ONEOK Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 20, 2023

There are 10 speakers on the call.

Operator

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' presentation, there will be a question and answer 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.

Operator

Please go ahead.

Speaker 1

Thank you, Abigail. Good morning, everyone, and thank you for joining us today for First Western Financial's Q3 2023 earnings call. Joining us from First Western's management team are Scott Wiley, Chairman and Chief Executive Officer Julie Korkamp, 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 and Presentations page of First Western's Investor Relations website to download a copy of the presentation.

Speaker 1

Before we begin, I'd like to remind you that this conference call contains forward looking statements with 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 for the most directly comparable GAAP measures.

Speaker 1

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

Speaker 2

Thanks, Tony. Good morning, everybody. The operating environment remained challenging in the 3rd quarter, We were able to deliver another quarter 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 at a reduced loan demand and created a very competitive deposit pricing environment. We generated net income of 3,100,000 or $0.32 per diluted share in the 3rd quarter with $4,600,000 in pretax pre provision income, which was an increase of 17% from the prior quarter. As we've indicated previously, we've increased our focus core deposit gathering around the organization and we saw good results from these efforts during the Q3 with total deposits Increasing at an annualized rate of 7.5%.

Speaker 2

While overall loan demand remains muted due to the higher interest rates, We're still seeing attractive lending opportunities in our markets, which enabled us to generate annualized loan growth of 5.6% while maintaining our conservative underwriting standards and pricing criteria. The higher rates on our new loan production are well above the incremental cost of funding we're seeing which is making our new loan production accretive to our margin and relieving some of the margin pressure we've seen in prior quarters. With our success in deposit getting, we're able to lower our loan to deposit ratio from the end of the prior quarter, which was one of our near term priorities. As I mentioned earlier, we've been successful in areas we can control. This includes our disciplined expense management, which resulted in our operating expenses coming in at the lower end of our targeted range in the 3rd quarter.

Speaker 2

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 Q3. Broadly speaking, our loan portfolio continues to perform well, although we did have an increase in NPAs this quarter, primarily due to the downgrade of 4 loans totaling $42,000,000 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 become delinquent on their payments, which resulted in the placement of these loans on non accrual.

Speaker 2

Given our conservative underwriting criteria and the multiple sources of repayment we require, These loans are well collateralized with a number of properties. The borrower is planning a number of liquidity events including the sale of these properties that should Result in the full repayment of the loans. It will likely take a few quarters for these loans to be resolved, but given the strong borrower And collateral that we have, we believe the loss potential is minimal. Moving to Slide 4, We generated net income of $3,100,000 or $0.32 per diluted share in the Q3. And 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.

Speaker 2

Now I'll turn the call over to Julie for some additional discussion of our balance sheet, interest and investment management trends. Julie?

Speaker 3

Thank you, Scott. Turning to Slide 5, We'll look at the trends in our loan portfolio. Our total loans increased $35,000,000 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 CRE loans due to As this has been the case over the past few quarters, the increase we are seeing in construction loans are related to draws on credit lines primarily related to residential housing projects being built by very strong experienced developers in areas with limited housing supply. As we mentioned on our last earnings call, we saw an increase in loan production during June and this continued through the 3rd We had more than $100,000,000 in new loan production, which is our highest quarter so far this year.

Speaker 3

And with the discipline we are maintaining in our pricing criteria, the average rate on new production increased 51 basis points from the prior quarter to 7.92% and was 8.44% in the month of September. Moving to Slide 6, We'll take a closer look at our deposit trends. Our total deposits increased by $45,000,000 during the quarter. We continue to have success in new business development and added $26,000,000 in new deposit relationships during the Q3. 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.

Speaker 3

Turning to Trust and Investment Management on Slide 7. We had $108,000,000 decrease in our assets under management in the 3rd quarter, primarily due to market performance, which is partially offset by inflows from new clients that we added during the quarter. Now I'll turn the call over to David for further discussion of our financial results. David?

Speaker 4

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 percent from 17.7% in the prior quarter. Turning to Slide 9, we'll look at the trends in net interest income and margin.

Speaker 4

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 percent driven by an increase in interest bearing deposit costs and slightly lower yields on average earning assets. We did not accrue interest on the loans placed on nonperforming status in the quarter, which included the 42,000,000 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 4th quarter. Turning to Slide 10.

Speaker 4

Our non interest income increased 54% from the prior quarter, primarily due to items that impacted our 2nd quarter non interest income. 3rd quarter included $300,000 of losses accounted for under Fair value impacting EPS by $0.02 Among our larger recurring sources of non interest income, Our trust and investment management fees increased 5.3% due to an increase in our fee structure to bring us more in line with market rates and to reflect the additional value we are providing through enhancements we have recently made to our service level and technology platform. Net gain on mortgage loans decreased to approximately $700,000 as higher rates continue to impact loan demand. Approximately 91% of the mortgage originations were for purchase loans in the 3rd quarter. And we had a slight decline in bank fees due to lower loan prepayment and swap fees relative to the prior quarter.

Speaker 4

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 Q3 included approximately $400,000 of acquisition related compensation expense that was accelerated due to an early termination. This impacted EPS by $0.03 For the Q4, we continue to expect our non interest expense to range between $18,500,000 19,000,000 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.

Speaker 4

The increase in nonperforming assets was primarily driven by the downgrade of the $42,000,000 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 30. Now, I will turn it back to Scott.

Speaker 4

Scott?

Speaker 2

Thanks, David, and congratulations on getting through your first Earnings call there. It's great to have you on the call with us. Thank you. Turning to Slide 13, we've provided an update on our strong track record of value creation for shareholders. This slide shows our trend in tangible book value per share since our IPO in 2018 and the factors that have contributed to our consistent ability to drive the growth in tangible book value per share as we've executed well on the plan that we communicated at the time of our IPO.

Speaker 2

Following our Q3 performance, We've now increased our tangible book value per share by 144% since our IPO, which includes The $0.56 decrease that we had due to the adoption of CECL at the beginning of 2023. We're very proud of this track record of value creation and believe that we're well positioned to continue creating additional value for our shareholders in the future. Turning to Slide 14, I'll wrap up with some comments about our near term outlook. Well, there's a high degree of economic uncertainty. We're going to continue to perform to prioritize prudent Risk management and maintain high levels of liquidity, capital and reserves even if that impacts our level of profitability in the short term.

Speaker 2

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 1st full service office in the Bozeman, Montana market where we previously only had a loan production office. Since entering this market, we've steadily build out the team and clients With now full service office, we believe we can accelerate our business development activities in this area.

Speaker 2

With the strategic investments that we continue to make, 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.

Operator

Thank you. At this time, we'll conduct a Our first question comes from Brady Gailey with KBW. Your line is open.

Speaker 5

Hey, thank you. Good morning, guys.

Speaker 2

Good morning, Brady.

Speaker 5

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?

Speaker 5

And as we look to next year, Do you think the margin is stable? Do you think you could do we think it could have some upside from asset repricing? Like how How are we thinking about the margin into 2024?

Speaker 2

Yes. Great question, Brady. So, obviously, it's been a difficult year to forecast NIM 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 And we did see in the last quarter on this call that we thought that once the Fed stopped raising short term rates that our deposit cost would stabilize and our asset yield would improve which would drive a higher NIM. Unfortunately in July we had another interest rate increase Which given the number of deposits we have with kind of 100 percent beta on them, we saw a significant increase in our deposit costs in Q3.

Speaker 2

So that was not particularly helpful to short term results. But if you look at this quarter month by month, We were kind of in the 250s each month. And so I'm hopeful That if we don't see another short term interest raise by the Fed, which is I think what the market is expecting at this point that there won't be one that we could see stabilizing deposit cost for us. Again, I've talked before about The fact that I think our clients are kind of ahead of the typical bank clients because of their fact that they're larger and more sophisticated. And so going into Q4, hopefully, we see stabilized deposit costs And improving asset yields.

Speaker 2

So at least we're stable to maybe a little bit of margin compression Q4. Our numbers going into 2014, we're assuming higher for longer, but Flat on the short end to where we are today. So if that's the scenario, then I think you see the benefit of the Higher asset yields playing out over the course of the year. And I think the interesting thing this kind of goes back to our IPO too. I think the interesting thing for our business model Is if that plays out like that and we can see stable funding costs, higher asset yields And well controlled operating expenses then you see improved earnings which is what I talked about in my comments.

Speaker 5

Yes. And then a similar question on the expense side. I know you guys are expecting $18,500,000 to 19 $1,000,000 of expenses to finish the year. Can you hold those expenses flat Next year, do you think you see some modest creep? How do you think about expense growth in 2024?

Speaker 2

Our assumption is to accomplish the things we want to do long term for shareholders, we need to continue to invest. And we have that built into Our $18,500,000 to $19,000,000 So all other things being equal, we believe we can hold expenses In the ballpark of where they are now, of course, there's a little bit of seasonality with what is the FICA Yes, payroll taxes as you get in the Q1 stuff like that. But generally, our starting point for our planning for next Here is, let's figure out how to hold expenses flat and show some revenue improvement, which would drive some operating leverage and improved earnings.

Speaker 5

All right. And then finally for me, the $42,000,000 relationship that went into nonperforming, I think you said it was 4 loans. So did all 4 of those loans stop paying interest or was it just 1?

Speaker 2

Yes. This was an interesting case. We thought that we were going to get this guy current in Q3 And he's a wealthy guy that has cash crisis going on right now. But At the end, we decided that what we would have had to give up to get them current wasn't worth it to us and we would just soon take our lumps here And see the increase in NPAs, which seems to happen to us once every 5 years where we get a wealthy person gets into trouble And we have to work them out. And so this guy is We think still very strong.

Speaker 2

We think we're going to have a full recovery. The real estate collateral that we have It is a very desirable market. It's in Aspen. It's in Nantucket. And it's in the West Palm Beach area.

Speaker 2

So, it was just an article in the Wall Street Journal, I think yesterday talking about how hot the high end Market, the premium market is which in Aspen which is already a premium market, but they're talking about Yes, how that continues to be a very desirable market. And so I think as we move to Either he or we get liquidity on those properties, I think that that's all going to turn out fine. And as we work through work out, it's going to take a while like I said in my comments.

Speaker 5

Okay. All right, great. Thanks for all the color, Scott.

Speaker 2

Yes. Thank you, Brady.

Operator

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

Speaker 6

Hey, good morning, Scott and Julie.

Speaker 2

Good morning, Brett. I wanted to ask

Speaker 6

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.

Speaker 2

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. So I think for the short term quarterly reporting, it's going to be a 0.

Speaker 2

But Yes, depending how it all plays out, I think we will get that back at some point.

Speaker 6

Okay. And then you had some Solid loan growth this quarter. Just was hoping for some additional color around pipelines and as you think about The environment in 'twenty four, 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 loan portfolio. How do you think about that?

Speaker 2

We said that we thought we would Target mid single digit growth on the loan side while we worked our floating deposit ratio Back down to where it's historically been in the 90s. And so I think that's kind of exactly the way it's played out. We saw Deposit growth in Q3 outpaced loan growth by a couple of percentage points annualized. And I think if that trend continues, which I would expect it to, Again, months and month quarter to quarter, there's going to be some bumpiness. But hopefully, We can get that taken care of here in the next quarter or 2.

Speaker 2

And Then I think there's adequate loan demand in our markets from the kind of loans and the borrowers that we like to work with to Continue to see mid single digit for now. I think we can grow deposits to get that loan deposit ratio down. And I think we can do all that while we're managing and improve NIM the way I talked about. And I think that's fine for now. For where we are in the cycle, I don't know that we need to be doing our normal kind of 15% or 20% organic growth rate that seems to be not really what we Want to do now.

Speaker 2

So that's how we're thinking about it, Brad.

Speaker 6

Okay. And does the Concentrations on C and D or commercial real estate, does that play into anything related to how you think about growth going forward? And I know you're I think you're state FDIC, so maybe you don't have the FedOCC pressure to be below the 100, 300?

Speaker 2

Yes. We just had an FDIC exam here. We have an excellent regulatory relationship. And I think for us our construction loan portfolio Numbers are a little higher than where we've traditionally had them where we'd like to see them. Part of that is just the funding up and not paying off quite as quickly as we had planned.

Speaker 2

And so we have gone up above 100%. We are 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, But we're going to work that back down under 100%. Anyway, I think that's prudent for us and The way we'd like to see the portfolio mix.

Speaker 6

Okay. And then just lastly for me Scott, a lot of banks in this environment are looking at 24 versus 23 and just the environment and it's obviously a challenge to grow earnings for the industry. And so a lot of banks are thinking about What they might do operationally or strategically over the next quarter or 2 to try and improve their earning power. And I was just curious if you were thinking about anything related to either mortgage banking, a possible securities portfolio restructuring Or anything else that might be a boost to your profitability?

Speaker 2

I think the best thing we can do is stick to our knitting here. I talked a little bit before about the operating leverage in our business. If we control expenses, which we've done, I think, a nice job of this year, we were Thinking we were going to spend about $21,000,000 a quarter and we've been well under that this year. If we hold that number flat for 2024 and we can have the NIM story that I just talked about play out. We also talked, I think in the last two calls and I know for sure in the last call About the fact that we were working on a project to raise our fees 10%.

Speaker 2

And I think Julie or David, I'm not sure which mentioned in their Comments that we had completed the first phase of that in Q2 went into effect on July 1st. Yes. I was pretty happy to see. You do these things, you're like, well, I hope it shows up in the numbers. And sure enough, Yes, we thought it was going to be $960,000 from Phase 1, which seems like a little bit too fine of an estimate To believe in them, I think we did grow fees $240,000 in Q3.

Speaker 2

So kind of a bull's eye there. So hopefully, we'll continue to get these other phases done. We're certainly working on it. I think that'll be the largest Phase, but we're looking for an overall 10% increase in our trust fees just from the higher Service that we're providing and the additional value we're providing to clients. And I think we're still very competitive at these higher rates.

Speaker 2

So I think as all that stuff plays out, we should see opportunity for revenue growth in 2024, Stable expenses and therefore improved earnings in the bottom line.

Speaker 6

Okay. Appreciate all the color.

Operator

One moment for our next question. Our next question comes from Adam Butler with Piper Sandler. Your line is open.

Speaker 7

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.

Speaker 7

Do you happen to have the average margin in September And the spot rate on deposits in September either interest bearing or total?

Speaker 2

I have it, but I'm going to let David take his first earnings call question as CFO. David, you want to answer that question? Yes, I would love

Speaker 4

to. Yes, Adam, the spot rate on deposits was 312 on September 30 And the NIM for September was $2.45 and that's inclusive of the negative impacts of the non accrual loans.

Speaker 7

Okay, got it. Thanks. And just moving over to deposits, they were up nicely in the Q3 and looks like they were driven mainly by Dave, thanks for the Money Market. And along with the $26,000,000 in new relationships added, I was wondering if you could Going forward and where you see the loan deposit trending with your outlook for mid single digit loan growth?

Speaker 2

Yes. Good question, Adam. And you're reminding me part of Brett's 5 part question that I forgot to answer about pipelines. Pipelines at the end of Q3 for loans were down about 50% from little over $200,000,000 to a little over $100,000,000 the way we look at it, which is 90 day probability weighted. And then deposits pipeline were actually up quarter over quarter.

Speaker 2

So we're actually seeing, I would say positive trends in both ways, right? I mean, I think that if we want to grow deposits faster than loans, That's the setup we want to see. So that's a positive. In terms of your question more specifically, How do we do it? We have a very, I call it geocentric based distribution model where we focus on client relationships in our markets that are served by teams of relationship bankers that are providing local boutique private bank and trust services to that base of clients.

Speaker 2

And What we have said to our relationship bankers is, hey, this is a time for us to focus on existing and new relationships that we think can add more deposits and loans. And so we're not doing one off New loans for people that aren't going to bring relationships here and we are going to take a look. We have reporting that we give each office, which we call OneView reporting that tells our bankers who's got what products with us. So if you see somebody that said they were going to bring over deposits and hasn't done it, then we're calling on them and saying, hey, Where is this deposit account or why do you have a 0 balance account with us or are there some other deposits or other Trust and Investment Management business that we see on your financials that we could help you with. So that's really been The focus and why we're seeing good results is that we've really refocused these teams in the local offices on more of the deposit and What we call PTEN, the planning trust investment management side and less on straight up loan growth, Which I think is a viable strategy.

Speaker 2

It's a great way to lead into new relationships. But for now, we're more focused on how can we cross sell deposits, how we can attract new deposits, how can we build relationships with folks that can bring us More stable core deposits that help build our balance sheet and strengthen our financial performance.

Speaker 7

Okay, great. That's good to hear. And it sounds like with the pipeline that the loan to deposit will be trending downward Going forward, and then also it looks like the non interest bearing contribution to total deposits trended downward at a similar rate compared to last quarter. I was wondering if you're seeing that pressure slow And what your outlook is there?

Speaker 2

Yes. That's just hard to know. I think We've done a really nice job of holding on to our non interest bearing deposits. But again you have larger relatively sophisticated depositors here. Yes.

Speaker 2

And I think when everybody's talking about 5% deposits, they're talking about it too. And so I would say earlier this year, we were hearing a lot more about can you build me a treasury bill ladder. And I think we're hearing less of that today. And I feel like The moves that we're seeing out of DDAs are more into NOW accounts And into money market deposit accounts and less into CDs. So that's all positive.

Speaker 2

But I hope at some point we've seen the early movers on the DDAs move and we're going to see a slowdown in The remaining DDAs haven't really seen much of that so far, but hopefully that's Where we're headed, certainly we have strengthened our treasury management team and tried to make sure that the clients understand The value that we can provide on the treasury management side, which drives them to keep more non interest bearing deposits here Or move more non interest bearing deposits here. That's a big focus throughout the organization as well.

Speaker 7

Great. I appreciate the commentary there and I'll step back.

Speaker 2

Great. Thanks, Adam.

Operator

One moment for our next question. Our next question comes from Bill Dezellem with Tieton Capital Management. Your line is open.

Speaker 8

Thank you. First question is asking David, would you please repeat what caused the $0.03 Earnings per share impact this quarter that you referenced, I just missed what you said in your comments.

Speaker 4

Yes, that was in our non interest expense. It was related to Give me a second. Let me pull it up real quick. So that was related to Some compensation that was related to a previous acquisition and we had to accelerate that Compensation expense. And so that impacted it was about $400,000 or $0.03 of EPS.

Speaker 2

It's an accounting fiction bill that The way that we had to account for the whole acquisition when we did it was included This compensation expense and then like David says, if the person leaves earlier gets terminated Then you've got to accelerate the remaining tail on that. So it's a one time thing. The person is gone, the expense is gone. What would that be? A deferred asset is gone.

Speaker 2

And so that's a one time thing of $0.03 in the quarter.

Speaker 8

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 goes up. Would you discuss that difference and what's leading to the 3 basis Point

Speaker 2

decline. That's loan mix, isn't it? Yes. David is saying that he thinks he knows the answer. Also,

Speaker 4

there was an impact of the non accrual loans as well. So those loans are Generating 0 of interest income, as Scott mentioned, through the quarter. And the balances are then still in the denominator. So that's going to have a negative impact on

Speaker 8

our interest earning asset yields. And which asset categories Did you see that you had grew with that had lower yield that would have contributed to this in addition to the non accrual?

Speaker 2

We're looking at the answer for you, Bill. Thank you. Yes. So we saw

Speaker 4

in our loan portfolio, we saw We saw yield reduction in the consumer and other bucket and in the commercial real estate buckets As well as C and I. That and I'm speaking to spot yields there.

Speaker 2

Let data be in the queue, David. Odd yields will not, no. Average yields,

Speaker 4

Not at that level.

Speaker 8

And so Help us understand either the competitive dynamics or your own individual strategy to relative to Loan yields in those categories declining when rates are generally upward biased.

Speaker 4

Well, I think Generally, our loan yields are improving, but the negative impact of those non accruals is what's really weighing our average loan yields down quarter over quarter.

Speaker 3

And Bill, I think in my comments, we were talking about the rate in September on our loan production and it was At the highest level, 8.44%. I think we're generally seeing nice Increases in new loan production on the rate as well as loans are renewing and rolling at the higher rate. So we are seeing good benefit from that, but we've got some of these nuances with the non accrual loan that have impacted some of those categories.

Speaker 8

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

Speaker 3

I think that's the largest driver.

Speaker 8

Okay, great. Thank you. And then final question is, how are you thinking about share buyback Given that the stock price is trading roughly 70% of book value, but at the same time, we also recognize Philosophical thought process here.

Speaker 2

Yes. We discuss it with the Board every quarter. And every time the stock trades down, we're like, well, we should have stock buyback Plan in place right now, but I think generally what we have thought Yes. This is a good time to have strong capital and the extent that there are earnings or Credit or acquisition opportunities out there having a stronger capital base is going to be beneficial for the long term Shareholder value creation here. So, I think the Board measures all those things Bill and tries to make the best decision in terms of how to manage our capital.

Speaker 2

And I think we've talked about Our improvements in our tangible book value per share without any significant buybacks And our improving capital ratios which are already way above well capitalized ratios. I just would add To your question about the reporting of our yields and our interest income, We think we're going to collect the principal and interest on these additional $42,000,000 in Loans that we put on non accrual. So I mean that is money that we do expect to see back in the bank in the future In spite of sort of the short term disappointment here, but Yes. We will sure talk about that again at our Board meeting in this quarter and we're mindful of the fact that that's a good way to drive EPS and trying to use our best judgment on how do you balance that against some of those other factors I talked about.

Speaker 8

That is helpful. Thank you all for the comments.

Speaker 2

Thank you, Bill. Appreciate the support.

Operator

One moment for our next question. Our next question comes from Ross Haberman with RLH Investments. Your line is open.

Speaker 9

Good morning, Scott. Scott, how are you? Could you talk about, are you seeing any other Dents or weaknesses in delinquencies or slow payers or anything like that besides this one, Hopefully an anomaly in terms of the bad number which you referred to today?

Speaker 2

So good morning, Ross. We are not seeing any other signs of credit This is a one off situation. Unfortunately, in addition to the other one off situation that we reported But they both are isolated cases very different from each other. And Again, from what we know today, we expect to collect fully on these things. We have now $4,000,000 Specific reserve on the $8,000,000,000 credit and again we think we're very well collateralized on this new issue.

Speaker 2

It's really unfortunate timing for us at 90 days Past due at quarter end, but we think we're doing the right thing in the way we've handled that with the borrower and with our accounting And obviously going to cause some short term pain for us in terms of these conversations, but I think the fundamentals are going to be fine.

Speaker 9

How often do you stress test, I guess, your maturing loans

Speaker 2

In terms of all these many of

Speaker 9

these commercial borrowers have been borrowing at, I don't know, 4% or 5% and suddenly Your loans come due and they have to pay 8 plus. How often do you stress test that and Paying 4 or 5 is one thing, paying 8.5 is another thing. Do you sort of get ahead of it and say, hey, Is this going to be a viable loan at 8.5% cash? Can they afford This type of dramatic jump up in rates?

Speaker 2

Yes. So a couple of things we do there. When we're underwriting loans, originally we do stress tests. I would tell you, the traditional kind of Up and down 300 basis points,

Speaker 4

looks a

Speaker 2

little light compared to the 5 50 basis points of I-seventy five where it's been now over the last 18 months. But that's something we've always looked at As you know what would be the scenario for this borrower if we see a rising rate environment. And then It was part of our internal loan review process. We've gone through here over the last few months And looked at where we see risk in the portfolio for this repricing risk you're talking about. And what we've seen is the bulk of The risk is probably a couple of years out and is not It's minimal.

Speaker 2

I mean where we've looked at credits that are coming due or going to come The borrowers do have adequate coverage to cover higher rates. So we're not seeing That is a fundamental problem in the portfolio or with any individual credits at this point or for the foreseeable future. If rates continue to go higher, I think we'll probably need to do deeper dive into that. But from where we are today that seems to be a risk that's well managed in the portfolio.

Speaker 9

I didn't quite I couldn't tell from your handout, your mortgage business, was that Breakeven for the quarter, I couldn't quite tell from, I forgot what page it was. Page 10, in terms of your non interest income, was the mortgage business that had a breakeven this quarter?

Speaker 2

So I think we lost, David, is it $200,000 for the quarter, I believe, in the mortgage segment.

Speaker 9

And from what you're seeing for the Q4, will that probably be as good a guess as any for the Q4 as well?

Speaker 2

Unfortunately, we've really cut expense there. And unless we want to close it down, which we don't, I think we're kind of stuck with some minimal contributions coming out of mortgages here, Negative contributions for the short term. We are doing a couple of things to manage that. We've looked to add MLOs which are all variable cost and we've also looked to Manage spreads in a way that drive more volume. And so we've had some success with that.

Speaker 2

I think we've added another Mortgage loan officer in our resort communities and we've got a couple more that we're talking to. I think the President at mortgage group is working, he's certainly well aware of our focus on that And trying to be responsive. I don't know Julie that's all under you if there's any other color you want to add On that, I do think we've done a nice job over the past 3 years in bringing the cost down in that area to where revenues look like they're going to be. And unfortunately, it's a little upside down right now. But again, I mean, that's been strategically valuable for us.

Speaker 2

It's produced assets. It's minimized our risk in mortgages, which I think is no small feat. I think if we're going to be a private bank You need to have the volume to make sure you've got the compliance and risk well managed. And then we just made so much money In the boom part of it that having some incremental losses here is not the end of the world I think. At some point that's going to turn around and be A nice profitable business again as it was a couple of years ago.

Speaker 9

Could you talk about Some of your newer offices, you said you I think I read you're opening up one in Bozeman. Is that going to be a full service? And if it is, what kind of deposits do or timing do you need to hit a breakeven? Could that be I don't know, could that be a $300,000,000 $400,000,000 branch in a couple of years?

Speaker 2

I think $300,000,000 or $400,000,000 would be an ambitious goal. We talk in terms of revenues here When we think about new locations and so we opened that as a LPO And we told them that when they get to $1,000,000 in revenues that we could give them a full service office. We opened as a full service office. I think actually we moved into that office this week, earlier this week And our grand opening is going to be, I believe November 9 or something like that. And so I think As we build that out and build the business there, I would expect that to grow to be $2,000,000 business A year, 18 months from now and then ultimately be a $5,000,000 $10,000,000 business with a couple of $1,000,000 in expenses.

Speaker 2

So having a nice contribution margin in the relatively near term. And I think it's very additive to what we're doing in Western Wyoming and obviously gives us a nice entree into Montana, which I think is full of opportunities for us as well. So I think that's just part of a longer term strategy to continue to expand in the Rocky Mountain West, we have a really great team there that I think is going to produce great results for us. We're very optimistic about it.

Speaker 9

Could you talk about the Wyoming business, I guess, when you bought that about a year and a half ago or so, how is that performing on a bottom line basis?

Speaker 2

Yes. I don't think we've really released much information about that. I mean, what we've seen In Jackson, as we combined our 2 Jackson offices, the one we had there plus the one that we acquired And the one that we acquired has a beautiful office at the corner of the metaphorical 1st and Main Street. Interestingly, we had First Republic open across the street from us And that was a bit of a shocking experience, the aggressiveness that they brought to the market. Of course, that's It's gone now.

Speaker 2

So I think that that's going to be a big benefit for us that are the more Long term focus players in the market. And then our other two offices which we weren't Too sure about when we first started looking at this opportunity which are Pinedale and in Rock Springs, They've turned out to be really pleasant surprises. The teams there have been wonderful. The market obviously there's no competition for what we do In those markets and so I think those are going to turn out to be really nice success stories for us for the long term. If you wanted to have A stable base of core deposits that is so desirable today, all of those offices are very added to that.

Speaker 2

And I think In retrospect that acquisition was a huge success. You probably recall that it was accretive to capital On day 1, the tangible book and we got more expensive out of that than we thought Yes. And the revenues have been strong. So I think all in all that's been a really nice success story for us.

Speaker 9

And just one final question, are you actively looking for more things to buy or fill in or if we do see any Further growth, it will be organic like the Bozeman endeavor?

Speaker 2

We do believe that there's going to be opportunities that come out of this cycle. Talking to other bankers, I've heard some stories of some pretty rough exams and since March now. And I think that the downgrades that may come out of that may put pressure on boards and maybe people that Otherwise wouldn't be interested in looking for a bigger stronger partner, maybe will. Yes. And so I do think that that's going to create opportunity for us.

Speaker 2

We do have our list of targets that we talk to and Socialize the idea of joining somebody bigger with a bigger toolbox and a bigger footprint that could be a beneficial partnership for them. And I think that that's going to play out here over the next couple of years. It does take time, I think, for that to play out. And what we've seen in prior Down cycles as you see these big sort of spectacular events like we saw in March and then sort of the follow on Take several quarters to play out and I think we've got that to come still, which I do believe will create opportunity for us.

Speaker 9

And just one last one, I just left one thing out. A number of banks I've seen this quarter Have sort of tinkered with their securities, maybe sold some, shortened up the maturities or Durations, have you thought about that On some of yours or I guess if you did anything with those held to maturities, you would have to move the whole thing

Speaker 2

To help for sale and you couldn't just sell a portion of it. Our The curious portfolio here is relatively small. We made a conscious decision in was that 2011 truly 2021, I mean, 2021, not to go out and buy a bunch of 1% or 1.5% yielding bonds With all that cash that we had on the books and so I just don't feel that we have the need To cause that kind of turmoil in our balance sheet, I mean, I think our Total investment portfolio is relatively small. It's performing well. So I think we'll just leave that there.

Speaker 2

I mean we certainly We have done analysis to look and see if it makes sense to trade it out. But at this point, I think Given all the different accounting and economic factors, we're better off leaving it in place and letting it pay off.

Speaker 9

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

Speaker 2

Yes. Thanks Ross.

Operator

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

Speaker 6

open. Hey, just one follow-up. I know this call has gone long enough. I guess first, sorry, I didn't acknowledge you earlier, David, When I said hi to the crew.

Speaker 2

I wanted to ask,

Speaker 6

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 what would help if you could give it, I know you don't want to talk too specifically about the properties and Get into too much detail, but if you had anything you could share around any valuations you have, updated Appraisals on the building, give us some sense of your comfort, how you get there in terms of not expecting losses on those Particular properties? Thanks.

Speaker 2

So, yes, good question. We have spent a lot of Time on this as you would expect is a very large number for us $42,000,000 And we've had a couple of different options About how to deal with it as I talked about before. And I think we've chosen the more painful option That will be much better for our shareholders for the short and long term here. And so if we take some lumps with the stock price, I mean, I guess it's a buying opportunity. Yes, we have taken a close look at it.

Speaker 2

We have current appraisals on all are there 7 properties, Julie? 6. Six properties. We've looked at them in detail. I was thinking that there's some nice opportunity in here For collecting on this, before I saw this article in the journal and the article in the journal was just Very positive about how strong the high end market is in Aspen.

Speaker 2

And again, you're looking at Properties in Aspen, you're looking at property in Nantucket and West Palm Beach. I mean those are all Very hot desirable markets that I think are still trading at premiums. And these aren't people That can't figure out how to pay an 8% mortgage. These are people that are coming in and buying trophy properties for cash. And the article actually talks about that, that end of the market is really isolated from what's going on in monetary policy and whatnot.

Speaker 2

So I do think Brett, I don't want to be overconfident about it, but I do think that we're well positioned there and should be fine.

Speaker 6

But to kind of get back to the core of that question, updated appraisals, anything that would give us confidence that The borrower purchased properties at Axon is not going to have to take a Or the appraisals might not come in lower much lower than where you purchased them. Any color on that?

Speaker 2

No, we have current appraisals. We already have them in hand.

Speaker 6

Okay. And they do they Meaningfully exceed the unpaid balance in principal?

Speaker 2

I think we're going to do fine with them.

Speaker 6

Okay. Sorry to push. I just trying to help you Get some confidence around that, so for the market. So appreciate the follow-up.

Speaker 2

Thank you, Brett.

Operator

That concludes the question and answer session. At this time, I would like to turn it back to management for closing remarks.

Speaker 2

Great. Thank you, Abigail. Just a couple of things. Well, the reported numbers this quarter obviously are disappointing. Our core business is performing well in an unprecedented environment.

Speaker 2

The company has responded well With balance sheet management, higher fees and well controlled expenses, our 3rd quarter NPA spike is discouraging. We do expect to collect on these 2 larger problem relationships and continue our long history of near zero loan losses. Going forward, even if we only have moderate revenue growth with continued expense control, We think we can produce nice operating leverage and improved earnings story. We're very focused on improving current and future earnings while operating with our historic focus on careful risk management. So with that, Thanks everybody for dialing in.

Speaker 2

We really appreciate your interest and support of First Western and have a great weekend.

Operator

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

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Earnings Conference Call
ONEOK Q3 2023
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