-year basis, our interest income increased 74.6%. Our net interest income increased by 0.8% compared to the Q1 of 2022. Turning to slide 10, we'll look at the trends in net interest income and margin. Our net interest income decreased 10% from the prior quarter due to an increase in interest expense resulting from a higher average cost of deposits, as well as the impact of holding higher cash balances in March.
Our net interest margin decreased 37 basis points to 2.93% due to the higher average cost of deposits and excess liquidity we carried in the quarter. Much of the funding we have added is in the form of borrowings and time deposits are short-term and or callable, which gives us the flexibility to quickly make adjustments in our funding mix as market conditions change. Turning to slide 11, our non-interest income decreased 11% from the prior quarter, primarily due to lower bank fees and risk management and insurance fees. The lower bank fees were partially attributed to a decrease in prepayment penalty fees, while the decline in risk management and insurance fees primarily is typical following the seasonal bump we see in the Q4.
The decline in these areas offset a 6% increase in trust and investment management fees and higher net gain on mortgage loans. The increase in net gain on mortgage loans is primarily attributed to the increased loan production we are seeing from our expanded team in Arizona, which more than offset the seasonality we typically see in Q1 production in Colorado. The volume of locks on mortgage loans originated for sale increased 41% from the prior quarter, with 96% of the originations being for purchase loans. Turning to slide 12 and our expenses. Our net interest expense increased 3% from the prior quarter, primarily due to the seasonal impact of higher payroll taxes as well as lower deferred compensation due to the decline in loan originations. The higher FDIC assessment rate now in place contributed to the increase in non-interest expense.
These increases were partially offset by a decline in technology and marketing expense. As part of our regular review of expenses, we have recently made some adjustments throughout the organization in areas such as staffing, software spending, and real estate, all of which reflect the changing nature of our business and areas we no longer focus on growing. A portion of the cost savings from these adjustments will be reinvested into other areas of the company. Overall, these adjustments will help us to maintain expense control and should result in our non-interest expense being in the range of $19 -$20 million per quarter for the remainder of 2023. Turning to slide 13, we'll look at our asset quality.
On a broad basis, the loan portfolio continues to perform very well as our non-performing assets were essentially unchanged from the end of the prior quarter. We had another quarter of minimal losses. Following the adoption of CECL at the beginning of the year, our allowance for credit losses stood at 81 basis points at March 31st. This is down three basis points from our CECL day one coverage, as we had a small reserve release during the quarter due to changes in loan volumes and the mix in the portfolio. I will turn it back to Scott.
Thanks, Julie. Turning to slide 14, I want to take a moment and review our strong track record of value creation for our shareholders. This slide shows our trend in tangible book value per share since our IPO in 2018. As you can see, we've consistently increased our tangible book value per share throughout a variety of economic and estate cycles, including the pandemic and then the higher rate high inflation environment we've seen over last year. We believe this reflects our strong execution on our strategies for generating profitable growth while prudently managing our balance sheet, as well as our commitment to protecting shareholder value by not doing capital raises that are dilutive to shareholders and being disciplined in our acquisition pricing. As you may recall, our acquisition of Teton Financial Services was immediately accretive to tangible book value per share.
Our core wealth management earnings have also shown great progress in recent years, although they too have come under pressure in the last two quarters. Turning to slide 15, I'll wrap up with some comments about our near-term outlook. While the banking system remains under stress and there's a high degree of economic uncertainty, we're gonna continue to provide to prioritize prudent risk management, even if that impacts our level of profitability in the short term. We'll also continue to focus on disciplined expense control so that we can realize more operating leverage as we continue to grow our balance sheet. We recently completed a review of operating expenses and made adjustments that will reduce our non-interest expense by approximately 6.9% or $1.4 million per quarter from the level expense we had in the Q1.
When we started the year, we knew it was going to be a challenging year to forecast, and it's only gotten more difficult since. In particular, loan growth is particularly hard to forecast in the current environment, given that we're being very selective in the new credits that we originate and overall demand is lower due to higher interest rates, and we see more clients reconsidering investments they were planning to make. Can we find out where we got cut off?
All right. Please proceed with your call.
Okay. Well, this is Scott Wylie. I understand we got cut off there. I'm not sure exactly where we got cut off, so I'll go back to the outlook slide on slide 15. I was noting that with... While the banking system remains under stress and there's a high degree of economic uncertainty, we're gonna continue to prioritize prudent risk management, even if that impacts our level of profitability in the short term. We'll continue to focus on disciplined expense control so that we can realize more operating leverage as we continue to grow our balance sheet. We recently completed a review of operating expenses and made adjustments that will reduce our non-interest expense by approximately 6.9% or $1.4 million per quarter from the level of expense we had in the Q1.
When we started the year, we knew it was gonna be a challenging year to forecast. It's only gotten more difficult since then. In particular, loan growth is particularly hard to forecast in the current environment, given that we're being very selective in the new credits that we originate and overall demand is lower due to the higher interest rates and we see more clients reconsidering investments they were planning to make. We believe that we'll have some level of loan growth this year, but there's now a wider range of possible outcomes. Where we end up will be highly dependent on what we see in terms of economic conditions. While it's a challenging environment, ultimately, we believe it will be one that will be favorable for our franchise given the strength of our balance sheet.
We have high levels of capital and liquidity, a stable deposit base, exceptional asset quality, and an extremely low level of unrealized losses in our securities portfolio. Given our balance sheet, we believe we can capitalize on opportunities just as we did during the pandemic, adding new clients who are reevaluating their banking relationships and looking to move to a stronger, more responsive financial institution. Earlier in the year, we completed a reorganization of how our offices operate, which was designed to provide our senior leaders in those offices more time to focus on business development. Essentially, we've made it possible for our best salespeople to spend more time selling and focusing on new clients for both trust and banking.
While we'll likely continue to see near-term impact on our level of profitability due to the current economic environment, ultimately, we believe that we'll be a net beneficiary as the opportunities we have to add new clients will contribute to our long-term continued profitable growth and additional value being created for our shareholders. With that, we're happy to take your questions. Amy, if I could ask you to open up the call, please.
As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question is from Brett Rabatin with Hovde Group. Your line is open.
Hey, good morning, Scott and Julie.
Morning.
Wanted just to start off on margin and then just thinking about the balance sheet and maybe dollars of NII. Could you maybe give us a little bit of flavor for where you're seeing, you know, new deposit rates come on the balance sheet and just thinking about NII dollars this year, if the margin is down but the balance sheet grows, can NII kind of hold in or increase a little bit? Is that you think too aggressive given the deposit outlook?
Well, I'll start with a high-level answer and then ask Julie to give you more of the numbers if I can. You know, I think that, you know, we had projected a tightening in our NIM in Q1, which certainly we saw, and that seems likely to continue into Q2. We do think that, because of the nature of our business, we've probably seen more pressure earlier than most banks on our interest expense side and our interest income side. You know, we've actually seen really nice progress there, which we would expect to continue. Julie mentioned in her prepared remarks that our interest income is up 74% year-over-year from the Q1 last year to Q1 this year. Our interest expense is up like 10x.
You know, I think that kind of pressure just really pretty strong headwind. The fact that we've been able to grow net interest income, you know, in dollars year-over-year is pretty impressive. That, that would be kind of my general answer, I think. Julie, if you wanna highlight some of the numbers behind our NIM progress and outlook.
NIM for March was 2.97%. If you just look at the month of March, our spot rate on deposits or cost of deposits was 2.57% at the end of March. I think our new deposits were coming in quite a bit higher than that, more at the 3.69% level. We would say we would expect to see some compression, as Scott mentioned in the Q2, then it really depends on our loan growth and what happens in the rest of the rate environment and competition. We're not really giving back guidance on NIM. As a secondary point, we haven't raised rates in April or at the end of March.
you know, we're continuing to hold our rate sheet where it is and then making exception pricing as needed to win or retain client deposits.
Okay, that's helpful. Julie, I'm sorry, the 297 number, what, for March, which was that?
That's NIM for March.
Okay, NIM for March. Okay. great. and then the other thing I just wanted to ask was, you know, thinking about that $41 million of bucket that you exited, non-relationship. Any other color around that just didn't fit in any of the boxes from a relationship perspective going forward or any additional color that would obviously lower rate, but anything else that made those loans sensible to move on from?
No. With our acquisitions, we've acquired some loans that weren't really our, you know, what we do. If they're attractive and they're not distracting us, fine. If it's taking up balance sheet space that we don't need, and we were able to sell them at a small loss, I think we took a $175,000 loss, something like that, in the quarter.
In a principal balance kind of perspective, when you look at the allowance and the purchase credits on it was actually accretive to overall earnings for the quarter. You know, we look at all of the factors on each of the loans and make sure that it makes sense from a, you know, P&L as well as a going-forward balance sheet management perspective.
Yeah. Great. Thanks, Julie.
Okay. That's helpful. Thanks for all the color.
Thank you. One moment for our next question. Our next question comes from Matthew Clark with Piper Sandler. Your line is open.
Hey, good morning.
Morning, Matthew.
Just wanna clarify the margin in the month of March. Did you say 257 or 297?
9. 297.
Okay. Thank you. then also to clarify-
Matthew, excuse me. The other number that she gave was the cost of deposits at the end of March. That spot cost was 2.57%.
Yeah, that's what I was gonna ask. Thank you.
Okay.
Okay.
Sorry. Yeah.
Good. Thank you. You beat me to it. Great. Your commentary on loan growth, should slow to, quote-unquote, some amount. That's down from your prior mid-teens expectations and, understandable and We wouldn't probably want you growing mid-teens right now anyway. How should we think about, deposit growth from here and kind of mix change?
You know, we've said that, we wanna get our loan to deposit ratio down below 100. You know, we've traditionally operated kind of in the 95% loan to deposit range. I think if we could get it down below 100 by year-end, that would be a good objective for us. We were pretty flat in Q1, and I think that's probably a good accomplishment considering, you know, the drama of the quarter in the industry. You know, we're gonna look to continue to grow deposits at a pace that's probably higher than the rate we anticipate growing loans. You know, hopefully, a lot of those are core deposits that will be, you know, building a nice core deposit base for the future for us.
Okay, great. On the uninsured deposits, at the end of the quarter, any plans to reduce that amount further? Is there anything else you can do to increase the coverage there?
Well, I think, you know, our clients have indicated with their feedback and with their actions that they're comfortable with the deposits they have here. We have seen people looking to move to products that have, you know, 100% deposit insurance, whether that's CDARS or ICS or one of those. We've seen a little bit more of that at the margin. You know, overall, I think our deposit base has been very stable. As I mentioned in the slide deck and in the prepared comments, you know, we've actually seen nice growth in existing depositors and new deposits in February, March, and April.
You know, I would tell you historically, and this has been true for all, you know, 18 or 19 years here, in all 30-whatever years of my career in my well, private banks, is that we see significant outflows in Q2 for tax payments. You know, our client base tends to put deposits in when they have their various liquidity events and then, you know, pay their taxes in April. You know, I don't know how that'll play out this quarter. As I said, you know, month to date, we've seen, I think, $65 million in net deposit increases here in April and $91 million in new deposits. You know, we're seeing the continued trend we saw in February and March. We'll see how it plays out over the quarter.
Okay, great. Last one for me, just on the reserve and CECL. Can you give us a sense for some of the underlying assumptions you assumed with adopting CECL, just how conservative they might be? I'm trying to get a sense for the flexibility of that reserve going forward and whether or not we should assume it continues to migrate higher with deterioration in the macro factors.
Sure. I don't know that I can give you all the core details of the modeling, but we used the most, I would say, complicated modeling in the DCF modeling, and we went down to very low level of, you know, categories of loans to do a lot of work on that. Did a pretty deep dive on peer sets that, obviously, you know, That's our hardest area is because of our lack of loan loss in our portfolio. Then, you know, finding peers that might be somewhat consistent with us in our loan book and loan types was a little bit more challenging.
I think we have a pretty good handle, and we've been running it parallel for about a year now and feel like we have a pretty good handle on the different metrics and economic factors that go into that model. I think as things are changing in the environment, you know, we're keeping a pretty close eye on the different things that and levers that we can pull within the modeling to make sure that we're properly reserved for. You know, we've given a lot of information, I feel like, on the different impacts. There was a decent amount of reserve put on the unfunded commitments and then an additional amount of a little over $10 million that was put on the purchased loans as part of implementing CECL.
you know, overall, I think it will move around as our loan funding does or loan mix, excuse me, does move around. I think, you know, we're just trying to figure out how to manage through those different changes, but trying to stay consistently, applying each of the factors is where we're at right now.
would you say, Julie, to be a little more direct. From what we know today, assuming a relatively stable economic and asset quality environment, that we don't think that the extra $5 million we put in in January is a trend, right? That that would be reflective of our future.
Correct. Yeah. We took that as a one-time transition cost going into CECL modeling. From here, it will really just be modifications based on any economic changes and/or just the mix and volume of the portfolio.
Growth of portfolio. Yeah.
Got it. Thank you.
One moment for our next question. Our next question is from Brady Gailey with KBW. Your line is open.
Hey, thanks. Good morning.
Morning, Brady.
The $40 million of non-relationship loans that were sold in the quarter, are there other non-relationship loans that where, you know, something similar could happen in future quarters?
I would say not material. Although having said that, you know, we do keep a list here of broken promises. If clients say that they're gonna, you know, bring over relationships and they don't do it, we'll call them up and bug them about it. You know, if you were in a time when you were looking to grow deposits, you'd probably pay a lot more attention to the broken promises list than you might otherwise. Definitely as an organization, we're paying attention to that. You know, I think people that wanna be relationship-based clients here, great. Those that wanna have a transaction, that's not really what we do. You know, as I said, the ones that we had and that we had sold were really not, you know, part of our core business model.
It came through acquisition. I think that, I don't really anticipate doing more of that, Brady. We do expect our clients to honor their promises when we make loans to them.
All right. With forward growth slowing, potentially you're gonna be building some capital here. You know, the stock is at 80% of tangible book value, so a decent discount to tangible book value. How do you think about share buybacks going forward?
I think I'd love to do them. You know, obviously from our perspective at this price, it's very attractive. I think, you know, we have to be conservative and preserve capital here. I think, you know, our actions are, let's work on the margin, let's work on the fees, let's manage expenses, make sure that our earnings are continuing to improve. You know, we'll see where that leaves us. You know, I think historically we've been opportunistic and, you know, if we get to a point where we feel comfortable doing that, we will. We've got right now great credit, history and current experience. You know, we don't have unrealized losses in our investment portfolio unit.
Issues that might put stress on our capital at other banks are not an issue for us here. Again, we don't want to put ourselves in a position where we have to raise capital at a time we wouldn't want to do that either.
Yeah, that makes sense. All right. Thanks for the color.
One moment for our next question. Our next question is from Ross Haberman with RLH Investments. Your line is open.
Hi, Scott. How are you? You were fairly optimistic about, I guess, the Arizona market, the Wyoming market and Montana. Could you talk about the growth of those markets, where you see them today vis-a-vis where you view them, say, I don't know, 6-9 months ago? Could you also comment on I saw there was actually a small deal, I think, in the Phoenix area announced last night at roughly book value. Did you look at that? Was that attractive to you? If something came up like that, would you rather use your money to do something like that as opposed to buying back your own shares? Thanks. Bye.
Yeah. Thanks, Ross. Good question. For the optimistic view, I'll go first. Julie, if you want to issue a rebuttal, go ahead. You know, we've talked for a long time about our desire to expand in Arizona and add a mortgage team there that could help us in a countercyclical way. I mean, we think that's an interesting part of the Arizona franchises, that there's a lot of connections between Colorado and Arizona from a culture and business and people standpoint, but also they're countercyclical, certainly in mortgages, which is an attractive piece of it. We did add a Arizona mortgage team latter half of last year. I'm not sure exactly when. They're getting ramped up. We actually saw a nice benefit of that in Q1.
March was our first month of making money in mortgages in quite a while. It was great to see some progress there. We've actually added mortgage loan originators in our resort communities. We have some coverage in Wyoming. We'd like to expand that and into Montana. The core business, you know, I think we have great opportunities in all three of those markets. Montana's has been a really pleasant surprise for us. We're very small there. Our permanent office, we just have an LPO right now. Our permanent office will be opening, Julie, in the third quarter, you still thinking?
Yeah. September-ish.
I think that will be an important next step for us. The Wyoming folks are doing great, and actually it's been a continued ongoing pleasant surprise to the upside with our partnership with the former, again, the legacy Rocky Mountain Bank team there. All that I think is opportunity for us, Ross. You know, it's all relatively small compared to our core footprint here in Colorado. I think, you know, creating long-term shareholder value, those are all really important and valuable components to us. You can't, you know, you can't get there without starting. You know, in each of those, we're making progress. Your question about M&A, I think, you know, M&A is tricky right now, right?
When our stock's where it is and with the uncertainty out there, you know, we don't think that we're really interested in doing lots of deals. When we see opportunities that are relatively small or aren't that great a fit, you know, I think we'll look at them and see if it makes sense. Realistically, you know, we really like to do things that can be either, you know, strategically or financially or both meaningful to us. You know, those opportunities, I think are out there now in a limited way. You know, I think we all remember from the great recession, you know, coming out of the great recession, there were some real winners and losers among the banks.
The difference was, you know, kind of your financial strength and your capital base and your earnings and your operating performance, and that's really what created M&A opportunities in the last cycle. I think, you know, we did know those folks at the small bank that was announced, drawing a blank on the name, Commerce Bank or Bank of Commerce or something like that in Arizona. We, we did know them, but, you know, I think we'd like to do something that's more, more impactful if we had the chance.
Just one follow-up question in terms of local competition. Who would you say, one on the commercial real estate loan side, who is your toughest local competition? Is it the Alpine Banks of Colorado or some of the bigger banks? Thank you very much.
Yeah. You know, the competitive landscape is just really interesting right now. Obviously on the deposit side is really tough. You know, we're seeing very strong competition from all kinds of bank and non-bank players. You know, frankly, one of the questions we've heard the most from clients over the last 6 months is, you know, will you guys open a trust account for me and build a bond ladder? You know, that's a challenge on the deposit side. On the loan side, and particularly CRE, to your point, you know, what we're seeing is, you know, there's a few banks that are still being competitive and sort of living in the past in terms of interest rates. We're seeing other banks that have stopped lending and they're saying, you know, we're not gonna do CRE right now.
I would tell you know, that if we see growth this year, I think that's why we're gonna see it, is because our clients may slow down the things they might have otherwise done. There may be some interesting client acquisition opportunities here in terms of rates that are accruing to us because of, you know, people kind of pulling out of the market and being less aggressive than they were, you know, a year or so ago.
Sorry, just one final thing. On those CREs, what kind of rates are you getting today on those types of new loans?
Do you know, Julie, what our average rates? I mean, it's up dramatically.
Our new production is averaging about mid sevens.
Yeah.
On the C&I or CU, if that was the question. CRE is, you know, maybe like 6%, and then C&I is gonna be more like 8%. It's a bit of a difference, and that's, you know, a pretty rough average, but that's what we've been seeing.
Okay. Thank you, guys. Have a good weekend. I appreciate it.
Thanks, Ross.
One moment for our next question. We have a follow-up question from Brett Rabatin with Hovde Group. Your line is open.
Just two quick things. Scott, first, in your prepared comments, it sounded to me like the message was that, you know, you're implementing things in the current environment for the long-term improvement and growth of the bank. I kind of sense that maybe the profitability you were intimating that maybe profitability might continue to have some drag in the near term. Is that a fair assessment, or can you talk maybe directionally about your comment on profitability?
Gil, I have said on these calls before that our path to success is probably not cost cutting. It's growing revenues. you know, you look at the environment today and you say, well, you know, how confident do you feel about revenue growth? I think it's hard to say, oh, yeah, mid-teen growth and all this other stuff, right now because it's, you know, a very uncertain environment. you know, I think we've looked at this and said, okay, you know, let's kind of plan for the worst and act on that and then hope for the best. you know, the plan scenario is, you know, how do we manage our liability costs as best we can? How do we grow loans cautiously at rates that make sense to us on terms that make sense to us?
If that doesn't produce a whole lot of net balance sheet growth, how do we manage our expenses so that we can improve earnings? I think we talked about the fact that we're down 22 FTEs in the Q1. That was on purpose. We also talked about the fact that we've done a 6.9% cost reduction in April versus our costs in Q1 to drive expenses that are more in the, you know, mid-19 range. Julie, I think, guided the $19 -$20 million a quarter, which is down from, you know, kind of 21 where we've been headed. You know, you just do those things.
Those tweaks on those numbers, you're going to see, I think, absent of, you know, further drama in the industry, you're gonna see improved earnings. Then, you know, the hope scenario is all that stuff plays out. We see better mortgages revenues and income. We see improved trust and investment management fees, which we saw in Q1. Then you see a little bit more growth on a well-controlled expense base, and then all that adds up to some really nice expense, excuse me, earnings growth. You do all that with a strong capital base, and then you just see what opportunities come out of the downturn in the recovery here. I think, you know, that's kind of the picture I was trying to paint indirectly.
I don't know if being a little more direct about it, that's how we're thinking about it.
That's helpful. Then you talked quite a bit about the $1.4 million of reduction, and it sounds like, you know, you feel like you're gonna have an improved efficiency with the production people, with maybe some streamlining. Is there a concerted effort to maybe have a higher calling effort just to be out there talking to people a little more if business does become a little more available? How do you see, you know, kind of the pullback if you're seeing it in credit by other banks affecting your production?
Your question is 100% right. In our, you know, 19 locations, we've got these market presidents that have senior bankers on the bank trust and investment side, bank trust, investment, private banking side that we've now made as direct reports to the market president, and then the other support people report to those folks. What that does is that frees up all those top people that are our most experienced bankers to spend less time being managers and administrators, more time getting out and being active in their markets and visible in their markets and letting our clients and prospects, COIs, centers of influence know that we're in business and taking care of our clients. That was absolutely part of the reorganization that we did in those offices.
We actually started that last fall, I think our comment today was that we completed that in Q1, which we did. You know, is that going to drive more new business in Q2? I don't know. Over the course of the year, I feel really good about it. I think it's going to be a really nice change for us, and it does allow us to do exactly the thing you asked about.
Okay. great. Thanks. Additional caller.
Good. Thank you for the questions.
Thank you. One moment for our next question. We have a follow-up question from Matthew Clark with Piper Sandler. Your line is open.
Hi. Thanks for the follow-up. Just wanna clarify the margin, commentary. 297 in the month of March is above the Q1, which is a little that doesn't seem to make sense to me of 293. You know, when you recast loan yields and securities yields, deposits, borrowings, I mean, it kind of suggests a margin that falls into the mid 250s. I just wanna square those two, those two thoughts.
I think through the latter part of March and into early April, we were carrying more liquidity on our balance sheet, which would have cost us a little bit more. I think we had some noise in our loan fees as well in the first and Q2 or first and Q4s. It's a little bit lumpy from that perspective. I think that at least gives you kind of a direction as to where we are seeing the NIM for, you know, the early part of April here.
I would not expect NIM in the Q2 of 2.97%. It's going to come in from there from what we know today, Matt.
We will see compression in the Q2 on the NIM.
Yeah.
for sure. Yeah.
Which is what Julie said before.
Yeah. Then maybe it's also around the borrowings. I mean, they were average. They averaged $195 million, if you include the sub-debt in the quarter. The end of period was $314 million, if you add again, in the sub-debt. Where do you see that $314 going, in total? Maybe just separate out the sub-debt if you want. Where do you see borrowings trending?
Borrowings overall will trend down. We pulled $1 million, $150 million, I think, off the balance sheet in the first part of April in the borrowings, with the excess liquidity that we were holding on the balance sheet in March and the growth we've seen in deposits since the end of March. I think we're up about $65 million net in deposits which are gonna just have a lower cost than our borrowings have had, that was in that spot NIM for March.
Okay. The, yeah, 150 comes out in the here in April. Okay, great. Thank you.
I'm showing no further questions at this time. I would now like to turn the call back over to Scott Wylie for closing remarks.
Great. Thank you, Amy. Just at this significant time of disruption in the industry, I'd like to give a special thanks to our associates and clients for the extra efforts of the associates and the support that we've had from the clients through this challenging time. First Western has demonstrated solid, steady progress in creating fundamental shareholder value in spite of significant headwinds. We've positioned our balance sheet and expense structure for continued headwinds. However, if cost of fund pressures stabilize and asset yields improve and fee income picks up and our expenses are well controlled, we believe our earnings outlook could improve nicely. With that, thank you, everybody, for their interest and support today. We really appreciate your interest in First Western.
This concludes today's conference call. Thank you for participating. You may now disconnect.