First Western Financial Inc Q4 FY2023 Earnings Call

Thank you for standing by and welcome to the First Western Financial Q4 2023 Earnings Conference Call. At this time, all participants are on a listen-only mode. After the speakers' presentations, there will be a question-and-answer session. Please be advised that today's call is being recorded. At this time, I'm going to turn the call over to your host, Tony Rossi with Financial Profiles. Please go ahead.

Thank you, Valerie. Good morning, everyone, and thank you for joining us today for First Western Financial’s fourth 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 have not done so already, please visit the events and presentations page of First Western's Investor Relations website to download a copy of the presentation. Before we begin, I'd like to remind you that this conference call contains forward-looking statements with respect to the future performance and financial condition of First Western Financial that involve risks and uncertainties. Various factors could cause actual results to be materially different from many future results expressed or implied by such forward-looking statements. These factors are discussed in the company's SEC filings, which are available on the company's website. I would also direct you to read the disclaimers in our earnings release and investor presentation. The company disclaims any obligation to update any forward-looking statements made during the call. Additionally, management may refer to non-GAAP measures, which are intended to supplement but not substitute for the most directly comparable GAAP measures. The press release, available on the website, contains the financial and other quantitative information to be discussed today, as well as the reconciliation of the GAAP to non-GAAP measures. With that, I'd like to turn the call over to Scott.

Thanks, Tony. And good morning, everybody. As we enter our 20th year in business and our sixth as a public company, we believe we're well positioned for solid revenue and earnings gains in spite of the environmental challenges of 2023. During the fourth quarter, we continued to execute on our strategic priorities, which included maintaining disciplined expense control, while focusing on new deposit relationships in order to increase our liquidity and put us in a better position to fund new loan production once loan demand increases as economic conditions improve. With our increased focus on deposit gathering, we had an 18% annualized growth in total deposits with increases in both non-interest bearing and interest bearing deposits and further lowered our loan to deposit ratio to achieve our year-end target of 100% as we remain conservative in new loan production, which kept our total loans relatively flat during the quarter. As part of this effort, we made the strategic decision to add some short-term higher cost deposits. While this had a near-term impact on our net interest margin, we believed it was in the best long-term interest, as it enables us to have the funding to add new client relationships that we believe we can expand over time and be highly profitable for the company. Given the short-term nature of the deposits, we'll be able to replace them with lower-cost funding sources as market conditions normalize and interest rates decrease. Our provision for credit loss has increased largely due to reserves on individually analyzed loans we established for the relationship that we put on non-accrual in the prior quarter. This provision resulted in a lower level of net interest income for the quarter, but we still had $4.1 million in pre-tax, pre-provision net income. As we're going through the workout process for the relationships in non-performing status, we've received updated appraisals on the properties we have as collateral, which have all remained consistent with previous valuations, and in some cases increased. However, in a couple of cases, we also have as collateral receivables and business valuations that we now believe might not be fully collectible. So we established a reserve on individually analyzed loans to reflect the possibility that we may not fully collect on those receivables. Consistent with what we said last quarter, we expect it will take a few quarters for these loans to be resolved and with the sale of multiple properties we have as collateral, all being on different timelines. The experience we have consistently through the history of First Western is that the strong underwriting criteria and collateral we have has ultimately resulted in minimal or no losses on these loans. As I indicated earlier, we continue to execute on our key strategic priorities, one of which was disciplined expense control. At the beginning of 2023, we indicated we expected non-interest expenses to be in the range of $20 million to $21 million per quarter in 2023. We finished the year with non-interest expense well below this level at just over $18 million. This reflects our focus on improving efficiencies throughout the organization and reducing costs without impacting our business development capabilities or the level of service that we provide to our clients. We're continuing to look at all areas for opportunities to operate more efficiently, which not only reduces expenses, but also offsets our investment in other areas, such as our technology platform that we believe will help enhance the long-term value of our franchise. Moving to Slide 4, we generated net income of $0.3 million or $0.03 per diluted share in the fourth quarter. We also saw a small decline in our tangible book value per share during the quarter, which was due to an unfavorable shift in AOCI, resulting from a cash flow hedge on certain FHLB borrowings that decreased in value as interest rates declined. Nevertheless, our tangible book value has increased 143% since our pre-IPO levels of June 2018, as shown in the later slide. 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 $12 million from the end of the prior quarter. The increase is driven by growth in our residential mortgage and CRE portfolios, which was partially offset by small declines in our other portfolios. We continue to be conservative and highly selective in our new loan production, focusing primarily on clients that also bring a full relationship including deposits and investment management to the bank. This resulted in new loan production being about half of what it was in the prior quarter, which, as Scott mentioned earlier, helped us to bring our loan to deposit ratio in line with our year-end target of 100% and much closer to our historic target of 90% to 95%, which is a key near-term objective for the company. With the discipline we are maintaining in our pricing criteria, the average rate on new production increased 35 basis points from the prior quarter to 8.27% and was 8.43% in the month of December. Moving to Slide 6, we'll take a closer look at our deposit trends. Our total deposits increased by $109 million during the quarter with increases in both non-interest bearing and interest-bearing deposits. We continue to have success in new business development and added $118 million in new deposit relationships during the fourth quarter. Non-interest-bearing deposits increased $6.3 million during the fourth quarter, reversing the trend of clients moving money out of non-interest-bearing accounts into interest-bearing accounts in order to get a higher yield on their excess liquidity. As Scott mentioned earlier, we made a strategic decision to add some short-term higher-cost deposits, which also contributed to the deposit growth in the quarter, but will be replaced with lower-cost funding as market conditions normalize and interest rates decrease. Turning to trust and investment management on Slide 7, we had a $357 million increase in our assets under management in the fourth quarter, primarily due to market performance. We also had $303 million in inflows from new and existing clients during the quarter. However, this was offset by account closures and withdrawals. The $646 million increase in AUM year-over-year was achieved in spite of a 10% fee increase we began implementing mid-year. Now, I'll turn the call over to David for further discussion of our financial results.

Thank you, Julie. Good morning, everyone. Turning to Slide 8, we'll look at our gross revenue. Our gross revenue declined 2.7% from the prior quarter, primarily due to an increase in deposit costs that reduced our net interest income. This was the smallest decline that we have seen over these past five quarters as the environmental headwinds have abated. Turning to Slide 9, we'll look at the trends in our net interest income and margin. Our net interest income decreased 2.6% due to a decline in our net interest margin. Our net interest margin decreased 9 basis points to 2.37%, driven by an increase in interest-bearing deposit costs, offset partially by an increase in yields on average earning assets. As Scott indicated, we made a strategic decision to add some short-term higher-cost deposits to increase our near-term liquidity, which negatively impacted NIM in the fourth quarter. As market conditions normalize and interest rates decline, we will replace these deposits with lower-cost funding that will be beneficial to our NIM. Now turning to Slide 10, our non-interest income remained flat compared to the prior quarter. Net gain on mortgage loans was slightly lower, which reflects both the seasonal impact of lower mortgage demand in the fourth quarter, as well as the higher rate environment. We had a slight decline in trust and investment management fees compared to the prior quarter. However, fees increased 8% year-over-year. These declines were partially offset by an increase in risk management and insurance fees, which are seasonally higher in the fourth quarter each year. Now turning to Slide 11 and our expenses. Our non-interest expense was relatively consistent with the prior quarter, as we continue to focus on disciplined expense control. A decline in our salaries and benefits expense in the fourth quarter, partially driven by the one-time acquisition-related compensation expense that was recognized in the prior quarter was offset by small increases in most other line items. It is a challenging environment to forecast in. However, if we generate mid-teens revenue growth in 2024, we expect our non-interest expense to range from $19.5 million to $20.5 million per quarter. If we generate single-digit revenue growth in 2024, we expect our non-interest expense to range from $18.5 million to $19.5 million per quarter. Now turning to Slide 12, we'll look at our asset quality. On a broad basis, the loan portfolio continues to perform well as we had another quarter of minimal losses. This continues our 10-year history of near 0% credit losses. We had a slight increase in non-performing loans, which was attributable to two credits placed on non-performing status in the quarter. We recorded a provision for credit losses of $3.9 million, which related to the reserve on individually analyzed loans that Scott discussed earlier, as well as reserves established for the two new credits that were placed on non-performing status. The provision recorded this quarter, combined with the modest level of loan growth, increased our level of allowance to adjusted loans by 18 basis points to 1.1% at December 31st. Now, I'll turn it back to Scott.

Thanks, David. 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 fourth quarter performance, we've increased our tangible book value per share by 143% since our IPO, which includes the 56% decrease we had due to the adoption of CECL at the beginning of 2023. The fourth quarter included a negative impact due to the unfavorable shift in AOCI resulting from the cash flow hedge on certain FHLB borrowings we mentioned earlier. 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 outlook and priorities for 2024. There remains a high degree of uncertainty regarding the economic conditions we'll see in 2024, but we believe we're well positioned to perform well in any economic scenario that emerges this year. A strong balance sheet and conservative underwriting criteria should enable us to effectively manage through an economic downturn as we have throughout our history. I'd like to reemphasize a point I made earlier. While we may see an increase in problem loans and non-accrual loans in an economic downturn, historically this has not resulted in a meaningful level of loss due to the strong collateral we require in our underwriting. We would also expect to continue to have a level of net charge-offs that's well below the level experienced by the broader banking industry in a material economic downturn or recession. Should the Fed manage to keep us out of a recession and effect a soft landing for the economy, our business development capabilities and unique value proposition will enable us to take advantage of strengthening economic conditions and an increase in loan demand. At this point, with economic conditions remaining uncertain at the start of the year, we'll continue to prioritize prudent risk management and conservative underwriting criteria, which should result in a modest level of near-term loan growth. However, we have the ability to be nimble and quickly respond to changing market conditions. Should economic conditions improve and loan demand increase, we would expect to see a higher level of loan growth at that point. As we look to our markets, we believe the competitive environment has become more favorable for us as many banks have had to pull back from loan production due to capital constraints, funding challenges, and/or credit concerns. We're able to maintain our disciplined pricing criteria and still add new relationships with fewer banks being aggressive in pricing and structure to win business as we've seen in recent quarters. As we've indicated, deposit gathering is going to remain a top priority with an increased focus on targeting deposit-rich industries like nonprofits and homeowner associations. We have a great deal of expertise in both of those areas throughout the company that we're now leveraging to a greater extent to add new clients that are good sources of low-cost deposits. Most importantly, our focus will remain on our core business and our core clients. These types of clients provide good opportunities to expand relationships over time as they typically want and need the various products and services that we provide, and they typically result in very low levels of credit losses. This is what we built our franchise on and there are still lots of rooms to grow by focusing on these types of clients. While 2024 will be a difficult year to forecast, we do see a number of catalysts that should contribute to earnings growth this year. Our core revenue sources of loan yields, deposit costs, fees, and mortgage fees have survived the strains of 2023 and seem likely to have upside in 2024. We have good momentum in business development that should lead to continued growth in our client roster and balance sheet. We have a liability-sensitive balance sheet and a good deal of deposits indexed to Fed funds. So when we see expansion in our economic conditions, we should see expansion in our net interest margin as market conditions normalize and interest rates decline. We'll also continue to be disciplined in our expense management while we continue to get the benefit from leveraging past investments in technology, talent, and office expansion. In the past year or so, we've also made many process improvements throughout the organization that should lead to enhanced efficiencies as we continue to add scale. We believe these catalysts should result in a higher level of earnings this year, even with a modest level of balance sheet growth. As always, we'll continue to operate the company with a long-term perspective. The strength of the franchise and the balance sheet we've already built should allow us to continue to capitalize on the attractive markets that we operate in, consistently add new clients, realize more operating leverage as we increase scale, generate profitable growth, and further enhance the value of our franchise. In the future, as we grow earnings and create value for shareholders, the improved currency we'll have from higher stock prices will enable us to execute on additional M&A transactions that we believe will enhance shareholder value just as our past transactions have done. With that, we're happy to take your questions. So, Valerie, go ahead and open up the call, please.

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

Hey, good morning, everyone.

Good morning, Brett.

I wanted to start off on credit and you talked a little bit about the $3.9 million that you added this quarter. Can you talk a little bit about what led to those moving to non-accrual and just anything you're seeing in any particular industries?

Are you asking about the credit or are you asking about the credit trends across the platform?

I'm just asking about those two loans that I think are $3.9 million, just what led to those…

Okay. Yes, sure. So one was a relatively small commercial loan, and the other was a construction loan that has substantial equity in it. Recent valuation collateral showed it was well in excess of the loan. Both of those were downgraded for very specific reasons related to the borrowers. They aren't indicative of broader trends that we're seeing in the portfolio. This is reflective of what we've seen throughout our history, which is that sometimes loans go into non-performing status, and they rarely result in a meaningful level of loss due to our underwriting standards and our strong collateral and the multiple sources of repayment that we require.

Okay. Regarding the four loans that were moved to non-accrual last quarter totaling $42 million, how much of the $3.9 million provision was specifically related to those? Also, can you provide details on how much of that relationship includes a commercial loan, a commercial owner-occupied commercial estate loan, a residential mortgage, and a personal line of credit, and how much would not be covered by real estate?

I think a starting point on that has to be that that relationship is currently the subject of ongoing litigation, which is out in the public realm through the courts. And because of that, we shouldn't provide any additional detail. I think, specifically on the question of the reserve this quarter we put up, it was substantially related to that relationship. We think that the provision that we recorded is prudent and conservative based on everything we know as of now. We do continue to believe we have adequate collateral, and I mentioned that we've been working on updated appraisals, and all the appraisals have held up, including some that have increased significantly in a couple of cases.

Okay. Yes, a little litigation, that's somewhat unusual. And then maybe just for clarity on the margin and kind of the pace from here, you referenced that you use some shorter term funding sources this quarter. Can you maybe talk about just how you see the margin progressing in 2024? And then just if the Fed's cutting 2025, 100 basis points, what rate cuts would mean to the margin, as you see it?

Yes, let me address that, David, and feel free to add if needed. Looking at our net interest margin as a starting point, I see a trend toward stabilization. Over the last three months, our margins were 2.50% in October, 2.35% in November, and 2.26% in December. We anticipated 2.33% for January, which aligns with what we're seeing. For February, we project 2.35%, with expectations of 2.43% in February and March. It's important to note that the bank is currently liability sensitive. Historically, we aimed for a balanced approach, but at this moment, we are notably liability sensitive. We estimate that a 25 basis point decline could lead to approximately a $1 million annualized increase in earnings. Those are the key data points based on our current understanding.

Yes, that's totally fair.

Give a good start.

Yes, that's really helpful. I've got other questions, but I'll hop back into the queue. Thanks so much.

Yes, thank you.

Thank you. One moment please. Our next question comes from the line of Brady Gailey of KBW. Your line is open.

Thanks. Good morning, guys.

Good morning, Brady.

One more just on the reserve build. I mean, taking the reserve up 18 basis points in a quarter is pretty notable. It sounds like that's driven by a specific reserve on this credit where litigation is involved, is that correct?

That is correct.

Okay. And I know you don't want to talk much about it, just the facts on it, how big is that loan and what type of loan is that? Where the litigation is involved?

The relationship, which includes a number of loans, is a total of $53 million and we participated out $11 million of that. So on our books, it's $42 million.

Okay. And the composition of those loans is what?

The composition of the loans?

Yes, the several loans that make up the $42 million that's on balance here, are those C&I, CRE.

They're commercial loans that are secured with all that real estate collateral that we've talked about in the past.

Okay. All right. And then, Scott, I heard you say that you're expecting a modest level of loan growth this year. I mean, should we interpret that as low single digit or could it be better than that?

Let me check my crystal ball here. I think that for us, we don't think 2023, we're hoping 2024 is not another 2023. So we have historically found lots of opportunities to grow our types of loans with our types of clients across our 19 offices. I think that will be the future for us. I'm not sure if that plays out entirely in 2024. One of the things we were thinking about in 2023 is we had a 114 basis point loan deposit ratio in October of 2022. It's just really hard to grow loans when you're not sure where your deposit growth is going to come from to support that. A lot of our thinking in 2023 was, let's grow deposits, back to get our loan-to-deposit ratio down where we have historically run it, which is kind of 90% to 95%. I think what we've talked about on these calls is we would like to get that down to 100% by year-end 2023, which we did. I think we were in a little bit of a chicken and egg problem in 2023 where we were saying we're not really going to grow loans if we don't have the deposits to support it in-house. Let's focus on getting deposits in-house. However, if you shut off the loans they get, it's hard to turn it back on. So we tried to be mindful of that with our relationship bankers and support loan requests for loans that do fit well into our credit approach and our strategy and our type of client. So a long way around of saying we're planning on kind of mid-single-digit loan growth in 2024, because we don't know. For us, that drives a guesstimate of mid-teen revenue growth. If we can do what David was saying in terms of managing our operating expenses, which is if we grow mid-teens revenue growth, then maybe $20 million or so in operating expenses per quarter. If we did mid-single-digit revenue growth, maybe $19 million in the quarter in operating expense. I mean, that's kind of how we're thinking about it, Brady, and I know that's not a very satisfying answer, but that's, I think, the best you can do, given the environment we're in.

I understand it. That’s really helpful. Thank you, guys.

Thank you. One moment please. Our next question comes from the line of Adam Butler of Piper Sandler. Your line is open.

Hi. Good morning, everybody. This is Adam on for Matthew Clark. If I could just touch on the deposit side first. You guys had nice deposit growth during the quarter and looks like the majority of it was based on time deposit growth. I was just curious if you could touch on the nature of that growth and the maturity of those deposits and what you put them on at?

Yes. Adam, just before we address that, there's one more point I'd like to make about Brady's question, which I think was obvious, but in case it wasn't, I would just follow through and make the point. I think that the more important measure for me of all those things I said is what is the run rate EPS and what's happening there. I think our core EPS run rate would improve significantly with those conditions I described, a 15%-ish revenue growth and the expense growth we talked about, and gets us by the end of the year into an earnings position well above where we were in 2022 and 2023 on a run rate basis. So I just think that's an important conclusion, Brady, of what you specifically asked about. So sorry to take a detour there, Adam. But let's go to your question about deposits. I think the increase that we put on deposits in the fourth quarter included noninterest-bearing. We actually grew DDAs, I think, for the first time in a year. Of the CDs, I think we added about $49 million in three-month deposits, $45 million in six-month deposits and $7 million in nine-month deposits during Q4. Those would roll off over the course of the year, giving us the opportunity to reprice those. As we talked about, either because rates are falling or because markets are normalizing, and that’s something we've discussed several times in our comments, because historically, we have been able to grow core deposits with clients pretty effectively. For example, we have tripled the balance sheet since our IPO. I think that 2023 was this abnormal environment that I don't think it's going to continue forever. It may continue some into 2024, but I don't think it's going to continue forever. So, I do expect we'll have the opportunity to refinance those higher-cost deposits as they roll off in 2024.

I appreciate the information you provided. I also wanted to highlight the increase in noninterest-bearing deposits, which was encouraging to see. Looking at the overall deposit flows, considering your guidance for potential mid-single-digit loan growth, are you anticipating similar growth in deposits and aiming to keep the loan-to-deposit ratio around 100%? Or has that guidance changed on your side? Thank you.

No. I think we would like to see it trend over time back to our historic numbers in the low to mid-90s. I think that's where we feel comfortable. Another data point that supports the idea that we may have reached the lowest point for net interest margin is our spot rate for deposits, which was 3.31% as of December 31. We are observing that increase stabilize as we progress through the fourth quarter.

Yes. That’s great to see. Those are my questions. I appreciate the time. Thanks.

Good. Yes, thank you, Adam.

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

Is that Bill Dezellem?

Yes, your line is open.

Thank you. I have two questions. First, regarding your comment in the press release, are you noticing an increase in loan demand now, or was the press release simply indicating that you are prepared for that when it occurs?

Yes. I'm not sure, Bill. I think our loan demand definitely came down from our type of borrowers when rates spiked. I think people have come back some. In that sense, it's probably improved. Our pipelines at the end of Q4 are actually down from the end of Q3, but I think some of that is this kind of pressure we put on relationship bankers to focus on deposits over straight loans. We also saw, let's say, a year ago and probably six months ago, banks doing unreasonable loan terms and rates. I would say we see a lot less of that now. In January, we have heard a couple of anecdotes about pricing that we would never do. I assume that some of these banks that are looking to grow in our markets are assuming that we're going to see big Fed rate cuts. My underlying conclusion from all that is we have tiny market share in all of our markets, and we're in a lot of really attractive growth markets. To the extent we want to grow loans, we're going to be able to. A mid-single-digit growth seems very achievable for me this year.

Okay. That's helpful. You may have just answered my follow-up question to that. As you think about running the bank and the fact that you probably have seen your loan pipeline decrease, really because of a directive or initiatives that you've had in place to focus on deposits, does that lead you to change anything in terms of the direction that you're asking bankers to go? Or are you still in the same holding pattern that maybe you would have been last quarter?

No. I felt like we were in a little bit of a chicken-and-egg problem in Q3 where we're telling our bankers to focus on relationships to bring deposits and loans but not to lead with loans. A lot of times, the relationships you want, you do lead with loans and you bring deposits with it. By getting our loan to deposit ratio down to 100%, I feel like that frees us out of the chicken-and-egg problem and we can focus on the kind of relationships that we want. I feel like this second half of the year 2023 gave us an opportunity to talk to our people about our type of client and focusing on those kinds of people that we can really do a range of services for. If you look at our top 10 clients in any office, it's the same story in every one of them, where they have six or eight or 10 products with us. We're really helping our people focus on our type of client with our types of credits and relationships that include deposits, loans, treasury management, risk management, planning, and succession planning, and that's what we're really good at. I think that will benefit us in 2024. I think that will be a good thing for us.

Great. Thank you, Scott. And then I'm going to ask one question relative to the large borrower that went bad in Q3. You mentioned that you put a provision in place on some of those loans. My question is, if you were to have more success, say, if you took a loan over and sold it at a premium, would that also apply to offset these other loans that you may come in a bit under? Is there any cross-reciprocity between the loans as collateral that comes into play that could make your reserving or provisioning conservative that way?

Yes. With the litigation, I want to be really careful what we say here. If the question is, are the loans cross-collateralized, the answer to that is yes.

Great. I’ll leave it at that and keep it easy for you. Thank you.

Yes. Thank you, Bill.

Thank you. One moment please. Our next question comes from the line of Brett Rabatin of Hovde Group. Your line is open.

Hi. I have a couple of follow-up questions. First, did I hear correctly that if you have mid-teen revenue growth, the guidance is between $19.5 million and $20.5 million, and if it's single digit, then it's between $18.5 million and $19.5 million on a quarterly basis? Were those the correct numbers?

Correct, yes.

Does that imply that the difference would be the bonus or incentive compensation for achieving certain targets? Can you provide more detail on that distinction?

The vast majority of it is incentive comp accrual related, yes.

Okay. And then, Scott, as I think about mortgages, obviously, it's tough to know what rates do, but it feels like people are getting more used to higher mortgage rates. I was just thinking about the mortgage production from here and potential revenue in 2024. I know it's tough to predict, but I would assume that we'd see a meaningful pickup in activity and income related to that as we get into the second quarter. Is that fair? Or do you see the challenges remaining for production and overall revenue for that piece of the business?

Well, we come in every morning and hope for an uptick, and it's hard, of course, in December and January, which are slow months, but you want to address that, Julie?

Yes. I would kind of say we're hoping for an uptick. We're planning for an uptick, but it will continue to be challenging regardless. There is, in addition to the rate environment, just the supply is still kind of low in our core markets as well. We're working very hard to find new production avenues, so new MLOs, and we've been adding those over the course of the last couple of quarters, have some good ones in the pipeline. That's another way we're looking at increasing our production. But I think we foresee it to be a bit of a challenge for the next several months and then I’m hoping for seasonality coming into the spring and summer months, as well as rate environment improvement and consumer sentiments changing a little bit to give us a little bit of a base into the summer and fall months.

We're seeing house prices flat to coming down in our higher-end markets, and we're seeing the time on the market extend. So all that stuff sounds like late-cycle recovery potential, and then we see rates come down. Of course, mortgage rates are generally tied more to the bond values that we've seen over the last six months and Fed funds. You could imagine a better year this year for mortgages than what we saw last year, which was pretty difficult.

We continue to rationalize expenses in that area as much as possible and share resources and do the things that we can do to keep managing expenses as well.

We've loaned some of the people out to other areas to sort of help cut our production capability.

Okay. And maybe just one last one. In your prepared commentary, Scott, you talked about M&A. I was a little surprised just given where the stock is; it would seem like that'd be tougher. I kind of thought you might talk more about maybe share repurchases than M&A, but any additional color around M&A? Are you having discussions with folks — what do you think is the outlook for you guys from an M&A perspective? I know you've been acquisitive in the past.

Yes. What works well for us are courtships that lead to partnerships. The fact that our stock is at 80% or so of tangible book value, I mean, we don't believe that makes sense, and that's not really where it's going to be. It was at $33 a year and a half ago. We do think if we can show and demonstrate some of the things we've been talking about on this call today, there is some upside there. As the courtships are proceeding, that would give us the currency we would want to do M&A. But we're always looking and we're opportunistic. We're working on relationships, but we're going to be conservative and disciplined. Your comment is absolutely right. We're not going to do anything with our stock at $18, I don't think — and or $17 where it is now. It doesn't mean we shouldn't keep working on it.

Okay. Fair enough. Appreciate all the color. Thanks.

Thank you. I'm showing no further questions at this time. I'd like to turn the call back over to Scott Wylie for any closing remarks.

Yes. Well, thank you again, Valerie. I'd just like to wrap up with some overall comments from our conversation today. Our focus on client relationships got us through 2023 with positive earnings, with deposit growth, loan growth, and increased tangible book value per share, in spite of the CECL negative impact on tangible book value. We reduced our operating expenses. We reduced our loan-to-deposit ratio from a peak of 114% in 2022 down to just over 100% at year-end. Our NIM appears to have bottomed out. Our AUM showed some nice growth, and our capital ratio has improved. Our increased NPLs should work out in 2024 as we continued our 40-quarter streak of essentially 0% charge-offs last year. With 2023 behind us and entering our 20th year in 2024 here, we opened the doors on March 17, 2004. We're cautiously optimistic about our ability to grow revenues and therefore, earnings nicely in 2024 and beyond. We feel that relatively modest asset growth with improved margins and improved fees can once again deliver the kind of strong operating leverage that we've seen since our 2018 IPO. I really appreciate everybody taking the time to dial in and speak with us this morning. We certainly appreciate the support for First Western. Have a great day.

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