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Scott Wylie

Thanks, Tony, and good morning, everybody.
As expected, during the fourth quarter, we generated a higher level of profitability as a result of the positive trends in many areas of the business including generating growth in loans and deposits while keeping our loan to deposit ratio in the mid 90% range and maintaining disciplined expense control. We continue to maintain a conservative approach to new loan production with our disciplined underwriting and pricing criteria. However, as a result of the additions we've made to our banking team over the past several quarters, we saw a higher level of loan production in the fourth quarter, which was our highest level of loan production of any quarter in 2024.
We also continue to have success in our deposit gathering efforts, adding new clients and expanding relationships with existing clients that resulted in deposit inflows that more than offset the seasonal outflows we typically see in the fourth quarter. We were also able to successfully lower our deposit costs which contributed to the expansion we saw in the net interest margin.
We saw generally positive trends in asset quality during the fourth quarter resulting in a decline in our NPAs to total assets and we had another quarter of immaterial charge offs. We've also continued to make progress on resolving the large nonperforming relationship where we had several properties as collateral, the largest of those properties is now under contract for sale and we expect the transat the transaction action to close in the first quarter.
We're also seeing a good level of interest in other properties that are currently being marketed as a result of our stronger financial performance and balance sheet management strategies. We had a further increase in our tangible book value per share in the quarter.
Moving to slide 4, we generated net income of $2.7 million or $0.28 per diluted share in the fourth quarter.
Both increased from the prior quarter. We had a $1.1 million write down in OREO from new appraisals that negatively impacted EPS by $0.08 in the fourth quarter.
With our prudent balance sheet management, our tangible book value per share increased by 1.6% this quarter.
Now I'll turn the call over to Julie for some additional discussion of our balance sheet and trust and investment management trends. Julie?

Julie Courkamp

Thanks.
Turning to slide 5. We'll look at the trends in our loan portfolio. Our loans held for investment increased $42 million from the end of the prior quarter. We continue to be conservative and highly selective in our new loan production but saw an increase in loan production which was driven by a higher level of productivity from the additions we made over the last several quarters to our banking team. New loan production was $94 million in the fourth quarter, up from $83 million in the third quarter.
Most of our new loan production is coming in the areas of commercial loans and residential mortgages where we are also getting deposit relationships, but we also saw an increase in CRE loan demand as borrowers are looking to take advantage of lower property valuations. Essentially all of the new CRE loan production was owner occupied, which is what we typically focus on. We continue to be disciplined and are and we are maintaining our pricing criteria.
This resulted in the average rate on new production being 7.44% in the quarter, which was higher than the average rate on our payoff, which resulted in the turnover in our loan portfolio being accretive to our average yield on loans.
Moving to slide 6, we'll take a closer look at our deposit trends. Our total deposits increased $11 million from the end of the prior quarter. The increase is largely attributed to an expansion of existing client relationships.
This is more than off -- this more than offset the typical seasonal runoff that we see in non interest bearing deposits during the fourth quarter, which typically starts to build back up again as we move through the year. On an average basis, our deposits were $96 million or 4% higher in the fourth quarter than in the prior quarter.
Turning to trust and investment management on slide 7. We had a $145 million decrease in our assets under management in the fourth quarter. Primarily attributed to net withdrawals and lower market values during the fourth quarter during 2024, our a increased more than 8% due to both new client additions and market performance.
Now I'll turn the call over to David for further discussion of our financial results. David?

David Weber

Thanks, Julie.
Turning the slide 8. We'll look at our gross revenue. Our gross revenue increased 4.8% from the prior quarter primarily due to an 8.3% increase we achieved in our net interest income.
Now turning the slide 9. We'll look at the trends in net interest income and margin. Our net interest income increased 8.3% from the prior quarter or 33% annualized due to an increase in average interest earning assets and expansion in our net interest margin. Our NIM increased 13 basis points from the prior quarter to 2.45%. This was due to a reduction in our cost of deposits which was larger than the decline we had in our average yield on interest earning assets.
While we expect to benefit from rate cuts, we are not solely reliant on rate cuts to see expansion in our NIM going forward.
Now turning to slide 10. Our noninterest income decreased by approximately $500,000 from the prior quarter. This was due to a decline in gain on sale of mortgage loans resulting from the seasonal decline we see in mortgage demand during the fourth quarter. This was partially offset by a record quarter of risk management and insurance fees of $1.1 million, which was double the level we generated in the fourth quarter of the prior year. In addition, our 2024 trust and investment management fees increased by $400,000 or 2.2% year over year.
Now turning to slide 11 and our expenses. Our non interest expense was up $1 million from the prior quarter which was entirely attributable to a $1.1 million write down of OREO following the receipt of an updated appraisal during the quarter. All other areas of non interest expense were relatively consistent with the prior quarter as we continue to tightly manage expenses while also making investments in the business that we believe will positively impact our long term performance.
Now turning to slide 12, we'll look at our asset quality. As Scott indicated earlier, we saw generally positive trends in the loan portfolio in the fourth quarter with a decline in nonperforming assets and another quarter of immaterial charge offs with the positive overall trends we had in asset quality and improved economic forecasts. We had a small release of reserves which resulted in a negative provision for loan losses in the quarter.
Now I'll turn it back to Scott. Scott?

Scott Wylie

Thanks, David.
Now turning to slide 13. I'll wrap up with some comments about our outlook for 2025.
While we're pleased that we've been able to improve our financial performance over the past few quarters, we're still not at the level of performance that we target, but we expect to make continued improvement. Our financial performance in 2025 overall, economic activity continues to be healthy in our market and with the strength of our balance sheet and the franchise we've built, we see good opportunities to capitalize on market disruption and challenges being faced by competing banks to add new clients and banking talent.
We'll continue to prioritize prudent risk management and conservative underwriting criteria, but we are seeing some increase in our loan pipelines as the new bankers we've had in the past several quarters, increase their level of productivity deposit gathering will remain a top priority throughout the organization as we work to further reduce our loan to deposit ratio.
With the successful repositioning of our balance sheet and the increased liquidity that we have in our lower loan to deposit ratio, we believe we're well-positioned to generate a higher level of loan growth in 2025 as loan demand increases while maintaining our disciplined pricing and underwriting criteria. We see a number of catalysts that we expect to contribute to our improved financial performance in 2025. These include a higher level of loan growth, continued expansion in our net interest margin.
The redeployment of cash generated from the sale of our OREO properties into interest earning assets, more robust business development activities in our wealth management business as a result of the changes we made in this business during 2024 and more operating leverage as we increase revenues while maintaining disciplined expense control.
It should the environment become more favorable for mortgage demand in 2025 that we should benefit from the MLOs we added during 2024 and generate a higher level of gain on sale of mortgage loans.
The positive trends we're seeing in a number of key areas are expected to continue, which we believe should result in steady improvement in our financial performance and further value being created for our shareholders in 2025 as well as in the coming years.
With that, we're happy to take your questions. So Carmen, can you please open up the call?

Question and Answer Session

Operator

(Operator Instructions)
Brett Rabatian, Hovde.

Brett Rabatian

Wanted just to start off on the large ore property. So just to be clear that the ranch is under contract and was just trying to, I was a little surprised if that's the case just given that the winter selling season in Colorado is usually a little tough. So I was just hoping for some more color around the sale of the large property and if that was the write down on this quarter or if that was one of the houses.

Scott Wylie

So we have three properties left in the resolution of that Aspen problem loan. And one of them is the Three Meadows Ranch, which is a very large and unusual property outside of Basalt, which is just down valley from Aspen. It actually, each of these three properties is a pretty unique property. None of them are production homes in the neighborhood, right? These are all very, three very unique properties. And so, in the Aspen market, it's just not very predictable of, who's going to show up when. And I would say, since we've got control of these properties, we've had lots of showings and lots of interest in all three of them.
Ttowards the end of the fourth quarter, we had a couple of strong bidders show up for the ranch and there was a lot of activity that ended up with us accepting a contract from one of them. We haven't really talked about the price and I would be reluctant to, prior to the closing, which is scheduled for early February, but I would tell you a very strong price that will not involve a write down on that property. We're really pleased with the buyer and what that's going to do for that ranch in the future in the community.
So it's a really a very happy ending to that part of the story assuming it happens, like I don't want to get out in front of that. So that's that one. But the other two, are a lot smaller dollar amounts, the ranch, was in the high 20s on our books and in our asking price. The other two are kind of $5 million or $6 million. And so, completely different price point. They're both on the river in Basalt and so they're very desirable, unusual properties are very different from each other. We've had, I would say steady interest since we started marketing those. We've had a number of kind of low ball offers. We've had a few serious offers. Nothing really that we felt we should jump on yet.
And I think odds are that we're probably not going to sell those during, the winter season. But you never know. I mean I would have said the ranch won't sell until the summer either and then there it is. So you don't have to see what happens with the other two, but we're really happy with the outcome on the ranch and hope that that closes on schedule, which is as far as we know, it's 100% on track to do.

Brett Rabatian

And then maybe for Julie or David, just the margin outlook from here with or without rate cuts. And you know what -- how do you think the margin progression will trend through the year and how much maybe you might have in the loan portfolio from the fixed side?

David Weber

Yeah, but we feel that we do have the opportunity to continue to expand our margin through 2025 without rate cuts. Obviously, rate cuts will certainly benefit that additionally. As far as the rate cut standpoint, I think our our previous comments on roughly $1 million of annualized nI increase per a 25 basis point reduction. I think that's still a fair assumption.
And then without rate cuts, we have the opportunity when we look at the loan portfolio to continue to turn that over. As we bring on new loans at a higher level than our average yield on the loan portfolio and then on the deposit portfolio that certainly needs stabilized DDAs. We're focused on seeing some growth in 2025 and DDA. So if we can achieve that growth in DDAs, obviously, that that improved mix will help on our average cost of funds as well. So that's how we're thinking about it for 2025.

Brett Rabatian

Okay. And then David, just to follow up on that is, any thoughts on the margin progression throughout the year in terms of basis points and maybe if you had it for December?

David Weber

For the month of December, we're at 247. Like I said, we are expecting name expansion. I think it -- there's just a number of variables at play there that could certainly impact that whether it's, it's quicker or slower than our expectations. But yeah, we are thinking that we will continue to see an expansion in 2025.

Operator

Woody Lay, KBW.

Woody Lay

Wanted to start on fees and especially the risk management insurance fees. It was a really strong quarter there. Any color on what drove the increase in the quarter?

Scott Wylie

Sure. So one of the efforts we've been making this year, Woody, is to strengthen our, what we call PT planning, trust and investment management, offering, including insurance and retirement services. And so we had expectations this year that we would be able to grow that insurance business and, kind of, we were holding our breath by the fourth quarter because we weren't really seeing the progress that we were hoping for during the year. But obviously, that stuff turns out to be very seasonal anyways. It tends to happen in the latter part of the year and it was a very strong fourth quarter for us.
This year, like David talked about, it was a record quarter. I hope that this is an important part of our effort to get our fee income back in line where it's historically been -- we've been able to operate first Western over the years at pretty close to a 50% split between fee income and in net interest income. And that number came down as we've grown. The bank post IPO, we tripled the size of the bank and so that the income really has not kept up with that. And I think we were down kind of 24 25% a couple of quarters ago, I think 27.7% in Q4. So I'm hoping that this is a indicator of things to come in the future.
I don't know that we'll continue to have record quarters every quarter in insurance. I would say that's very unlikely. But another strong year next year, another strong quarter, fourth quarter, next year, I would say that's what where we're working towards and targeting and, and building towards, that's a small part of the overall, PT fee business and, and, that grew the PT business without insurance, grew 2% year over year. And I'd like to see that really accelerate and grow and become a meaningful part of our fees.
And then it would sure be helpful if mortgages would wake up. I think the mortgage industry has just gotten Coor this year and we had signs of hope in Q3 that really did not pay out in Q4, which is seasonally slow anyways. But Q4 was pretty disappointing on the mortgage side.

Woody Lay

Yeah. I mean mortgage continues, activity just continues to be a little slow. Does that impact your thoughts on hiring in 2025 and hiring additional additional MOOs?

Scott Wylie

We had some success with that this year which again doesn't show up anywhere. Right. I mean, we wanted to bring in a number of new Ml Os, we did that successfully. They've been producing at reasonable levels, given the market, we actually have opened two new production offices in 2025. So those '23 '24, I mean, those expenses are in there. And I think some of the results we saw in Q3 were reflecting that those are for some of the new folks too.
The question is what's going to happen in 2025 with that business? And, and I think it was slightly positive for us. We made money in mortgages in 2025. We all perform plan by a little bit. So we're definitely high f in the team on, hanging in there and performing well compared to the industry. But we'd like to see that normalize and really get back to be a nice contributor for us in our overall financial picture. And, and, and I would tell you, we are seeing signs of life in January.
We had a really good week last week after a pretty quiet, first couple weeks of the, of the year. So, hopefully we'll see that pick up certainly as we get out of the seasonal slow period, which will be, the first quarter still got it. And then, I just wanted to check with Julie does any, she wants to add on mortgages. She looks over that day to day and pays a lot of attention to it.
Sorry, what are you going?

Woody Lay

Yeah. And, and then I just wanted to follow up on expenses. Sorry if I missed it. But is there any run rate you're expecting for the first quarter of 2025?

Scott Wylie

Yeah. So we have worked hard to keep expenses flat over the over the last, year or so and we were trying to do that again 2025. You know, there's just a lot of inflationary pressure kind of everywhere in our business. And so we know we've had efficiency initiatives, we've had productivity initiatives, we've driven more accountability.
We really asked people to step up and, and and, and you'll drive more productivity and even with that, I think it's going to be hard to hold the line on the $19.5 million is, is kind of the target we've talked about in 2025. So we're thinking in terms of guidance, I think $20 million is probably a reasonable guess estimate for 2025 quarterly operating expenses. Hopefully we can outperform that, maybe there'll be some bad surprises. I don't know, but that's, I think a reasonable starting point.

Operator

Matthew Clark, Piper Sandler.

Matthew Clark

What about just on the OREO? Just want to confirm that the marks on the ranch are now kind of fully reflected in the fourth quarter relative to sale. And then as a follow up the two homes that you have out there, just give us a sense for the mark you incurred on those two and your comfort level kind of being able to clear, clear those houses at that level.

Scott Wylie

So I have our controller in here, give me the stink eye because she likes to remind me we have to carry these things at the lower cost or our market. And I keep telling her, the market could be better and she's like lower cost or market. So where we are on that is we're carrying the rents below the price that we have it under contract for. So that would be a first quarter impact.
And, and then the other two properties we have to appraise them annually. David said in his comments that we got a new appraisals in the quarter. We actually didn't. We got them on January 1 and I'm talking to County saying really we're going to write these down Q4 because we get the report, the updated appraisals. But I mean, those are the rules.
So we follow the rules and those are the new appraisals. I believe that these properties are very unusual and, we find the right buyer. We're going get a good bid on those. If we don't, we'll have to, look at the carrying cost and hopefully you'll get those off the books here in 2025. But that's how the accounting works.

Matthew Clark

And so the updated appraisals on Jan One were reflected in 4Q, correct? And then back to the margin. Do you have the spot rate on deposits at the end of December?

David Weber

Yeah, it was 3.05%.

Matthew Clark

And then I think when we met a couple of months ago and updated numbers, we were kind of trending toward a 273 margin for the year, but that was before I think we knew the ranch might be sold, before mid year. And knowing you're going to be able to redeploy those proceeds, I mean, do you feel better about that 273 for the year, on average kind of exiting the year obviously higher than that. But any updated thoughts on kind of where you might exit the year based on your kind of baseline assumptions on the margin.

Scott Wylie

Well, let me just start by your comment about the benefit to nim of taking, $20 million-some in non earning assets and turning it into a productive earning assets is right on. I mean that's a material number and we're really pleased to be able to have that for the bulk of 2025. Now do you want to make any comment about the 273? I think that is in the ballpark of what we're thinking for Q4 for December.

David Weber

Yeah, I think that's still achievable.
Like, like I said, we've got to see improved loan production and we need to get the right behaviors on our DDAs well. But yeah, I think that that can still be achievable.

Matthew Clark

And that's for the year up just to clarify, not exiting the year.

Scott Wylie

I do think that that historically first Western has produced a net interest margin of some number like 33, 15, 320. And, and I think as we see a normalized economic environment with a positively shaped yield curve and all the dust settles on all this stuff we've been through over the last couple of years. We're going to get back there, but I don't see any reason we wouldn't -- that's not going to happen in 2025.
Continued progress in that direction as we saw in the latter half of last year.

Matthew Clark

And then last one for me just on the non interest bearing deposits. I think on average they were up a little bit but at the end of the year, they drop pretty meaningfully, just any color as to, any lumpiness there or expectation that some of that will come back.

Scott Wylie

So we did a a close look at why it came up at the end of Q3 and why it came down in Q4 and you know, there were some one time things in at the end of Q3 that are normal for us, clients that have liquidity events, they deposit at the bank. And then they use it for something in Q4 II. I thought that that average balance number was really important for us to see average deposits up 4% in the quarter.
Was, was really positive and I, and I personally don't put a lot of weight on, the quarter end number because it does bounce around Q4 has a particular, really there's two months in the year where we see artifacts in tax season, we'll see some runoff and then a year end we see run up because the operating accounts for our clients, they'll go and pay bonuses and they pay distributions out and those are coming out of their operating accounts, which are DDAs typically. And so you do see that in Q4 and especially in the latter half of December, very typical for us.

Operator

Bill Dezellem, Tieton Capital.

Bill Dezellem

I had a couple of questions. First of all, Scott, you had referenced loan activity picking up after the election. Would you please talk a little bit about the loan pipeline and the overall discussions that you've been having since the election? And if you are sensing that there is a mind shift that's taking place favorable or unfavorable.

Scott Wylie

Yeah, I mean there's a lot of factors in loan demand and one of them is the mood of our type of client and when you know, people are feeling confident and optimistic about the economic or political outlook, that's going to be good for loan demand in our, in our market and with our niche. So definitely we're seeing that I would say with other banks not really wanting to do investor, commercial real estate. We've seen a lot more demand for that.
We don't really want to do it either. We're our appetite and that is full. And so, as both Julie and David mentioned in their comments, we've really been focused on owner occupied commercial real estate, which is what we do anyway. But that's really been the focus for us in the latter part of 2024 when we're looking at commercial real estate.
The other really positive trend is we had been focused here the last couple of years, I would say on building more c and I demand and, and that has really played out nicely in Q4 and we were looking we did our annual or our monthly senior management meeting yesterday and we're talking about the loans that are in the pipeline ready to close here in Q1.
And the bulk of those are either C&I or cash, remarkable securities secured. So it's really great to see that that coming out and not, reliance on CRE or especially not investor CRE. So I think the bands there competition continues to be very tough. We talked several times in our comments today about, being strict on rate and in terms, and I think, the team's doing a good job with the discipline there. And in spite of that, we had a really strong quarter in Q4 and a strong pipeline going into 2025.

Bill Dezellem

And so just to pick up on that, so the loan pipeline increased, is that what is that -- what we're hearing, you say, Scott?

Scott Wylie

Significantly. And I think the right kind of loans, good quality relationship loans with a strong commercial or investor bias.

Bill Dezellem

And then I did you, that's a great segue into the C&I SO C&I loans versus on the books versus a year ago were down over 100 million. And, and so my question was going to be, is that intentional or a function of the borrower needs? But given the strength that you just highlighted in the C&I pipeline maybe would be more appropriate to ask kind of why was the C&I book down over the last year and then what's in process of changing and kind of what's the inflection point we're dealing with now?

Scott Wylie

Yeah, I think some of the problem loan that we identified from our friend in Aspen was ac and I loan. So, I mean, that's a big part of that and I think some of this is just, the ups and downs of what we see in commercial lending. I actually saw, I think increased line utilization in Q4 Julie, you were talking about that.
The other day, I thought so.
But II don't think there's anything big to read into the numbers there bill other than just the ins and outs of of our, of our loan clients. II do think what I said before is true, which is if you look at the pipeline of what we're seeing now, the focus that we've had on C&I, we're seeing more demand and when we talk about pipeline, I'm talking specifically about things coming out of the pipeline and, and into closed loans now.

Bill Dezellem

And Scott just to make sure that I'm understanding correctly that the increase in C&I activity that you are seeing in terms of new new loans being put on the books is a function of, of both the efforts, the concerted efforts that you all have been making over the last few quarters coming to fruition along with a more confident backdrop by your customers. It's a combination of both of those. Is that correct?

Scott Wylie

That's right.

Operator

Thank you so much. And as I see no further questions, I will turn it back to management for final remarks.

Scott Wylie

Great. Well, thanks everybody for dialing in today.
We believe that this business can and will deliver attractive shareholder returns as it has in the past and is now back trending toward you know, I started my first bank in 1987. And so I've seen a number of rate cycles over these years and, and none was fast changing or as long of invert purpose, what we've seen here over the last few years in this market. This made for a challenging couple of years for banks in our niche.
And First Western has proven to be up to these challenges as we report in the past couple of quarters. Now we've seen really positive underlying trends that are now playing out in our numbers with, I think much more to come with some modest growth in 2025 improved margins, fewer non earning assets, improved fee income and limiting expense growth.
All those should produce nice additional operating leverage and continued earnings gains. We believe the shift to offense at First Western will make 2025 a really good year for our stakeholders, including our shareholders. So we really appreciate the support we've had and appreciate people taking the time to dial in and speak with us today. Thanks everybody.

Operator

And thank you everyone for participating in today's conference and you may now disconnect.