Good day, and thank you for standing by. Welcome to the First Western Financial Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then 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, at Financial Profiles. Please go ahead.
Thank you, Abigail. Good morning, everyone, and thank you for joining us today for First Western Financial's Third Quarter 2023 Earnings Call. Joining us from First Western's management team are Scott Wylie, Chairman and Chief Executive Officer, Julie Courkamp, Chief Operating Officer, and David Weber, Chief Financial Officer. We will use a slide presentation as part of our discussion this morning. If you've not done so already, please visit the Events & 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. And with that, I'd like to turn the call over to Scott. Scott?
Thanks Tony. Good morning everybody. The operating environment remained challenging in the third quarter, but we were able to deliver another quarter of strong financial performance by executing well in those areas we can control, which helped us to offset the impact of things we can't control, such as the higher interest rates that have reduced loan demand and created a very competitive deposit pricing environment. We generated net income of $3.1 million, or $0.32 per diluted share in the third quarter, with $4.6 million in pre-tax, pre-provision income, which was an increase of 17% from the prior quarter. As we've indicated previously, we've increased our focus on core deposit gathering around the organization, and we saw good results from these efforts during the third quarter, with total deposits increasing at an annualized rate of 7.5%.
While overall loan demand remains muted due to the higher interest rates, we're still seeing attractive lending opportunities in our markets, which enabled us to generate annualized loan growth of 5.6% while maintaining our conservative underwriting standards and pricing criteria. The higher rates on our new loan production are well above the incremental cost of funding we're seeing, which is making our new loan production accretive to our margin and relieving some of the margin pressure we've seen in prior quarters. With our success in deposit gathering, we're able to lower our loan-to-deposit ratio from the end of the prior quarter, which was one of our near-term priorities. As I mentioned earlier, we've been successful in areas we can control. This includes our disciplined expense management, which resulted in our operating expenses coming in at the lower end of our targeted range in the third quarter.
We continue to have success in our Trust and Investment Management new business development efforts, which continue to offset the impact of lower market values on our assets under management during the third quarter. Broadly speaking, our loan portfolio continues to perform well, although we did have an increase in NPAs this quarter, primarily due to the downgrade of four loans totaling $42 million that are all related to one relationship. These loans consist of a commercial loan, an owner-occupied commercial real estate loan, a residential mortgage, and a personal line of credit. This is a client we've had since 2018 and had good experience with. However, they're currently facing a liquidity crunch and have become delinquent on their payments, which resulted in the placement of these loans on non-accrual.
Given our conservative underwriting criteria and the multiple sources of repayment we require, these loans are well collateralized with a number of properties. The borrower is planning a number of liquidity events, including the sale of these properties, that should result in the full repayment of the loans. It will likely take a few quarters for these loans to be resolved, but given the strong borrower and collateral that we have, we believe the loss potential is minimal. Moving to slide four, we generated net income of $3.1 million, or $0.32 per diluted share in the third quarter. Over the past year, due to our strong financial performance and prudent balance sheet management, we've seen increases in both book value and tangible book value per share, despite the impact to capital accruals resulting from our adoption of CECL at the beginning of the year.
Now I'll turn the call over to Julie for some additional discussion of our balance sheet and Trust and Investment Management trends. Julie?
Thank you, Scott. Turning to slide five, we'll look at the trends in our loan portfolio. Our total loans increased $35 million from the end of the prior quarter. The increase is driven by growth in our commercial, residential mortgage, and construction portfolios, which was offset by a decline in the CRE loans due to an increase in payoffs that we saw during the quarter. As this has been the case over the past few quarters, the increase we are seeing in construction loans are related to draws on credit lines, primarily related to residential housing projects being built by very strong, experienced developers in areas with limited housing supply. As we mentioned on our last earnings call, we saw an increase in loan production during June, and this continued through the third quarter.
We had more than $100 million in new loan production, which is our highest quarter so far this year. And with the discipline we are maintaining in our pricing criteria, the average rate on new production increased 51 basis points from the prior quarter to 7.92% and was 8.44% in the month of September. Moving to slide six, we'll take a closer look at our deposit trends. Our total deposits increased by $45 million during the quarter. We continue to have success in new business development and added $26 million in new deposit relationships during the third quarter. The mix of deposits continues to reflect a trend of clients moving money out of non-interest-bearing accounts into interest-bearing accounts in order to get higher yields on their excess liquidity. Turning to Trust and Investment Management on slide seven.
We had a $108 million decrease in our assets under management in the third quarter, primarily due to market performance, which is partially offset by inflows from new clients that we added during the quarter. Now I'll turn the call over to David for further discussion of our financial results. David?
Thanks, Julie. Turning to slide eight, we'll look at our gross revenue. Our gross revenue declined 6.6% from the prior quarter, as a decline in net interest income was partially offset by an increase in non-interest income. The non-interest income mix increased to 26.7% from 17.7% in the prior quarter. Turning to slide nine , we'll look at the trends in net interest income and margin. Our net interest income decreased 9.1% from the prior quarter due to an increase in interest expense resulting from a higher average cost of deposits. Our net interest margin decreased 27 basis points to 2.46%, driven by an increase in interest-bearing deposit costs and slightly lower yields on average earning assets.
We did not accrue interest on the loans placed on nonperforming status in the quarter, which included the $42 million of loans under one relationship that Scott discussed. These loans accounted for 20 of the 27 basis point decline that we had in our net interest margin in the quarter. Given the current trends we are seeing, we expect pressure on our net interest margin to moderate in the fourth quarter. Turning to slide 10, our non-interest income increased 54% from the prior quarter, primarily due to items that impacted our second quarter non-interest income. Third quarter included $300,000 of losses accounted for under fair value, impacting EPS by $0.02.
Among our larger recurring sources of non-interest income, our Trust and Investment Management fees increased 5.3% due to an increase in our fee structure to bring us more in line with market rates and to reflect the additional value we are providing through enhancements we have recently made to our service level and technology platform. Net gain on mortgage loans decreased to approximately $700,000, as higher rates continue to impact loan demand. Approximately 91% of the mortgage originations were for purchase loans in the third quarter. We had a slight decline in bank fees due to lower loan prepayment and swap fees relative to the prior quarter. Turning to slide 11 and our expenses.
Our non-interest expense decreased 1.1% from the prior quarter, with slight declines in most of our major line items as we continue to focus on disciplined expense control. Our salaries and benefits expense in the third quarter included approximately $400,000 of acquisition-related compensation expense that was accelerated due to an early termination. This impacted EPS by $0.03. For the fourth quarter, we continue to expect our non-interest expense to range between $18.5 million and $19 million. Now, turning to slide 12, we'll look at our asset quality. On a broad basis, the loan portfolio continues to perform very well, as we had another quarter of minimal losses. The increase in non-performing assets was primarily driven by the downgrade of the $42 million in loans related to a single relationship.
These loans are now being individually analyzed, and given the strong collateral that we have, we did not require a specific reserve for these loans, and the downgrades did not impact our provision expense. We recorded a provision for credit losses of approximately $300,000 in the quarter. The provision recorded this quarter, combined with the modest level of loan growth, increased our level of allowance to adjusted total loans by 3 basis points to 92 basis points on September 30th. Now, I will turn it back to Scott. Scott?
T hanks, David, and congratulations on getting through your first earnings call there. It's great to have you on the call with us. Thank you. Turning to slide 13, we've provided an update on our strong track record of value creation for shareholders. This slide shows our trend in tangible book value per share since our IPO in 2018, and the factors that have contributed to our consistent ability to drive the growth in tangible book value per share as we've executed well on the plan that we communicated at the time of our IPO. Following our third quarter performance, we've now increased our tangible book value per share by 144% since our IPO, which includes the $0.56 decrease that we had due to the adoption of CECL at the beginning of 2023.
We're very proud of this track record of value creation and believe that we're well positioned to continue creating additional value for our shareholders in the future. Turning to slide 14, I'll wrap up with some comments about our near-term outlook. Well, there's a high degree of economic uncertainty. We're going to continue to perform, to prioritize prudent risk management and maintain high levels of liquidity, capital, and reserves, even if that impacts our level of profitability in the short term. Most importantly, we'll continue to focus on controlling the things that we can control, including our balance sheet management, attracting new clients, particularly those that provide core deposit relationships and Trust and Investment Management assets, providing exceptional service to existing clients, and tightly managing our expenses.
By continuing to execute well in these areas, we believe we can continue to offset the impact of a challenging macroeconomic environment and deliver strong financial results for our shareholders in the near term. At the same time, we continue to operate with a long-term approach and make investments that we believe will further enhance our business development capabilities. This includes recently opening our first full-service office in the Bozeman, Montana, market, where we previously only had a loan production office. Since entering this market, we've steadily built out the team and clients. With now a full-service office, we believe we can accelerate our business development activities in this area.
With the strategic investments that we continue to make, we believe we're well positioned to continue capitalizing on the attractive markets that we operate in to consistently add new clients, realize more operating leverage as we increase our scale, generate profitable growth, and further enhance the value of our franchise over the long term. With that, we're happy to take your questions. Abigail, please open up the call.
Thank you. At this time, we'll conduct the question-and-answer session. As a reminder, to ask a question, you will need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. One moment while we compile the Q&A roster. Our first question comes from Brady Gailey with KBW. Your line is open.
Hey, thank you. Good morning, guys.
Morning, Brady.
I just wanted to start with the net interest margin. You know, as I look over the last three quarters, you know, every quarter, it's been a pretty big step down. It sounds like that's going to moderate in 4Q. But I'm just wondering where you think the margin finds the bottom? And is that in 4Q? And as we look to next year, do you think the margin, you know, is stable? Do you think we could have some upside from asset repricing? Like, how are we thinking about the margin into 2024?
Yeah, great question, Brady. So, you know, obviously, it's been a difficult year to forecast NIM, given the number of variables and the unusual operating environment we've been in. You know, one of the things I looked at is kind of the month-by-month trend line, and we did see in the last quarter on this call that we thought that once the Fed stopped raising short-term rates, that our deposit costs would stabilize and our asset yields would improve, which would drive a higher NIM. You know, unfortunately, in July, we had another interest rate increase, which, you know, given the number of deposits we have with kind of a 100% beta on them, we saw a significant increase in our deposit costs in Q3. So that was not particularly helpful to short-term results.
But if you look at this quarter, month- by- month, you know, we were kind of in the 250s each month. And so I'm hopeful that if we don't see another short-term interest raise by the Fed, which is, I think, what the market is expecting at this point, that there won't be one, that, that, you know, we can see stabilizing deposit costs for us. Again, I've talked before about the fact that I think, you know, our clients are kind of ahead of the typical bank clients because of their fact that they're larger and more sophisticated. And so, you know, going into Q4, hopefully, we see stabilized, deposit costs and improving asset yields. So at least we're stable to, you know, maybe a little bit of margin compression Q4. Our numbers going into 2014, we're assuming-
You know, higher for longer, but flat on the short end to where we are today. So if that's the scenario, then I think you see the benefit of the higher asset yields playing out over the course of the year. And I think the interesting thing, this kind of goes back to our IPO, too. I think the interesting thing for our business model is if that plays out like that, and we can see stable funding costs, higher asset yields, and well-controlled operating expenses, then you see improved earnings, which is, you know, what I talked about in my comments.
Yep. And then a similar question on the expense side. I know you guys are expecting $18.5 million and $19 million of expenses to finish the year. You know, can you hold those expenses flat next year? Do you think you see some modest creep? How do you think about expense growth in 2024?
You know, our assumption is, you know, to accomplish the things we want to do long term for shareholders, we need to continue to invest. We have that built into our $18.5 million-$19 million. So all other things being equal, we believe we can hold expenses in the ballpark of where they are now. Of course, there's a little bit of seasonality with, you know, what is the FICA bump that you get?
Payroll tax.
Yeah, payroll taxes, as you get in the first quarter, stuff like that. But generally, you know, our starting point for our planning for next year is, let's figure out how to hold expenses flat and show some revenue improvement, which would drive some operating leverage and improved earnings.
All right. Then finally, for me, the $42 million relationship that went into nonperforming, I think you said it was four loans. So did all four of those loans stop paying interest, or was it just one?
Yeah, this was an interesting case. You know, we thought that we were going to get this guy current in Q3, and, you know, he's a wealthy guy that has, you know, cash crisis going on right now. But at the end, we decided that what we would have had to give up to get him current wasn't worth it to us, and we would just soon take our lumps here and see the increase in NPAs, which, you know, seems to happen to us once every five years, where we get a wealthy person, gets into trouble, and we have to work them out. And so, you know, this guy is, we think, still very strong. We think we're going to have a full recovery.
The real estate collateral that we have is in some very desirable markets. It's in Aspen, it's in Nantucket, and it's in the West Palm Beach area. There was just an article in The Wall Street Journal, I think yesterday, talking about how hot the high-end market, the premium market is, which in Aspen, which is already a premium market, but they're talking about, you know, how that continues to be a very desirable market. So I think, you know, as we move to, either he or we get liquidity on those properties, I think that that's all going to turn out fine. And as we work through work out, it's going to take a while, like I said in my comments.
Okay. All right, great. Thanks for all the color, Scott.
Yep. Thank you, Brady.
One moment for our next question. Our next question comes from Brett Rabatin with Hovde Group. Your line is open.
Hey, good morning, Scott and Julie.
Good morning, Brett.
Wanted to ask, you know, back on the margin, just, you know, obviously, that nonaccrual relationship was, I think, 20 of the 27 basis points of pressure. When you were giving comments around the margin, how does that relationship play into what you were talking about on the margin? I assume it kind of excludes it. What, you know, and it sounds like it's a few quarters before maybe that gets resolved.
Well, that will definitely come back to our benefit at some point. You know, it's, it's nonaccrual now, so it's going to stay nonaccrual as we collect on it. I assume we're going to collect past interest, penalty interest, and that will be, you know, a nice benefit in the future at some point, but I don't think that's going to be next week. It's going to be, it's going to be a little while. So, you know, I think for the short term quarterly reporting, it's going to be a zero. But, you know, depending how it all plays out, I think we will get that back at some point.
Okay. And then you had some solid loan growth this quarter. Just was hoping for some additional color around, you know, pipelines and, you know, as you think about the environment in 2024, if you think there's going to be a lot of opportunities to add some new business, or, you know, are you going to be a little more selective and maybe slow the balance sheet growth from here, in terms of the loan portfolio? How you think about that?
You know, we said that we thought we would target mid single-digit growth on the loan side, while we worked our loan-to- deposit ratio back down to where it's historically been in the 90s. And so I think that's kind of exactly the way it's played out. We saw, you know, deposit growth in Q3 outpaced loan growth by a couple of percentage points annualized. And, you know, I think if that trend continues, which I would expect it to, again, you know, months and month, quarter- to- quarter, you know, there's going to be some bumpiness, but, hopefully, we can get that taken care of here the next quarter or two.
And then, then, you know, I, I think there's adequate loan demand in our markets from the kind of loans and the borrowers that we like to work with to continue to see mid single- digit for now. I think we can grow deposits to get that loan deposit ratio down, and I think we can do all that while we're managing, you know, an improved NIM, the way I talked about. And, and I think that's fine for now. For where we are in the cycle, I don't know that we need to be doing, you know, our normal kind of 15% or 20% organic growth rate. That seems to be, you know, not really what we want to do now. So that's, that's how we're thinking about it, Brett.
Okay. And does the concentrations on C&D or commercial real estate, does that play into anything related to how you think about growth going forward? And I know your—I think your state FDIC, so maybe you don't have the Fed/OCC pressure to be below the 100, 300.
Yeah, we just had an FDIC exam here. We have an excellent regulatory relationship, and you know, I think for us, our construction loan portfolio numbers are a little higher than where we've traditionally had them, where we'd like to see them. You know, part of that is just stuff funding up and not paying off quite as quickly as we had planned, and so we have gone up above 100%. We are not doing new construction loans right now, and the extent we see any increase in that portfolio, it's just the pace of drawdowns versus the pace of payoffs. But we're going to work that back down under 100%. Anyway, I think that's prudent for us and the way we'd like to see the portfolio mix.
Okay. And then just lastly for me, Scott, you know, a lot of banks in this environment are looking at 2024 versus 2023, and just the environment, and obviously a challenge to grow earnings for the industry. And so, you know, a lot of banks are thinking about what they might do operationally or strategically, you know, over the next quarter or two to try and improve their earning power. And so, you know, I was just curious if you were thinking about anything related to either mortgage banking, you know, a possible securities portfolio restructuring or anything else that might be a boost to your profitability.
I think the best thing we can do is stick to our knitting here. You know, I talked a little bit before about, you know, the operating leverage in our business. If we control expenses, which we've done, I think, a nice job of this year, we were thinking we were going to spend about $21 million a quarter, and we've been well under that, this year. If we hold that number flat for 2024, and we can have the, NIM story that I just talked about play out. We also talked, I think in the last two calls, and I know for sure in the last call, about the fact that we were working on a project to raise our fees 10%.
I think Julie or David, I'm not sure which, mentioned in their comments that we had completed the first phase of that in Q2, went into effect on July first. I was pretty happy to see. You know, you do these things, you're like, "Well, I hope it shows up in the numbers." And sure enough, you know, we thought it was going to be $960,000 from phase I, which seems like a little bit too fine of an estimate to believe. And then, I think we did grow fees $240,000 in Q3, so kind of a bullseye there. So, hopefully, we'll continue to get these other phases done. We're certainly working on it.
I think that'll be the largest phase, but we're looking for an overall 10% increase in our trust fees just from the higher service that we're providing and the additional value we're providing to clients. I think we're still very competitive at these higher rates. So, you know, as I think as all that stuff plays out, you know, we should see opportunity for revenue growth in 2024, stable expenses and therefore improved earnings in the bottom line.
Okay. Appreciate the color.
One moment for our next question. Our next question comes from Adam Butler with Piper Sandler. Your line is open.
Hey, good morning, everybody. This is Adam, on for Matthew Clark.
Hi Adam. Good morning.
Just first touching on a couple questions on the margin. Do you happen to have the average margin in September and the spot rate on deposits in September, either interest-bearing or total?
You know, I have it, but I'm going to let David take his first earnings call question as CFO. David, do you want to answer that question?
Yeah, I would love to. Yeah, Adam, the spot rate on deposits was 3.12% on September 30th, and the NIM for September was 2.45%. That's inclusive of the negative impacts of the non-accrual loans.
Okay, got it. Thanks. And just moving over to deposits, they were, they were up nicely in the third quarter, and it looks like they were driven mainly by savings and money market, and along with the $26 million in new relationships added. I was wondering if you could provide some commentary on how you were able to attract new deposits and your outlook going forward, and where you see the loan deposit trending with your outlook for mid single-digit loan growth?
Yeah, good question, Adam, and you're reminding me part of Brett's five-part question I forgot to answer about pipelines. Pipelines at the end of Q3 for loans were down about 50% from a little over $200 million to a little over $100 million, the way we look at it, which is 90-day probability weighted. And then, deposits pipeline were actually up quarter- over- quarter. So, so we're actually seeing, you know, I, I would say positive trends in both ways, right? I mean, I think that, if we want to grow deposits faster than loans, that's the, the, the setup we'd want to see. So, so that's a positive. In terms of your question, more specifically, how do we do it?
You know, we have a very, I call it geocentric-based distribution model, where we focus on client relationships in our markets that are served by teams of relationship bankers that are providing, you know, local boutique, private and trust services to that base of clients. And so, you know, what we have said to our relationship bankers is, "Hey, this is a time for us to focus on existing and new relationships that we think can add more deposits than loans." And so, you know, we're not doing one-off, new loans for people that aren't gonna bring relationships here. And we are gonna take a look. We have reporting that we give each office, which we call One View reporting, that tells our bankers, you know, who's got what products with us.
So if you see somebody that said they were going to bring over deposits and hasn't done it, then we're calling on them and saying, "Hey, where is this deposit account?" Or, "Why do you have a zero balance account with us?" Or, you know, "Are there some other deposits or other Trust and Investment Management business that we see on your financials that, we could help you with?" So, that's really been the focus on why we're seeing good results, is that we've really refocused these teams in the local offices on more of the deposit and the, what we call PTIM, the Planning, Trust, and I nvestment Management side, and less on, you know, straight up loan growth. Which, you know, I think is a viable strategy. It's a great way to lead into new relationships.
But for now, you know, we're more focused on how can we cross-sell deposits? How we can attract new deposits? How can we build relationships with folks that can bring us more stable core deposits that help build our balance sheet and strengthen our financial performance?
Okay, great. That's good to hear, and it sounds like with the pipeline, that the loan to deposit will be trending downward going forward. And then also, it looks like the non-interest-bearing contribution to total deposits trended downward at a similar rate compared to last quarter. I was wondering if you're seeing that pressure slow and what your outlook is there.
Yeah, that's just hard to know. You know, I think we've done a really nice job of holding on to our non-interest-bearing deposits. But, you know, again, you have larger, relatively sophisticated depositors here. And I think, you know, when everybody's talking about 5% deposits, they're talking about it too. And so, I would say earlier this year, we were hearing a lot more about, you know, can you build me a treasury bill ladder? And I think we're hearing less of that today. And I feel like, you know, the moves that we're seeing out of DDAs are more into NOWs, NOW accounts and into money market deposit accounts and less into CDs. So that's all positive. But, you know, I hope at some point.
We've seen the early movers on the DDAs move, and we're going to see a slowdown in the, the remaining DDAs. Haven't really seen much of that, so far, but, hopefully, that's where we're headed. Certainly, we have strength in our Treasury Management team and try to make sure that the clients understand the value that we can provide on the Treasury Management side, which drives them to keep more non-interest-bearing deposits here or move more non-interest-bearing deposits here. That's, a big focus, throughout the organization as well.
Okay, great. I appreciate the commentary there, and I'll step back.
Great. Thanks, Adam.
One moment for our next question. Our next question comes from Bill Dezellem with Tieton Capital Management. Your line is open.
Thank you. First question is asking David, would you please repeat what caused the $0.03 earnings per share impact this quarter that you referenced? I just missed what you said in your comments.
Yeah, that was in our non-interest expense. It was related to. Give me a second, let me pull it up real quick. So that was related to some compensation that was related to a previous acquisition, and we had to accelerate that compensation expense, and so that impact, it was about $400,000, or $0.03 of EPS.
It's an accounting fiction, Bill, that the way that we had to account for the whole acquisition when we did it was, it included this compensation expense. And then, like David says, if the person leaves early or gets terminated, then you've got to accelerate the remaining tail on that. So it's a one-time thing. The person's gone, the expense is gone. What would that be? A deferred asset is gone. And so that's a one-time thing of $0.03 in the quarter.
Thank you, both for that. And then your interest earning asset yield, I believe, dropped three basis points sequentially, and yet you are increasing rates on the loans, particularly as Fed funds goes up. Would you discuss that difference and what's leading to the 3 basis point decline?
I think that's, that's loan mix, isn't it?
Yeah.
David's saying that he thinks he knows the answer.
Also, you know, there was an impact of the nonaccrual loans as well. So those loans are, you know, generating zero of interest income, as Scott mentioned, through the quarter, and the balances are then still in the denominator. So, that's going to have a negative impact on our interest-earning asset yields.
And which asset categories did you see that you had grew, that with that had lower yield, that would have contributed to this in addition to the nonaccrual?
We're looking up the answer for you, Bill.
Thank you.
Yeah. So we saw in our—in our loan portfolio, we saw yield reduction in the consumer and other bucket, and in the commercial real estate buckets, as well as C&I. That, and I'm speaking to spot yields there.
Will that data be in the Q, David?
Spot yields will not, no.
Average yields, sorry.
Not at that level. No. Yeah.
Help us understand either the competitive dynamics or your own individual strategy relative to loan yields in those categories declining when rates are generally upward biased?
Well, you know, I think generally, our loan yields are improving, but the negative impact of those nonaccruals is what's really weighing our average loan yields down quarte- over- quarter.
Bill, I think, in my comments, we were talking about the rate in September on our loan production, and it was at the highest level at 8.44%. I think we're generally seeing nice increases in new loan production on the rate, as well as, you know, loans are renewing and rolling into higher rate. So we are seeing good benefit from that, but we've got some of these nuances with the nonaccrual loan that have impacted some of those categories.
So ultimately, the real key to this comes right back to the nonaccrual?
I think that's the largest driver.
Okay, great. Thank you. And then final question is, how are you thinking about share buyback, given that the stock price is trading roughly 70% of book value? But at the same time, we also recognize the business isn't earning as much as it has in the past. So what's your philosophical thought process here?
Yeah. So I, you know, we discuss it with the Board every quarter. And, you know, every time the stock trades down, we're like: Well, we wish we had a stock buyback plan in place right now. But, but I think, you know, generally, what we have thought is, you know, this is a good time to have strong capital. And the extent that there are, earnings or credit or, acquisition opportunities out there, having a stronger capital base is going to be beneficial for the long-term shareholder value creation here, s o, I think the Board measures all those things, Bill, and tries to make the best decision in terms of how to manage our capital.
And I think, you know, we've talked about our improvements in our tangible book value per share without any significant buybacks and our improving capital ratios, which are already way above well-capitalized ratios. I just would add, you know, to your question about the reporting of our yields and our interest income. I mean, we think we're going to collect the principal and interest on these additional $42 million in loans that we put on nonaccrual. So I mean, that is money that we do expect to see back in the bank in the future, in spite of, you know, sort of the short-term disappointment here. But you know, we will sure talk about that again at our board meeting in this quarter.
You know, we're mindful of the fact that that's a good way to drive EPS and, I think, you know, try and use our best judgment on how do you balance that against some of those other factors I talked about.
That is helpful. Thank you all for the comments.
Thank you, Bill. Appreciate the support.
One moment for our next question. Our next question comes from Ross Haberman with RLH Investments. Your line is open.
Good morning Scott. Scott, how are you? Could you talk about, are you seeing any other dents or weaknesses in delinquencies or slow payers or anything like that besides this one, hopefully an anomaly in terms of the bad loan, which you referred to today?
So good morning Ross. We are not seeing any other signs of credit deterioration. This is a one-off situation. Unfortunately, in addition to the other one-off situation that we reported last quarter, but they both are isolated cases, very different from each other. And again, from what we know today, we expect to collect fully on these things. We have now $4 million specific reserve on the $8 billion credit. And again, we think we're very well collateralized on this new issue. It's really unfortunate timing for us that went 90 days past due at quarter end.
But we think we're doing the right thing in the way we've handled that with the borrower and with our accounting, and obviously going to cause some short-term pain for us in terms of these conversations. But I think the fundamentals are going to be fine.
How often do you stress test, I guess, your maturing loans in terms of, you know, all these or many of these commercial borrowers are—have been borrowing at, I don't know, 4% or 5%, and suddenly their loans come due, and they have to pay 8%+ ? You know, how often do you stress test that? And you know, paying 4% or 5% is one thing, paying 8& or 8.5% is another thing. You know, do you sort of get ahead of it and say, hey, you know, is this gonna be a viable loan at 8.5%? Can they afford this type of dramatic jump up in rate?
Yeah. So a couple of things we do there. When we're underwriting loans, originally, we do stress tests. I would tell you, you know, the traditional kind of up and down 300 basis points looks a little light compared to the 550 basis points or 575, where it's been now over the last 18 months. But that's something we've always looked at is, you know, what would be the scenario for this borrower if we see a rising rate environment? And then, you know, as part of our internal loan review process, we've gone through here over the last few months and looked at where we see risk in the portfolio for this repricing risk you're talking about.
What we've seen is the bulk of the risk is probably a couple of years out and is minimal. I mean, where we've looked at credits that are coming due or going to come due, you know, the borrowers do have adequate coverage to cover higher rates. So we're not seeing that as a fundamental problem in the portfolio or with any individual credits at this point or for the foreseeable future. You know, if rates continue to go higher, I think we'll probably need to do deeper dive into that. But, you know, from where we are today, that seems to be a risk that's well managed in the portfolio.
I didn't quite—I couldn't tell from your handout, your mortgage business, was that break even for the quarter? I couldn't quite tell from, from, I forgot what page it was. Page 10, in terms of your non-interest income, was the mortgage business at a breakeven this quarter?
No. No, I think we lost, David, is it $200,000 for the quarter, I believe, in the mortgage segment?
From what you're seeing for the fourth quarter, will that probably be as good a guess as any for the fourth quarter as well?
Unfortunately, you know, we've really cut expense there, and unless we want to close it down, which we don't, you know, I think we're kind of stuck with some minimal contributions coming out of mortgages here, negative contributions for the short term. You know, we are doing a couple things to manage that. We've looked to add MLOs, which are all variable cost. And we've also looked to manage spreads in a way that drive more volume. And so, you know, we've had some success with that. I think we've added another mortgage loan officer in our resort communities, and we've got a couple more that we're talking to.
So, you know, I think the president at Mortgage Group is working. He's certainly well aware of our focus on that and trying to be responsive. I don't know, Julie, that's all under you. If there's any other color you want to add on that. I do think we've done a nice job over the past three years in bringing the cost down in that area to where revenues look like they're going to be. And unfortunately, it's a little upside down right now. But again, I mean, that's been strategically valuable for us. It's produced assets. It's minimized our risk in mortgages, which I think is no small feat.
You know, I think if we're going to be a private bank and have mortgages, you need to have the volume to make sure you've got the compliance and risk well managed. And then, you know, we've just made so much money in the boom part of it, that having, you know, some incremental losses here is not the end of the world, I think. You know, at some point, that's going to turn around and be a nice, profitable business again, as it was, a couple of years ago.
Could you talk about some of your some of your newer offices? You said I think I read you're opening up one in Bozeman. Is that going to be a full ser- a full service? And if it is, what kind of deposits do you or timing do you need to hit a breakeven? You know, could that be, I don't know, could that be a $300 million-$400 million branch in a couple of years?
I think $300 million or $400 million would be an ambitious goal. You know, we talk in terms of revenues here when we think about-
Right
New locations. And so, you know, we opened that as a LPO, and we told them that when they get to $1 million in revenues, that we could give them a full service office. We opened as a full service office. I think actually we moved into that office this week, earlier this week, and our grand opening is going to be, I believe, November 9th or something like that. And so, you know, I think as we build that out and build a business there, I would expect that to grow to be, you know, $2 million business, a year, 18 months from now, and then, you know, ultimately be a, you know, $5 million-$10 million business with a couple of $1 million in expenses. So having a nice contribution margin, in the relatively near term.
And you know, I think it's very additive to what we're doing in western Wyoming, and obviously gives us a nice entry into Montana, which I think is full of opportunities for us as well. So, I think that's just, you know, part of a longer-term strategy to continue to expand in the Rocky Mountain West. We have a really great team there that I think is going to produce great results for us. We're very optimistic about it.
Could you talk about the Wyoming business? I guess, when you bought that about a year and a half ago or so, how is that performing, yeah, you know, on a bottom line basis?
Yeah, I don't think we've really released much information about that. I mean, what we've seen in Jackson is we combined our two Jackson offices, the one we had there, plus the one that we acquired. And, the one that we acquired has a beautiful office at the corner of, you know, the metaphorical First and Main Street. Interestingly, we had First Republic open across the street from us, and that was a bit of a shocking experience, the aggressiveness that they brought to the market. Of course, that's gone now. So, I think that that's going to be a big benefit for us that are, you know, the more long-term focused players in the market.
And then our other two offices, which we weren't too sure about when we first started looking at this, opportunity, which are Pinedale and in Rock Springs, they've turned out to be really pleasant surprises. The teams there have been wonderful. The market, obviously, there's still competition for what we do in those markets, and so I think those are going to turn out to be really nice success stories for us, for the long term. You know, if you wanted to have a stable base of core deposits, that is so desirable today, all of those offices are very added to that. And I think, in retrospect, that, that, acquisition was a huge success. You know, you probably recall that it was accretive to capital on day one, to tangible book.
We got more expensive out of that than we thought, and the revenues have been strong. So I think, you know, all in all, that's been a really nice success story for us.
Just one final question. Are you actively looking for more things to buy or fill in? Or, or if we do see any further growth, it'll be, organic, like, like the Bozeman, endeavor?
We do believe that there's going to be opportunities that come out of this cycle. Talking to other bankers, I've heard some stories of some pretty rough exams, and since March now. And I think that, you know, the downgrades that may come out of that may put pressure on boards and maybe people that otherwise wouldn't be interested in looking for a bigger, stronger partner, maybe will. And so, I do think that that's going to create opportunity for us. We do have our list of targets that we talk to and socialize the idea of joining somebody bigger, with a bigger toolbox and a bigger footprint that could be a beneficial partnership for them. I think that that's gonna play out here over the next couple of years.
It does take time, I think, for that to play out. I mean, what we've seen in prior down cycles is you see these big sort of spectacular events like we saw in March, and then, you know, so the follow-on takes several quarters to play out. And I think we've got that to come still, which I do believe will create opportunity for us.
And just one last, sorry, I just left one thing out. A number of banks I've seen this quarter have sort of tinkered with their securities, maybe sold some, shortened up the maturities or durations. Have you thought about that, on some of yours? Or I guess if you did anything with those held-to-maturities, you would have to move the whole thing to held for sale, and you couldn't just sell a portion of it.
You know, our securities portfolio here is relatively small. We made a conscious decision, in was that 2011, Julie? 2021 , I mean.
Yes.
2021, not to go out and buy a bunch of 1% or 1.5% yielding bonds with all that cash that we had on the books. And, and so I just don't feel that we have the need to cause that kind of turmoil in our balance sheet. I mean, I think our total investment portfolio is relatively small. It's performing well, so I think we'll just leave that there. I mean, we certainly have done analysis to look and see if it makes sense to trade it out. But at this point, I think, given all the different accounting and economic factors, we're better off leaving it in place and letting it pay off.
Thanks a lot, guys. I appreciate it. Have a good weekend.
Yeah, thanks, Ross.
One moment for our next question. Our next question comes from Brett Rabatin with Hovde Group. Your line is open.
Hey, just one follow-up. I know this call has gone long enough. I guess first, sorry, I didn't acknowledge you earlier, David, when I said hi to the crew. Wanted just to ask, I mean, obviously, the stock is down quite a bit today. I think a significant portion of that might be around the NPA formation this quarter. And, you know, it feels like you guys are pretty confident that you're not gonna have losses around that one relationship. I think what would help, if you could give it, I know you don't want to talk too specifically about the properties, you know, and get into too much detail.
But if you had anything you could share around, you know, any valuations you have, updated appraisals on the building, you know, give us, give us some sense of your comfort, how you get there in terms of not expecting losses on, on those particular properties? Thanks.
So, yeah, good question. We have spent a lot of time on this. As you would expect, this is a very large number for us, $42 million. And, you know, we've had a couple of different options about how to deal with it, as I talked about before. And, yeah, I think we've chosen the more painful option that will be much better for our shareholders, for the short and long term here. And so, you know, if we take some lumps with the stock price, I mean, I guess it's a buying opportunity. But, yes, we have taken a close look at it. We have current appraisals on all. Are there seven properties, Julie, or six?
Six.
Six properties. We've looked at them in detail. I was thinking that that there's some nice opportunity in here for collecting on this before I saw this article in the Journal. And the article in the Journal was just very positive about how strong the high-end market is in Aspen. And again, you know, you're looking at properties in Aspen, you're looking at property in Nantucket and West Palm Beach. I mean, those are all very hot, desirable markets that I think are still, you know, trading at premiums. And these aren't people that, you know, can't figure out how to pay an 8% mortgage. These are people that are coming in and buying trophy properties for cash.
You know, the article actually talks about that end of the market is really isolated from what's going on in monetary policy and whatnot. I do think, you know, Brett, I don't want to be overconfident about it, but I do think that, you know, we're well positioned there and should be fine.
But to kind of get back to the core of that question, updated appraisals, anything that would give us confidence that, you know, the borrower purchased properties at X, and it's not going to have to take a, or the appraisals might not come in lower, much lower than where he purchased them? Any color on that?
No, we have current appraisals. We already have them in hand.
Okay. And they-
Yeah.
Do they meaningfully exceed the unpaid balance in principal?
I think we're going to do fine with them.
Okay.
Yeah.
Sorry to push. I just, you know, trying, trying to help you get some confidence around that, so for the, for the market. Appreciate the follow-up.
Yeah. Yeah. Thank you, Brett.
That concludes the question-and-answer session. At this time, I would like to turn it back to management for closing remarks.
Great. Thank you, Abigail. Just a couple of things, you know. While the reported numbers this quarter obviously are disappointing, our core business is performing well in an unprecedented environment. The company has responded well with balance sheet management, higher fees, and well-controlled expenses. You know, while our third quarter NPA spike is discouraging, we do expect to collect on these two larger problem relationships and continue our long history of near zero loan losses. Going forward, even if we only have moderate revenue growth with continued expense control, we think we can produce nice operating leverage and improved earnings story. We're very focused on improving current and future earnings while operating with our historic focus on careful risk management. So with that, thanks, everybody, for dialing in.
We really appreciate your interest and support of First Western, and have a great weekend.
Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.