First Western Financial Inc Q3 FY2023 Earnings Call

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 speakers' presentations, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Tony Rossi, at Financial Profile. Please go ahead.

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 a substitute for the most directly comparable GAAP measures. The press release available on the website contains the financial and other quantitative information to be discussed today, as well as the reconciliation of the GAAP to non-GAAP measures. With that, I'd like to turn the call over to Scott.

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 enable 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 were able to lower our loan to deposit ratio from the end of the prior quarter, which was one of our near-term priorities. As I mentioned earlier, we've been successful in areas we can control. 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. And 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 non-performing assets 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 a 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 4, 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 of capital 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.

Thank you, Scott. Turning to Slide 5, we'll look at the trends in our loan portfolio. Our total loans increased by $35 million from the end of the prior quarter. The increase was driven by growth in our commercial, residential mortgage, and construction portfolios, which was offset by a decline in the commercial real estate loans due to an increase in payoffs that we saw during the quarter. As has been the case over the past few quarters, the increase we're seeing in construction loans is 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. 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 6, we'll take a closer look at our deposit trends. Our total deposits increased by $45 million during the quarter. We continued 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 7, we had a $108 million decrease in our assets under management in the third quarter, primarily due to market performance, which was partially offset by inputs 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.

Thanks, Julie. Turning to Slide 8, 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 9, 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 non-performing status in the quarter, which included the $42 million of loans under one relationship that Scott discussed. These loans accounted for 20 of the 27 basis point decline that we had in our net interest margin in the quarter. Given the current trends we are seeing, we expect pressure on our net interest margin to moderate in the fourth quarter. 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. The third quarter included $300,000 of losses accounted for under fair value impacting earnings per share 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 earnings per share 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.

Thanks, David, and congratulations on getting through your first earnings call there. So great to have you on the call with us. Thank you. Turning to Slide 13, we provided an update on our strong track record of value creation for shareholders. This slide shows our trend in tangible book value per share since our IPO in 2018, and the factors that have contributed to our consistent ability to drive 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. While there's a high degree of economic uncertainty, we're going to continue 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. Our first question comes from Brady Gailey with KBW. Your line is open.

Hey, thank you. Good morning, guys.

Good morning, Brady.

I just wanted to start with the net interest margin. As I look over the last three quarters, every quarter it's been a pretty big step down. It sounds like that's going to moderate in 4Q, but I'm just wondering where you think the margin finds the bottom? And is that in 4Q? And as we look to next year, do you think the margin is stable? Do we think it could have some upside from asset re-pricing? How are we thinking about the margin into 2024?

Yeah, great question, Brady. So, obviously, it's been a difficult year to forecast net interest margin given the number of variables and the unusual operating environment we've been in. One of the things I looked at is kind of the month-by-month trend line. 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 cost would stabilize and our asset yields would improve, which would drive a higher net interest margin. Unfortunately, in July, we had another interest rate increase, which given the number of deposits we have with kind of 100% bait on them, we saw a significant increase in our deposit costs in Q3. So that was not particularly helpful to short-term results. If you look at this quarter, month-by-month, we were kind of in the 250s each month. I'm hopeful that if we don't see another short-term interest rate raise by the Fed, which is what the market is expecting at this point, there won't be one, and we can see stabilizing deposit costs for us. Again, I've talked before about the fact that I think our clients are ahead of the typical bank clients because of the fact that they're larger and more sophisticated. Going into Q4, hopefully, we see stabilized deposit costs and improving asset yields. So at least we're stable to maybe a little bit of margin compression in Q4. Our numbers going into 2024 assume higher for longer, but flat on the short end to where we are today. 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. 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, we should see improved earnings, which is what I talked about in my comments.

Yep. And then a similar question on the expense side, whether you guys are expecting $18.5 million to $19 million of expenses to finish the year. Can you hold those expenses flat next year? Or do you think you see some modest creep? How do you think about expense growth in 2024?

Our assumption is 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 to $19 million. 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 payroll taxes as you get in the first quarter, stuff like that. Generally, our starting point for planning for next year is to figure out how to hold expenses flat and show some revenue improvement, which would drive some operating leverage and improved earnings.

All right. And then finally for me, the $42 million relationship that went into non-performing. I think you said it was four loans. Did all four of those loans stop paying interest or was it just one?

Yeah. This was an interesting case. We thought we were going to get this guy permanent in Q3. He's a wealthy individual facing a cash crunch right now. At the end, we decided that what we would have had to give up to get him permanent wasn't worth it to us, and we would just soon take our lumps here and see the increase in non-performing assets. This seems to happen to us once every five years where a wealthy person gets into trouble, and we have to work them out. We believe that we will 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 is in Aspen. They mentioned how it continues to be a very desirable market. As we move to either he or we get liquidity on those properties, we're confident this will turn out fine. It will take a while, as 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.

I wanted to ask, back on the margin, just, obviously that non-accrual relationship was, I think, 20 of the 27 basis points of pressure. When you were giving comments around the margin, how does that relationship play into what you were talking about on the margin? I assume it kind of excludes it. What, 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. It's non-accrual now, so it's going to stay non-accrual as we collect on it. I assume we're going to collect past interest, penalty interest, and that will be 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 a little while. For short-term quarterly reporting, it's going to be a zero. Depending on 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 hoping for some additional color around pipelines and how 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 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 do you think about that?

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. I think that's exactly the way it's played out. We saw deposit growth in Q3 outpace loan growth by a couple of percentage points annualized. If that trend continues, which I would expect it to, with some bumpiness month-to-month and quarter-to-quarter, hopefully we can get the loan-to-deposit ratio down. There's adequate loan demand in our markets for the kind of loans and borrowers that we like to work with, and I think we can continue to see mid-single-digit growth for now. I believe we can grow deposits to get that ratio down while managing and improving the net interest margin as I talked about. That's fine for our current cycle; I don't see the need for our typical 15% or 20% organic growth rate right now.

Okay. And do the concentrations on C&D or commercial real estate, do they play into anything related to how you think about growth going forward? I know you're state FDIC, so maybe you don't have the FED/OCC pressure to be below the 100%, 300%?

We just had an FDIC exam here. We have an excellent regulatory relationship. Our construction loan portfolio numbers are a little higher than where we'd like to see them, partly because of the pace of drawdowns versus payoffs. We're not doing new construction loans right now, and to the extent we see any increase in that portfolio, it's just the pace of drawdowns versus the pace of payoffs. We'll work that back down under 100% as that's prudent for us.

Okay. And then just lastly from me, Scott, a lot of banks in this environment are looking at 2024 versus 2023 and the challenges that it poses for the industry. A lot of banks are thinking about what they might do operationally or strategically over the next quarter or two to try and improve their earning power. I'm curious if you were thinking about anything related to mortgage banking, a possible securities portfolio restructuring, or anything else that might boost your profitability?

I think the best thing we can do is stick to our knitting here. I've talked a little bit before about the operating leverage in our business. If we control expenses, which we've done a nice job of this year, we're considering that we were thinking 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 can have the net interest margin story play out as I talked about, we can improve on that. We also talked about raising our fees by 10%. We've completed the first phase of that, and I was pleased to see that we grew fees by $240,000 in Q3 from that increase. If we continue working on other phases, we aim for an overall 10% increase in our trust fees from the higher service we provide. As all that plays out, I expect to see opportunities for revenue growth in 2024, stable expenses, and therefore improved earnings on the bottom line.

Okay. Appreciate all 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 of 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?

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 net interest margin for September was 2.45%. That's inclusive of the negative impacts of the non-accrual loans.

Okay, got it. Thanks. Moving over to deposits, they were up nicely in the third quarter, mainly driven by savings and money markets, 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, especially where you see loan deposit trending with your outlook for mid-single-digit loan growth?

Good question, Adam. 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, which is 90-day probability weighted. Deposits pipeline were actually up quarter-over-quarter. We're seeing positive trends in both areas. If we want to grow deposits faster than loans, that's the optimal setup. Part of our geocentric-based distribution model focuses on client relationships in our markets served by teams of bankers providing local private bank and trust services to our clients. We've told our bankers to focus on existing and new relationships that we think can add more deposits than loans. We're not doing one-off new loans for clients without relationships. We monitor our team’s performance with reporting that tells our bankers who has what products with us. So that's why we're seeing good results; we've really refocused these teams on deposits and planning trust investment management, not just loan growth, which I believe is a viable strategy.

Okay, great. That's good to hear, and it sounds like with the pipeline, the loan-to-deposit will be trending downward going forward. 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?

That's just hard to know. We've done a really nice job holding on to our non-interest-bearing deposits. Again, we have larger, sophisticated depositors here. Earlier this year, we were hearing a lot more about, can you build me a Treasury bill ladder? I'm hearing less of that today. The moves we’re seeing out of DDAs are more into now accounts and into money market deposit accounts, less into CDs. That's all positive. I hope at some point we've seen the early movers on the DDAs move and will see a slowdown in the remaining DDAs. We haven't seen much of that, but hopefully that's where we're headed. Our Treasury Management team is strong, and we try to ensure clients understand the value we provide on that side to maintain non-interest-bearing deposits.

Hey, 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, David, could 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 some compensation that was related to a previous acquisition, and we had to accelerate that compensation expense. That impacted it about $400,000 or $0.03 of earnings per share.

It's an accounting fiction, Bill that the way we had to account for the whole acquisition when we did it included this compensation expense. If the person leaves early or gets terminated, then you have to accelerate the remaining amount. It's a one-time thing. The person's gone, the expense is gone, and that deferred asset is gone. 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 3 basis points sequentially, and yet you are increasing rates on the loans, particularly as Fed funds go up. Would you discuss that difference and what's leading to the 3 basis point decline?

David, that's loan mix, isn't it? Yeah. David's saying that he thinks he knows the answer.

Also, yeah, there was an impact of the non-accrual loans as well. Those loans are generating zero interest income for the quarter, as Scott mentioned, and the balances are then still in the denominator, so that's going to impact our interest-earning asset yields.

Which asset categories experienced growth with lower yields that may have contributed to this, in addition to non-accrual?

We're looking up the answer for you, Bill.

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. Speaking to spot yields there.

Will that data be in the queue, David?

Spot yields will not, no.

Average yields are?

And so, 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?

Generally, our loan yields are improving, but the negative impact of those non-accruals is weighing our average loan yields down quarter-over-quarter.

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%. We see nice increases in new loan production on the rate, as well as loans renewing and rolling at a higher rate. We see good benefit from that, but have some nuances with the non-accrual loans impacting some of those categories.

So ultimately, the real key to this comes right back to the non-accrual?

I think that's the largest driver.

Okay. Great. Thank you. And then, final question is, how are you thinking about the 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?

Yes. We discuss it with the Board every quarter. Every time the stock trades down, we're like, we should have stock buyback plan in place right now. Generally, we've thought this is a good time to have strong capital. To the extent that there are earnings or credit or acquisition opportunities, having a stronger capital base is beneficial for long-term shareholder value creation. The Board measures all those factors and tries to make the best decision in terms of how to manage our capital. We've seen improvements in our tangible book value per share without significant buybacks, along with our improving capital ratios, which are way above well-capitalized ratios. I just would add to your question about the reporting of our yields in our interest income. We think we're going to collect the principal and interest on these additional $42 million in loans that we placed on non-accrual. This is money we expect to see back in the bank in the future, despite some short-term disappointment. We'll discuss this again at our Board meeting this quarter, mindful that this is a good way to drive EPS while balancing 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. How are you? Can you share if you are noticing any other trends or weaknesses in delinquencies or slow payers, aside from this one bad loan you mentioned today, which we hope is just an anomaly?

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. From what we know today, we expect to collect fully on these cases. We have now a $4 million specific reserve on the $8 million credit, and we're confident this new issue is well collateralized. It’s unfortunate timing for us that we’re 90 days past due at quarter end, but we’re doing the right thing in the way we handle that with the borrower and with our accounting. It will cause some short-term pain in terms of conversations, but overall, we believe the fundamentals are strong.

How often do you stress test your maturing loans in terms of many of these commercial borrowers borrowing at 4% or 5% and suddenly, the loans come due and they have to pay 8% plus? Do you get ahead of that and assess if this will be a viable loan at 8.5%? Can they afford this dramatic rate jump?

Yes. When we underwrite loans, we do stress tests. The traditional kind of up and down 300 basis points looks a little light compared to the 550 basis points or 575 basis points seen over the last 18 months. We've looked at where we see risk in a portfolio for this re-pricing risk. What we've seen is the bulk of the risk is probably a couple of years out, minimal risk right now. We've assessed credits that are coming due or will come due, and the borrowers do have adequate coverage to manage higher rates. We're not seeing that as a fundamental problem in the portfolio or with any individual credits at this point. If rates continue to go higher, we may need to perform a deeper dive, but from where we are today, that's a well-managed risk.

I didn't quite tell from your handout; your mortgage business, was that a breakeven for the quarter? I couldn't quite tell from non-interest income. Was the mortgage business at a breakeven this quarter?

No. I think we lost around $200,000 for the quarter 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, we've really cut expenses there. Unless we decide to close it down, which we don't, we're stuck with minimal negative contributions in mortgages for the short term. We've looked to add Mortgage Loan Officers, all variable costs, and manage spreads to drive more volume. We've had some success with that; we recently added a Mortgage Loan Officer in resort communities, and we're talking with a couple more. Our Mortgage Group President is aware of our focus to respond to the situation. We have done a desirable job over the past three years in bringing costs down to fit with anticipated revenues. Unfortunately, we're upside down right now, but I think at some point, that will turn around and be profitable again, as it has been before.

Could you talk about some of your newer offices? You said you were opening one in Bozeman; is that going to be a full-service? What kind of deposits or timing do you need to hit breakeven? Could that be, I don’t know, a $300 million, $400 million branch in a couple of years?

I think $300 million and $400 million would be an ambitious goal. We opened that as a loan production office and told them that when they get to $1 million in revenues, we could consider a full-service office. We opened as a full-service office. Our grand opening is going to be November 9th. We expect that to grow into a $2 million business a year within 18 months and maybe a $5 million to $10 million business in the future with a couple million dollars in expenses. This will provide a nice contribution margin in the near term and is part of our long-term strategy to expand in the Rocky Mountain West. We have a solid team there we believe will produce good results for us.

Could you talk about the Wyoming business? When you bought that about a year and a half ago, how is that performing on a bottom line basis?

We haven't released much information on that. In Jackson, we combined our two offices, the one we had with the one we acquired. The acquired location is at the corner of First and Main Street. We had First Republic open across the street, which was shocking in its aggressiveness, but they're gone now. We believe this will benefit us as the more focused player in this market. Our other two offices in Pinedale and Rock Springs have turned out to be pleasant surprises. The teams there have performed wonderfully, and the market still sees competition for our services. I think all those offices are very adept at gathering desirable core deposits. That acquisition was a success; it was accretive to tangible book value on day one, and revenues have been strong.

Are you actively looking for more things to buy, or will we see further growth be organic like the Bozeman endeavor?

We believe there will be opportunities that come out of this cycle. Many banks are reporting rough exams and the downgrades may push some boards, previously uninterested, to consider finding a stronger partner. We have our list of targets that we socialize about joining those that could benefit from our larger toolset and footprint. This will take time, but I believe it will create opportunities for us over the next couple of years.

A number of banks have tinkered with their securities, selling or shortening maturities or durations. Have you thought about that on some of yours? If you did anything with those held to maturities, you would have to move the whole things to held for sale and couldn't sell a portion?

Our securities portfolio is relatively small. We made a conscious decision in 2021 not to buy a bunch of 1% and 1.5% yielding bonds with all that cash we had on the books. I don’t believe we need to cause turmoil in our balance sheet. Our total investment portfolio is performing well; we'll leave it in place and let it pay off.

Thanks a lot, guys. I appreciate it. Have a good weekend.

Thanks, Ross.

One moment for our next question. Our next question comes from Brett Rabatin with Hovde Group. Your line is open.

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 group. Just wanted to ask, 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 it feels like you guys are pretty confident that you're not going to have losses around that one relationship. I think it would help if you could give us any valuations you have? Updated appraisals on the building? Any color on how you get confidence to not expect losses on those particular properties.

Yes, good question. We have spent a lot of time on this; it’s a large number for us, $42 million. We've looked closely at it, and we've chosen the more painful option that will benefit shareholders in the long and short term. If we take some lumps with the stock price, I guess it's a buying opportunity. We have current appraisals on the six properties. We believe that this can lead to collections for us. The article in the journal was positive about the strong high-end market in Aspen. You're looking at properties in Aspen, Nantucket, and West Palm Beach. These are desirable markets continuing to trade at premiums. I believe we will either get liquidity on those properties or benefit from strong sales. While it may take some time, we’re confident we are well-positioned.

I know you don't want to talk too specifically about the properties and get into too much detail. If you have anything you could share around any valuations you have? Give us some sense of your comfort about the properties not having to have a significant loss based on buildings.

No, we have current appraisals. I think we’re going to do fine with them.

Okay. So sorry to push. I'm just trying to help you gain confidence to the market on this, so I appreciate the follow-up.

Yes. 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. 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 controlled expenses. Our third-quarter NPA spike is discouraging, but we 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 believe we can produce nice operating leverage and improve earnings. We're very focused on improving current and future earnings while historically managing risk. Thanks, everyone, for joining us. We appreciate your interest and support of First Western. Have a great weekend.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.