First Western Financial Inc Q4 FY2022 Earnings Call

Thank you for standing by and welcome to First Western Financial Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. As a reminder today's call is being recorded. I would now like to turn the conference over to the host Mr. Tony Rossi of Financial Profiles. Sir, you may begin.

Thank you, Valerie. Good morning, everyone, and thank you for joining us today for First Western Financial's fourth quarter 2022 earnings call. Joining us from First Western's management team are Scott Wylie, Chairman and Chief Executive Officer; and Julie Courkamp, Chief Financial and Chief Operating Officer. We will use a slide presentation as part of our discussion this morning. If you haven't 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. And with that, I'd like to turn the call over to Scott. Scott?

Thanks, Tony, and good morning, everybody. We had a number of objectives that we wanted to accomplish in the fourth quarter. We wanted to increase our focus on deposit gathering in order to improve our liquidity and reduce our loan to deposit ratio. We wanted to continue to generate solid loan growth while tightening underwriting and pricing criteria given the potential for weakening economic conditions. And we wanted to continue to effectively manage our expense levels. I'm pleased to report that we were able to accomplish all these objectives and continue to generate strong financial performance, although earnings were lower than the prior quarter due to the increase in interest expense that we saw as a result of our strong growth in deposits and the competitive environment putting pressure on deposit class. Even with tighter underwriting and pricing criteria, we still generated 21% annualized loan growth in the quarter, with increases in each of our major portfolios. The strong loan growth that we continued to generate reflects our success in steadily growing our client base in Colorado, as well as the increase in contributions we're getting from the teams that we built to increase our presence in Arizona, Wyoming, and the Montana markets. With the strong business development capabilities that we've built, we're able to generate a significant volume of high-quality lending opportunities, enabling us to continue generating strong loan growth while maintaining our prudent approach to risk management. Importantly, the growth rate we saw in total deposits was more than double our loan growth. We are particularly effective in expanding deposit relationships with a few larger clients, which accounted for a significant portion of the deposit inflows we saw in the fourth quarter. As with our loan production, our increased presence in some of our newer markets was also a contributor to the strong deposit growth in the fourth quarter. As we mentioned on our last call, our near-term objective was to get our loan deposit ratio down near 100%, and we were able to achieve that with our strong growth in deposits during the fourth quarter along with our improving liquidity by reducing our loan to deposit ratio. During the fourth quarter, we also increased our total capital ratio by 53 basis points to 12.37%. Moving to Slide four, we generated net income of 5.5 million, or $0.56 per diluted share in the fourth quarter, or $0.58 a share with acquisition-related expenses excluded. Our strong profitability along with effective management of our investment portfolio has enabled us to continue to drive increases in both book value and tangible book value per share. In the fourth quarter, book value per share increased 2.5% from the prior quarter, while tangible book value increased 3%. During 2022, a year when most banks saw significant declines, both metrics increased by more than 9%, reflecting the strong value we're creating for shareholders. Turning to Slide five, we'll look at the trends in the loan portfolio. We had another strong quarter of loan growth, originating $182 million in loans. While this was down from the prior quarter, the average rate on new loan production increased by more than 100 basis points. We are still generating strong production without compromising on pricing. Payoffs are also continuing to moderate. So more of our loan production is translating into net loan growth and our total loans held for investment increased by $121 million from the end of the prior quarter. The growth was primarily driven by increases in our residential mortgage, construction, and C&I portfolios, which offset a decline in our CRE portfolio, which is an area we're limiting new production as part of our overall approach to risk management ahead of a potential recession. As with the prior quarter, most of what we're adding to the one to four family residential portfolio are jumbo arms that provide attractive risk-adjusted yields. Moving to Slide 6, we'll take a closer look at our deposit trends. The success we had in deposit gathering resulted in 44% annualized growth in total deposits during the fourth quarter. We had a decline in non-interest-bearing deposits, which was largely attributable to some clients deciding to move a portion of their excess liquidity into interest-bearing accounts to capitalize on the higher rates now being offered. We also made a decision to add some time deposits in order to lock in longer-term fixed-rate funding that we believe will enable us to more effectively manage our deposit costs going forward. Turning to Slide 7, Trust and Investment Management, our total assets under management increased by $189 million from the end of the prior quarter, which was primarily due to an increase in market values during the fourth quarter of 2022. Now I'll turn the call over to Julie for further discussion of our financial results. Julie?

Thank you, Scott. Turning to Slide eight, we'll look at our gross revenue. Our total gross revenue was relatively consistent with the prior quarter as an increase in non-interest income offset most of the decrease we saw in net interest income. On a year-over-year basis, our gross revenue increased 23.8% from the fourth quarter of 2021, largely due to higher net interest income resulting from both organic and acquisitive growth on our balance sheet. Turning to Slide nine, we'll look at the trends in net interest income and margin. Our net interest income decreased 4.6% from the prior quarter due to the increase in interest expense resulting from our strong growth in total deposits, and an increase in our average cost of deposits. With our strong growth in deposits, we reduced our level of FHLB advances. And we continue to make adjustments to our level of wholesale borrowings going forward based on the trends we're seeing in loan production and deposit flows. Excluding the impact of PPP fees and accretion on acquired loans, our net interest margin decreased 47 basis points to 3.31. The net decline in our net interest margin was due to an increase in our average cost of funds resulting from the higher rate environment and a very competitive environment for deposit gathering. Given the competitive environment for deposit pricing, we believe it is likely that we will continue to see some pressure on our net interest margin in the first quarter. As we exited the year, due to the changes in the composition of the balance sheet, we have moved to a more neutral position in terms of interest rate sensitivity. And we have indicated in the past, we do not make bets on the future direction of interest rates. Changes in our interest rate sensitivity are a function of the trends we see in loan production and deposit flows at any given point in time, with our primary focus being on generating growth in net interest income. Over the past few years, as the growth in our commercial banking platform resulted in more commercial deposit relationships and an increase in non-interest-bearing deposits, we became more rate-sensitive and saw significant expansion in our net interest margin. Now we are seeing a shift back to a more neutral position, which will serve us well in protecting our net interest margin when the Fed eventually starts to lower interest rates. Turning to Slide 10, our non-interest income increased 3.4% from the prior quarter, primarily due to higher bank fees and risk management and insurance fees. The higher bank fees were partially attributed to an increase in prepayment penalty fees, while the increase in risk management and insurance fees primarily reflects a seasonal bump that we typically see in the fourth quarter. The growth in these areas offset minor declines in trust and investment management fees, and net gains on mortgage loans, both of which are starting to stabilize relative to the larger declines we experienced earlier in 2022. The volume of locks on mortgage loans originated for sale declined 32% from the prior quarter, approximately 95% of the originations were purchased loans, and we are seeing very little demand for refinancing given the rise in mortgage rates. Turning to Slide 11, in our expenses. Our non-interest expense increased 3.3% from the prior quarter, primarily due to an increase in data processing costs resulting from non-recurring implementation charges relating to enhancements we have made to our trust and investment management platform. During 2022, we made significant investments and built new banking talent and technology that will contribute to our future growth and revenue and improvement in efficiencies. Following these investments, we expect the growth rate of non-interest expense to moderate in 2023, with most of the growth coming from annual salary increases. And for the first quarter of 2023, we expect non-interest expense to be in the range of $20 million to $21 million. Turning now to Slide 12, we'll look at our asset quality. On a broad basis, the loan portfolio continues to perform very well with another quarter of minimal losses, although we did see an increase in non-performing loans in the fourth quarter. The increase in non-performing loans is primarily attributed to one commercial loan. As we have indicated in the past, our underwriting criteria requires multiple sources of repayment. In this particular case, we have the assets of the business, a commercial property, and a personal guarantee from a high-net-worth client. As a result, we believe the loan is well secured, and there was no specific reserve required. We recorded provision for loan losses of $1.2 million, which was driven by the growth and changes in the mix of the loan portfolio. This puts our HFL to adjusted total loans at 78 basis points, which was relatively consistent with the end of the prior quarter, and reflective of our strong credit quality and the low level of losses that we have experienced in the portfolio. On January 1, we adopted the CECIL standard for allowance for credit losses. Our preliminary estimate is that our ACL to total loans ratio will be in the range of 75 to 90 basis points and a 30 to 45 basis point coverage on off-balance sheet commitments. Now I will turn the call back to Scott.

Thanks, Julie. Turning to Slide 13. I'll wrap up with some comments about our outlook and priorities for 2023. What appears to be a challenging macroeconomic environment this year, we believe we're well positioned to effectively manage through an economic downturn while continuing to generate profitable growth, particularly when economic conditions improve. With our conservatively underwritten, well-diversified loan portfolio and the strength of clients that we serve, we expect to maintain strong asset quality as we have during prior periods of economic stress. In each of the past three years, we further tightened our already conservative underwriting criteria. As a result, the credits we've added to the portfolio over that time have a substantial cushion in their debt coverage ratios and loan-to-values to absorb any deterioration that occurs in cash flows or collateral values. We also have little to no exposure to the areas that are most likely to be impacted by a recession, such as office CRE, retail CRE, SBA, or subprime consumer. We feel very comfortable with this small amount of office CRE that we have in the portfolio. These properties aren't in major metropolitan areas where the work-from-home trend has been most pronounced. They largely consist of smaller properties in high-end suburban areas with tenants in more recession-resistant industries like medical practices. In terms of new business development, we're going to continue to place an increased focus on core deposit gathering to fund our loan production. Our relationship anchors are focused on developing full relationships with both loans and deposits from clients, we expect this to result in better alignment between loan and deposit growth going forward. While we continue to be conservative and highly selective in our new loan production until economic conditions improve, we expect to be able to continue generating solid loan growth as the new teams that we've added in Arizona, Wyoming, and Montana continue to gain traction and increase our market share. One of our priorities for 2023 is increasing our business development in the trust and investment management area. We've made some adjustments in how this business operates which will free up our business development officers to spend more time meeting with potential new clients. We're also going to be adding a few new business development officers in various markets. We believe these efforts will not only help drive a higher level of growth in assets under management and fee income but will also contribute to balance sheet growth, given our consistent success in expanding relationships with wealth management clients to include loans and deposits as well. Our investment area will not have a meaningful full impact on our overall expense level as we're reallocating resources from other parts of the business. And as Julie mentioned, now that our near-term investment in talent technologies to support our long-term growth are largely completed, we expect to keep our expense growth rate well below our revenue growth rate this year resulting in increased operating leverage. We believe our increasing operating leverage will result in further earnings growth in 2023 with the second half of the year likely being stronger than the first half. It's now been about 4.5 years since our initial public offering, and I think we have successfully delivered on the strategy we outlined at that time for enhancing the value of our franchise. While navigating through a multiyear pandemic, we've generated strong organic growth by taking market share in our existing markets and expanding markets and complemented that with disciplined, well-priced, and well-executed acquisitions. The balance sheet growth we generated has resulted in greater operating leverage and a higher level of earnings and improved profitability. With our strong execution since the IPO, we've created significant value for the shareholders of tangible book value per share increasing by nearly 140%. We built a strong, high-performing culture and a very talented team that delivers exceptional client service and effectively communicates our value proposition to consistently bring in new relationships. With a strong team we've built, the attractive markets that we operate in, and the highly productive business development capabilities we've developed, we believe we're well positioned to deliver another strong year in 2023 and create additional value for our shareholders. With that, we're happy to take your questions.

Thank you. Our first question comes from Brett Rabatin of Hovde. Your line is open.

I wanted to talk about, first, the growth in deposits linked quarter. And I think, Scott, you mentioned some fairly sizable clients adding funds to the deposit mix. Can you talk maybe about the larger deposits this quarter and then the efforts to continue growing that? Would we expect that to continue in terms of the acceleration of the linked-quarter beta?

Yes, we've discussed this in our last couple of calls. Traditionally, we've managed to maintain a loan-to-deposit ratio of about 90% to 95%. We know where our next loan will come from, but we've often wondered about the next deposit. Over the years, we've observed that our clients have liquidity and are willing to deposit it here when we need it, so we don’t need to keep excessive liquidity on our balance sheet without earning income from it. That’s what we experienced in the fourth quarter. We instructed our relationship bankers not to operate with the 108% loan-to-deposit ratio we had in Q3. Instead, we increased our loans or deposits at a pace that was double our loan growth rate in Q4, which was a significant success. A lot of this growth came from existing clients, consistent with what we've witnessed over the past 18 years and my experience in private banking. I believe this trend will persist into 2023. Regarding your question about our deposit beta, we managed to keep it down well during the first half of last year. However, as we mentioned in the last call, it has been an unprecedented environment. In my decades of experience, I've never seen such rapid increases in deposit or Fed fund rates as we did in the middle and latter parts of last year. Our focus on relationships has been beneficial. In Q4, we experienced a notable rise in our cost of funds, which resulted in our net interest margin declining, as we anticipated in our previous call. We expect continued pressure in Q1 of 2023. Looking at our NIM of 332 in Q4, that’s a strong figure compared to our historical NIMs or compared to other high-fee banks like us. As we look ahead, I think it's wise to prepare for the worst while hoping for a better outcome. If we consider the year ahead, we faced pressure in Q4 to adjust the deposit beta we had kept low throughout the year. Personally, I don't expect to see a series of substantial rate hikes from the Fed this year, nor do I think the media will focus on these interest rate headlines as much, especially since clients are expressing confusion over receiving little interest while the Fed funds rate is much higher. It’s likely to be a different environment this year. If that holds true, despite any potential recessionary pressures we may face, we will continue to monitor our loan dynamics closely.

Five. Thank you.

We have something like $100 million or $200 million in loans that pay off every quarter, and we produce something like $200 million or $300 million a quarter, at least last year. And so you do look at the impact of loans rolling off of 3% or 4%, and either renewing or new loans coming on at 7% or 8%. And it just feels to me like we're pretty well positioned from an already competitively high net interest margin compared to high-fee bank peers. I think we're well positioned to see some growth later in the year, but we're going to see that come down in Q1. And I don't know what's going to happen the rest of the year, but just the dynamics that seem apparent today, leave room for upside later in the year. So that was a little bit of a long-winded answer to your question, Brett. I hope it was helpful.

Yes, Scott. That was very helpful. And I would agree, you obviously did a good job last year managing the deposit cost as just gotten so competitive and essentially your competition is the treasury curve. So sort of is what it is. My follow-up question, I wanted to ask about the loan portfolio growth from here. 4Q was construction and residential. Obviously, you have slow growth from 21% linked quarter annualized in the fourth quarter. But wanted to get a sense of what the pipeline looked like, what you think you might grow this year, and then any magnitude that you're expecting from a pipeline perspective?

Yes. We've historically said that we think we can grow loans in the mid-teens. I think, again, if you stand back a little further than just a quarterly look, we've kind of grown loans pretty consistently organically, at least in the mid-teens. So with tighter standards, with higher spreads, could we grow loans in the mid-teens in 2023? Well, I think so. We have the infrastructure in place. We've got some strong machines, I call it, in our existing offices. And then, we've added some more high-quality lenders in some of these new markets that we're in, Arizona, Western Wyoming, and Montana. So yes, I mean, I think we're well positioned to see growth in deposits and loans in those markets and relationships. But it's just hard to tell right now. I think we're seeing clients that we're thinking about doing something that makes sense at 4% and maybe doesn't make sense at 8%. And these are sophisticated people, and they've been through cycles, and they don't need to do something. And maybe they will, maybe they won't. I would say right now, our pipelines are down, but they're sure not empty. There's plenty of activity going on, and people are doing things, and we're closing on new loans.

Then I would just add, Brett, for the kind of the mix comment that you added into that question. We did see quite a bit of mortgage offering, mortgage production last year. And for us, it continues to be very strategically important to us. Like we've always said, it's a good new acquisition of clients and retaining existing clients tool for us to use. But we continue to be cognizant of generating appropriate risk-adjusted returns on our capital. So you'll probably see us dial back our residential mortgage production from what we did at least in the prior year for the first couple of quarters this year as we look at our competitors, what they're pricing those loans at, they're not quite as attractive as what we would want to put on our portfolio. So I don't think you'll see that same level of growth for us at least in the first part of this year unless things change.

And our next question comes from Brady Gailey of KBW. Your line is open.

Is the $20 million of sub-debt that was raised during the quarter solely for growth purposes, or were there other considerations behind that decision? I'm uncertain if there are any other obligations expiring or maturing. Can you provide some insight into the reasons for raising the sub-debt?

Yes. Well, we thought that going into a potential recession, more capital is better than less capital, and we didn't want to do a common raise. We don't need to because we've been able to generate good earnings here over these last few years to support the growth we've had. But we saw a window for an attractive non-rated raise. The one that was done before us, I think, closed at 8% of a regional bank. The one that was done after was 8.5%. We got ours done at 7% fixed for five years, and it gives us $20 million of surplus Tier-2 capital at the holding company that can be pushed down to the bank for additional common. It can be additional cash for the holding company. I mean we said general corporate purposes, which is exactly what we plan to use it for. So it just seemed opportunistic, and of course, it's non-dilutive. The impact on future EPS is minimal. And I think we don't know what's in the future. And when the windows like that is there, I think it makes sense to take advantage of it.

All right. And the new commercial loan that entered into NPA, it sounds like it's not a huge risk given the dynamics you talked about. But just a little more color, what type of loan is that and when do you expect to have that loan resolved and back out of the NPA bucket?

I think three weeks from Thursday. So these things are a process. A couple of points on that. It's a producer of a consumer product that probably got a little over their skis. That's a metaphor. I think are an indication of the strength of our credit process and of our borrowers here, as Julie said in her prepared comments, that we always underwrite that resource through a payment. We've got the business assets. We've got the buildings. We've got some other commercial buildings, and we have a personal guarantee from a very strong borrower client. So we don't anticipate a loss there. I do expect that it's going to take a little time to work out just because it always seems to. But it didn't feel to us, or it doesn't seem to us to be indicative of anything like it's not some systemic problem that we have three other loans just like it that are all going to have problems or something like that. I mean it's just, I think, a one-off thing that we felt better putting on non-accrual in Q4.

Okay. And then the commentary about the margin coming down in Q1. Any idea of the magnitude of how much it could come down? Or any idea where the margin exited the quarter in December?

Yes. In December, our NIM just for the month was 306. So that's a little bit of helpful context for you to see where the metrics meet us. And Scott touched on a lot of the NIM comments and the net interest income and market for deposits. So I think that will help you out.

Okay. And last one for me. So $20 million to $21 million of expenses in Q1, should we expect a little bit of growth beyond that for the rest of the year? Or do you think they'll be able to hold that flat for the rest of the year? How should we think about kind of full-year expenses?

We believe this is an opportune moment to manage our expenses. As mentioned previously, our strategy for success does not hinge on cost-cutting. Instead, we aim to maintain our costs this year in line with last year, with the primary cost increase expected to be due to salary adjustments from our annual merit increase for employees. Achieving this would signify a successful year in expense control. We are currently in a cycle that necessitates caution regarding growth, particularly in terms of expense growth. The figures we presented illustrate that if we continue to experience revenue growth similar to the past few quarters, particularly in our core earnings, this would set a positive foundation. Moreover, net interest income has surged, showing a year-over-year increase of 49% for the fourth quarter. While there are certain challenges regarding fee income, I believe there is a point where it won't decrease further. If we see any improvement there coupled with effective expense management, this aligns with our approach for strong earnings growth. Thus, we are focused on maintaining discipline in our expenses.

Okay. Great. Thanks, guys.

Thank you. One moment, please. Our next question comes from the line of Matthew Clark of Piper Sandler. Your line is open.

Just first one for me around the margin, if you had the spot rate on deposits, deposit costs, or interest-bearing deposit costs at the end of the year?

Spot rate for the cost of deposits at December was $199, so just about 2%.

That's total. Okay. And then the risk management and insurance fees, you have the seasonal step-up this quarter, a little bit higher than a year ago fourth quarter. Anything, I guess, about this rate environment or just general macro environment that might have lifted that a little more than usual? Or is that kind of a reasonable level of activity for next year's fourth quarter?

We can't seem to predict that. It seems to produce a pretty consistent amount year in, year out. Through the first three quarters of this year was below our expectation. We thought we were going to have a strong fourth quarter, and we did. So I think higher fourth quarters than the prior three quarters is a good expectation whether we're going to hit the number next year like we did this year, I don't know. I mean, we've got a bigger platform or perhaps a bigger client base, more folks out there helping our clients with wealth planning that smoothly drives the risk in the life insurance business. So hopefully, that trends up over time, and it will be cyclical where you're going to see more in the fourth quarter.

Okay. Got it. Great. And then just kind of big picture. I think a number of banks have kind of suffered from generating probably stronger loan growth than they should have and not funding it with deposits or low-cost deposits. You guys obviously had excess deposit growth this quarter. But it came at a price. I guess what are your thoughts around kind of maybe tapping the brakes a little bit on loan growth unless you can fund it with truly low-cost deposits and not price-sensitive type balances?

Well, honestly, we're not really thinking in terms of how to best manage NIM. We're thinking about how to grow the business with the clients that we want given the economic and competitive environment that we've handed. And we've talked about tightening credit standards. We talked about raising margins. We talked about the relationship focus. If you look at the actual trend line for loan production, it's gone from a little under $350 million, a little under $300 million, a little under $200 million over the last three quarters. I think that is all indicative of how we're approaching loans. I think sometimes with banks that turn this big, it off all the way. And certainly, in our market, we're seeing some of that. Then, you've got a problem turning it back on when the economy turns around. So I think to the extent we can keep our bankers focused on finding the relationships that we want, growing the relationships with existing clients, making sure that our clients and referral sources and our prospects see us as being in business and willing to do things that make sense, albeit under more stringent terms and more expensive. I think that's where we want to be. And if that slows our growth rate down the balance sheet in the interim here, I think that's fine. As I said, we're going to see a lot of lift. I expect, again, I don't want to give guidance on this, but I expect that we're going to see a nice lift in our NIM going through this year if the Fed does, in fact, slow down rate increases, so we don't see all this deposit pressure. And as we reprice our loan portfolio. I think the math on that stuff works pretty nicely for us, and Julie was talking about. We're not trying to make a big interest rate bet here. We're trying to run a balanced portfolio. And I think that's going to play out nicely over the course of 2023 as it was a historical year.

Great. Thank you.

Thank you. One moment, please. Our next question comes from the line of Bill Dezellem of Tieton. Your line is open.

It's Tieton Capital Management. I have a group of questions. First of all, would you please expand further on the comment that you just made relative to some competitors are shutting off their lending machine and what opportunities that may create for you all with market share?

Well, I don't know really what else to add. I mean I think we're seeing some banks are approaching this part of the cycle by saying we're not going to lend. And I think that does create opportunities for us with prospects that aren't here yet, or clients that have things that are a way that we can bring here. I would tell you; we are in very desirable markets. And so we continue to see new entrants to the markets, and Julie talked in her comments a little bit about people doing, I won't say stupid pricing, but pricing, certainly, we wouldn't do on resis, for example, on residential mortgages. We're just seeing things that are head scratches to us. But the beauty of our business model is, we don't have to do those things. We can focus on a different area. When one area looks like a competitive position we don't want to be in. And of course, with mortgages, we're able to use the secondary market capabilities that we have to still support clients without having to put low-priced stuff on our books that we don't want.

Maybe, Scott, it would be helpful to know how common it is for competitors to significantly reduce their lending.

I don't know how to answer that, Bill. We're operating in very different markets. What we see in Denver differs from the other front-range markets. The resort markets also vary. Western Wyoming is showing a unique dynamic market. We've had more success in Montana earlier than we expected. In Arizona, we've managed to attract new lenders. The high-quality professionals we want at First Western are drawn to us because they view us as a growth-oriented company rather than one that fluctuates. This creates opportunities for us. However, I want to emphasize that now is not the time to push aggressively for loan growth. While it's a good time to build strong relationships, we are tightening our credit standards and underwriting processes, as well as increasing our net interest margin and credit spreads. We have been disciplined in our approach, and I believe this will benefit us in 2023 and the years to come.

Okay. Thank you. And two additional questions, if I may. Acquisition pipeline, would you please provide an update in terms of what you're seeing given all of the macro factors that you're talking about and whether that's causing some to decide now would be a good time to sell? And then secondarily, the trust and investment management and systems enhancements, I know there was a one-time cost in the quarter, but more importantly, trying to understand what is it that you would anticipate those enhancements to do for that business, please?

Yes, I have two small questions. First, regarding the acquisition pipeline, it appears to be a challenging time for acquisitions. We are dealing with issues related to AOCI and credit uncertainty, making it difficult to finalize deals. However, we remain committed to our corporate development program, which we view as a core strength. We continue to engage with potential acquisition targets, but have found that some deals in the latter half of last year were priced higher than we were willing to pay. While we wish the successful buyers well, we are disciplined about our approach and ensure that our past acquisitions have been positive because we carefully evaluate and price opportunities without stretching our limits. As for this year, we don't have any immediate announcements, but if the right opportunity arises at the right price, we would be interested in pursuing it as part of our growth strategy. Moving on to Teton systems, there's a significant challenge in private banking — our trust, investment, mortgage, and banking systems need to interconnect better, but they currently don’t. Despite promises from vendors over the decades, solutions have been lacking. At First Western, we’ve historically extracted data from these core systems for various needs like client profitability and cross-selling, but now we see an opportunity to transition to cloud-based systems that are more compatible with fintech solutions. We initiated this process by upgrading our loan processing system and our platform trading system in previous years to improve efficiency. Recently, we replaced our trust and investment cores with a new vendor offering a cloud-based integrated solution. This year, we aim to upgrade our banking core as well, allowing better communication among our systems and greater flexibility moving forward. With the new trust and investment vendor, we are also anticipating breakeven and potential cost savings.

We should be at breakeven, yes.

And we'll see how, once everything is settled, if there are any cost savings to be had. However, my main point is that they are not costing us more. There are some one-time conversion costs and, as always, some difficulties associated with the conversion, but that would be a short-term and long-term response to your question, Julie.

That really sounds fantastic. Good pulling all that together, and thank you both.

Thank you. One moment, please. And it looks like we do have a follow-up question from Brett Rabatin. Your line is open.

Just wanted to follow back up on fee income and make sure I understood the expectations for the year, kind of seasonality, maybe of the risk management and insurance fees. And then, just thinking about mortgage banking, some folks have made some hard decisions on that business line. But my guess is you're going to continue to try and work that business. So I just wanted to hear any thoughts around the mortgage expectations given, obviously, low levels at current times. Thanks.

Yes. So obviously, we've had some pretty tough headwinds in our fee businesses as an industry, and here at First Western that's true as well. The two big headwinds for our fee business have been on the mortgage side, and obviously, that was a big disappointment this year. But we know it's cyclical. We know it's strategic for us, like you said. So we're not going to go out of it. What we can do is manage expenses, which we've done. We've cut expenses now, Julie, 2x or 3x?

3x.

Over the past 18 months, we have continuously evaluated our production. Typically, we experience a slower season during this time, so we will keep monitoring the situation in the coming months. Additionally, we have added some mortgage loan originators in Arizona, which I believe will enhance our market share. These mortgage loan originators work on a 100% commission basis, meaning there are no costs if they aren’t generating business, and currently, they are performing well. This is a practical approach given the current market conditions. If we look at the NPA figures for this year, they seem quite ambitious, but if they are achieved, we could expect at least a steady performance in mortgages compared to last year. With effective expense management, we anticipate that our situation won’t worsen; it should remain flat or improve. On the asset management front, particularly in trust and investment services, we see substantial potential. This is a particularly intriguing period because when the market is strong, clients are less likely to seek out assistance as their investments are performing well. However, in downturns, clients often question their losses and may require professional guidance. We believe this is a crucial time for us to enhance our services in planning, trust, and investment management, each of which is interconnected yet distinct. We are undertaking significant internal upgrades to strengthen these areas, as we believe it is an excellent opportunity to share our unique and compelling story. This aligns well with our ongoing narrative about providing a cohesive, team-oriented private banking and trust service locally. While it’s difficult to foresee significant declines from our current position, there remains potential for growth. Whether we see this in 2023 is uncertain, but looking back at our progress in these businesses, we have achieved substantial revenue growth. This period presents a compelling chance for us to leverage the current market dynamics.

Okay. That's great color, Scott. Appreciate it.

Thank you. I'm showing no further questions at this time. Let's turn the call back over to management for any closing remarks.

Yes, I did have a couple of closing points I wanted to make, if I could. I mentioned in our prepared comments that if you step back a little and look at the broader context, 5 years ago, pre-IPO, First Western was a $970 million bank with about $50 million in tangible book value. Today, we're approaching $3 billion. We have over $200 million in tangible book value. And we've done that without dilutive capital raises. In the meantime, we built out an infrastructure that can produce and support billions more in organic expansion, acquisition growth, and we're producing strong operating leverage and growth into the future, just as we have proven in these interim years here since the IPO. I also want to recognize the hard work of our 365 First Westerners. I feel like in a pretty challenging year. We've managed to produce another great year of solid organic growth in revenues and core earnings in spite of some significant headwinds, we're well positioned for the challenges that 2023 may bring and especially if some of those 2022 headwinds turn to tailwinds, and these challenges that we've seen become opportunities for us. I think we have a really terrific future here. So thank you so much for dialing in and for your interest and support for First Western. We really appreciate it.

Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect. Have a great day.