Q1 2024 First Western Financial Inc Earnings Call

Participants

Tony Rossi; Investor Relations; Financial Profiles, Inc

Scott Wylie; Chairman of the Board, President, Chief Executive Officer of the Company and the Bank; First Western Financial Inc

Julie Courkamp; Chief Operating Officer; First Western Financial Inc

David Weber; Chief Financial Officer, Treasurer of the Company and the Bank; First Western Financial Inc

Brett Rabatin; Analyst; Hovde Group, LLC

Woody Lay; Analyst; KBW

Adam Butler; Analyst; Piper Sandler & Co

Ross Haberman; Analyst; RLH investments

Presentation

Operator

Good day and thank you for standing by, and welcome to the First Western Financial First-Quarter 2024 earnings conference call. (Operator Instructions) Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Tony Rossi of Financial Profiles. Sir, please go ahead.

Tony Rossi

Thank you, Norma, and good morning, everyone, and thank you for joining us today for First Western Financial's First-Quarter 2024 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 any future results expressed or implied by such forward-looking statements. These factors are discussed in the company's SEC filings, which are available on the company's website.
I would also direct you to read the disclaimers in our earnings release and investor presentation. The company disclaims any obligation to update any forward-looking statements made during the call. Additionally, management may refer to non-GAAP measures, which are intended to supplement, but not substitute for the most directly comparable GAAP measures. The press release available on the website contains the financial and other quantitative information to be discussed today as well as the reconciliation of the GAAP to non-GAAP measures.
And with that, I'd like to turn the call over to Scott. Scott?

Scott Wylie

Thanks, Tony, and good morning, everybody. During the fourth quarter. While continuing to prioritize prudent risk management and conservative approach to new loan production, we were able to deliver a higher level of profitability than our originally reported $0.03 a share in Q4. This improvement is encouraging, although not at the level of profitability that we target.
We executed well on our strategic priorities, which resulted in positive trends in a number of key areas, including further lowering our loan to deposit ratio, generating a higher level of noninterest income, primarily driven by our wealth management and mortgage banking businesses, improvement in our asset quality with the decline in nonperforming loans and zero net charge-offs in the quarter.
The higher level of profitability combined with our prudent balance sheet management, resulted in an increase in our tangible book value per share and increases in our risk-based capital ratios. As we indicated in our last call, the primary focus of the near term is on core deposit gathering in order to further improve our level liquidity, which is reflected in our balance sheet trends in the first quarter, we remain conservative in new loan production, maintaining our disciplined underwriting and pricing criteria while prioritizing lending to clients that provide full banking relationships, including deposits and wealth management business.
This approach, along with lower level loan demand due to higher interest rates, resulted in a lower level of loan production in the quarter. Loan payoffs continue to be relatively the same level we've been seeing, but we also saw lower level of draws on existing credit lines that we've seen in the past few quarters. This resulted in a decline in total loans during first quarter, most notably in the areas of commercial and industrial loans.
In terms of asset quality. We continue to make progress on the resolution of loans that were put in nonaccrual status over the past several quarters. This included a paydown of one of one of the loans that comprise our largest nonaccrual relationship following the sale of one of the properties that we had as collateral and a second already in Q2.
As we've indicated this process will take some time and the sale of various collateral part pieces will proceed on different schedules. But based on the progress we're making, we expect to see continued successful resolutions with minimal loss incurred.
Aside from the existing nonaccrual loans. The rest of portfolio is performing well and we had a decline in past due loans during the first quarter. This continues the positive trend we've been seeing in this area as compared to the first quarter of 2023. Past-due loans are down 59%. As we announced during the first quarter, we successfully charged-off the other large nonaccrual loan after the guarantor filed for bankruptcy.
So the full extent of the losses on these loans have already been incurred and are reflected in our income statement. And as we pursue our recovery efforts, there will only be positive potential impact from here at home. We also sold off a third smaller nonaccrual loan last quarter at a small premium, further reducing our problem loans to the lowest percent of total loans over the past three quarters, down to 1.86%.
Moving to slide 4, we generated net income of $2.5 million or $0.26 per diluted share in the quarter, and pretax pre-provision net income of $3.7 million. Q1 earnings and EPS were about 16% higher than the average of the prior four quarters using our originally reported Q4 earnings, as we showed positive trends in several areas of our operations. With our higher level of profitability and prudent balance sheet management, we had a 1% increase in our tangible book value per share this quarter.
Now I'll turn the call over to Julie for some additional discussion of our balance sheet and Trust Investment Management trends. Julie?

Julie Courkamp

Thank you. Turning to slide 5, we'll look at the trends in our loan portfolio. our total loans decreased by $56 million, decreased $56 million from the end of the prior quarter. We Continue to be conservative and highly selective on our new loan production, focusing primarily on non-CRE lending opportunities and clients that also bring deposits to the bank.
And this resulted in $31 million in new loan production in the first quarter which was a lower level than we have had in the past several quarters, combined with payoffs continuing at a relatively consistent level and a lower level of draws on existing credit lines than we had been seeing primarily due to claims being cautious about interest, increasing debt levels at higher rates and until economic conditions improve. This resulted in the decline in total loans that we saw in the first quarter.
The largest decline came in our C&I portfolio, which is partially attributed to loan that we sold during the quarter. We continued to be disciplined in our pricing criteria. However, the average rate on our new loan production dropped a bit this quarter to 6.95%, which is primarily due to one large cash secured originations.
Moving to slide 6, we'll take a closer look at our deposit trends. Our total deposits were up slightly during the quarter. We continue to have success in new business development and added $17 million in new deposit relationships during the quarter first quarter with average deposits up $83 million or 14% annualized quarter over quarter. We had the largest growth in our money market accounts, which reflects the expansion of existing client relationships as well as clients moving funds into money market accounts from time deposits.
Turning to trust and investment management. On slide 7, we had a $388.5 million increase in our assets under management in the first quarter, primarily due to market performance. This continues the positive trend we are seeing in AUM, which has increased 12% or $750 million over the past year.
And now I'll turn the call over to David for further discussion of our financial results.

David Weber

Thank you. Turning to slide 8, we'll look at our gross revenue. Our gross revenue increased 4.6% from the prior quarter, primarily due to an increase in our noninterest income. As expected, this reverse the downward revenue trends we saw in 2023.
Now turning to slide 9, we'll look at the trends in net interest income and margin. Our net interest income decreased 1.6% from the prior quarter due to an increase in interest expense resulting from a higher average cost of deposits. Our net interest margin decreased three basis points to 2.34%, driven by an increase in the interest-bearing deposit costs and an unfavorable mix shift in our deposit portfolio, offset partially by an increase in the average yield on interest-earning assets. '
The rate of decline in has decelerated over the past four quarters nearing a point of stabilization. During March, we repaid $31 million of borrowings from the bank term funding program, which will reduce our level of borrowings in the second quarter. We continue to have $10 million of borrowings outstanding from the BTSP, but the rate is locked for one year. So we will not see a rate increase on these borrowings.
Now turning to slide 10, our noninterest income increased 19.7% from the prior quarter. We generated increases in trust and investment management fees, net gain on mortgage loans and bank fees, which were partially offset by a decrease in risk management and insurance fees, which are seasonally higher in the fourth quarter each year.
The increase in net gain on mortgage loans was due to two factors. First, loan production increased to $91 million from $67 million in the prior quarter, as we saw an increase in home buying activity in our markets as well as the contribution of production from new MLOs we had added this year. And second, we had an increase in our average gain on sale margins.
Now turning to slide 11 and our expenses. Our noninterest expense increased to $19.7 million, primarily due to the seasonal impact of higher payroll taxes and higher incentive compensation, which returned to a more normalized level as a result of our increase in profitability, and we had higher legal costs in the quarter.
For the next few quarters, we expect to manage core operating expenses carefully as in 2022 -- 2023, with the main variable being the level of incentive compensation, which will be dependent upon our financial performance.
Now turning to slide 12, we'll take a look at our asset quality. Our nonperforming assets declined $5.1 million, which was primarily due to the sale of a nonperforming construction loan at a gain and the paydown of our largest nonperforming relationship following the sale of a property that we had as collateral.
The remainder of the portfolio continues to perform well and we had a decline in past due loans and zero losses in the quarter. With the decline we had in loans, our level of allowance to adjusted total loans increased five basis points to 1% at March 31. I also want to note that multi-family loans represent just 7% of our total loan portfolio. These loans are performing well and none of the loans are to borrowers for rent-controlled properties.
Now I'll turn it back to Scott. Scott?

Scott Wylie

Thanks David. Turning to slide 13. I'll wrap up with some comments about our outlook. While economic conditions remain uncertain. We'll continue to prioritize prudent risk management and conservative approach to new loan production while continuing to make progress on resolving the credits that were placed on nonperforming status over the past few quarters, which we continue to expect to result in material losses.
However, with the strength of our balance sheet, we're well positioned to capitalize on increased loan demand. Once borrowers have more confidence in the economic outlook and the interest rates start to move lower. Our business development focus will remain on full banking relationships with high-quality clients that need the multiple products and services that we can provide in banking, wealth management and other areas.
These are what we consider to be our core clients, and they've historically resulted in highly profitable relationships and strong asset quality. Over the past several quarters, we've had good success in achieving our goal of reducing our loan-to-deposit ratio and will continue to prioritize core deposit gathering to further increase our liquidity.
We also expect the positive trends we saw in the first quarter in the areas of wealth management and mortgage banking to continue. We recently added some new MLOs in the mortgage business, which should contribute to higher levels of loan production, particularly as we move into the C seasonally stronger period for Homebase with the increase in our tangible book value per share and risk-based capital ratios in the first quarter, along with the improvement in asset quality, we have the flexibility considering adding additional options for capital utilization which we'll continue to discuss with the Board as market conditions evolve, as always, select in the best interest of shareholders.
Given the strength of the balance sheet, the franchise we've built we believe we're well positioned to continue to add an attractive service and relationships, growing our balance sheet over long term, increasing revenue and realizing more of a positive operating leverage, which should result in further increases in our level profitability and additional value being created for our shareholders.
With that, we're happy to take your questions. So normal, please open up the call. Thank you.

Question and Answer Session

Operator

(Operator Instructions)
Brett Rabatin, Hovde Group.

Brett Rabatin

Hey, good morning, everybody (multiple speakers) wanted to start just on the asset quality and understand a little bit better yet the sale of and construction loan and the paydown of the largest NPL. What is that what is the balance of that largest in NPL at this point? And then maybe can you talk about the resolution of the remaining piece from here, the additional sales of properties are you how you think that might play out?

Scott Wylie

Yes. We've said, I think pretty consistently that this is a process that's going to take some time, and that's true with any loan in workout. And in this particular case, we've got one relationship with four loans and seven pieces of collateral that are cross-collateralized. So it's a particularly complicated process. You know, our goal is to get these properties sold and get repaid.
And so the fact that one of them was sold in Q1 was definitely a positive. And then we've had another one already sold in Q2, and we've been paid down on that one. So we have five remaining properties and there are different stages of some of collection and they're in different locations. So it's going to have some differences in the timing, but we have already foreclosed into those remaining properties so far this month.
And as we move through the year, there should be consistent progress with making these recoveries. As of quarter end, we had $38.5 million still outstanding on the relationship with about $5.8 million of specific reserves, including the $2.3 million we put into specific reserve on that relationship in Q1. So I think on the on the books, you could look at it is $38.5 million minus $5.8 million. And then once we get title to these properties that we can in the foreclosure auction, then that will be at a decrease of $12 million or so in an increase in [REOs], obviously there.

Brett Rabatin

Okay. That's yes, that's pretty that's helpful, Scott. So I understand, so make sure I understand correctly, seven properties. You sold one in the first quarter. You've already sold one in the second quarter and you've taken possession or you've repossessed two more for $12 million and then the remaining would be two other properties, is that right?

Scott Wylie

Well, [seven minus two minus two is three] more to go (multiple speakers) and technically, Brett, we didn't sell them the borrower. So the two that were sold in Q1 and in the beginning of Q2, and that's good with us. I mean from what we want the loan repaid, we don't want to be in the property business so --

Brett Rabatin

So the borrower is paying down credit. Okay. And then what about recoveries on the one that you ended up having to fully charge off in the fourth quarter. What does that process look like from the legal perspective on that? I the judge has to basically take care of that at this point?

Scott Wylie

That's right. It's a bankruptcy process now. And I think the point we've tried to make on that is, you know, now we don't really control it as much in because it's the bankruptcy trustee that was appointed by the bankruptcy judge. We are supporting the bankruptcy trustee with analytic work to help get to the bottom of where the money is and how we can collect on it.
I would say we are anticipating some recovery. We don't have a strong sense yet of how much or when. But, you know, I think a reasonable expectation is we're going to have some recovery over the next 12 months. I think the main point for us as shareholders is we've taken our lumps on that one. And there's not going to be more bad news on it if we've got the bad news and hopefully we'll see some good news playing out here over the next 12 months or so.

Brett Rabatin

Okay. And then was just curious, you had the margin for December. And then just how much of the loan portfolio reprices this year and maybe an outlook, David or Julie on the margin from here?

Scott Wylie

Well, David, you want to tackle that one?

David Weber

Yes. As far as the repricing, we've got about 25% of the loan portfolio that reprices in the next 30 days. And then from a margin standpoint, we had -- I assume you're asking about March and not December.

Brett Rabatin

Yes

David Weber

Okay. Our March margin was a little bit lower --

Brett Rabatin

I'm sorry, March on December, yeah.

David Weber

Yeah correct. Okay. Our March margin was a little bit lower there can be some noise that comes through through amortized loan fees and things of that nature. So it was about 224. But if we look at it at a more of a normalized basis, and we're thinking that number's about two 31. And then going forward, we expect second quarter to be relatively in line with where we were in the first quarter in that kind of low [230s] type of range.

Brett Rabatin

Okay. And David, you said 25% of portfolio reprices. Are those variable rate variable rate loans that are repricing and what what rate are they replacing from?

David Weber

Yes. So that's that is variable. That's correct. As far as what right, great, they're repricing from. And I'll have to get that for you. I don't have that in front of me.

Brett Rabatin

Okay. And then if I could sneak in one last one, if I if I understood correctly, this expense run rate is probably a good run rate from here. And you mentioned that the biggest variables was the compensation. What about the other piece of the legal fees and all that, that might be elevated to any any the outlook overall on expenses from here?

David Weber

Yeah, going forward and the incentive compensation is certainly will be dynamic based on the financial performance of the company. And then we should see a little bit of relief due to the seasonality of payroll taxes that will start to come down in second quarter and continue through the third and fourth quarter.
As far as you know, legal and workout fees, I'm a bit hard to predict at this point, but I don't think we expect it has to be really at the same levels that we saw in the first quarter going forward.

Scott Wylie

Just to give a little bit more transparency, Brett, on Q1, I think the total number in Q1 was 700,000 for of workout, special legal fees and that sort of thing. And David said, you know, I don't think that goes to zero in Q2. But if you look at our underlying core expenses. I think it's typically much less than that and hopefully will normalize here over the course of the year.
We also had a $0.5 million operating losses in Q1, which were related to wire fraud in them. That's a very high number for us and it's not typical of what we see here. So those numbers are in our Q1 expenses that I can't, I wouldn't really consider to be core expense.

Brett Rabatin

Okay. Appreciate all the color.

Operator

Thank you. Woody Lay, KBW.

Woody Lay

Thanks for taking my question. Wanted to follow up on credit to start. I had just on the NPA bucket on trying to understand all the movements. So how how large was the credits that moved into the NPA bucket in the first quarter? And any color you can give on that loan.

David Weber

Yeah the size of that loan was a little bit under $2 million and it is a C&I loan.

Woody Lay

Okay. That's helpful. And any trends to note just then criticized or classified and that's in the quarter?

Scott Wylie

No, I think we're seeing stable to improving trends in most of the credit metrics. We look at the only real exception to that is I would tell you that we are definitely increasing our watch efforts. So, you know, loans that we think could be under stress, those barrels could be under stress if rates continue to higher rates or some CRE loans that are maybe maturing, we were definitely, you know, paying a lot more attention to those these days and they show up on the watch list.
So I don't necessarily view that as a credit indicator or as a concern, I think you know, I hope those are signs of good credit administration, credit management here. But as I said, I mean, I think the headline number on the NPL side and the 56% reduction on the past-due loans are both really positive trends for asset quality.

Woody Lay

Yeah, yeah, definitely. I guess last for me, shifting over to loan growth. I believe last quarter we sort of talked about an expected loan growth rate in the mid single digits. It sounds like you might be strategically pulling back a little bit. How should we think about loan growth going forward?

Scott Wylie

I don't know. It's really hard to predict right now, especially, you know, month-to-month and quarter-to-quarter rates are up, but rates are down and all that right. But but given that context, I think you know what what we have said in the past. And what we continue to think is, you know, in our strong growth markets that we have and with the platform that we have and the people that we have are producing loan growth in the mid single digits, and this year seems like a reasonable goal.
Now obviously, when you start down in the first quarter, that gets a little less likely. So I would say, you know, if we saw flat in the second quarter, that would be great. And if you talk to our regional presidents and our market presidents has which we have they seem confident that we're going to see some loan growth here this quarter and this year on a net basis.
So I think for modeling purposes, given a lot of uncertainty around flat here for the next few months in growth over the course of the latter half of the year, depending on what happens in the economy makes sense. One of that one of the things we've been looking at internally, as you know, we're seeing some really aggressive pricing now coming out of the community banks and credit unions in our markets on certain types of loans.
And those are particularly in the case of owner-occupied real estate and in C&I loans. And we're just not going to play that game. We are I've encouraged our people to stay disciplined on pricing and structure and not chase rates. You want to see it higher. In particular, it's frustrating because you will get a client or prospect that's wants to move here and bring their deposits and whatnot. And then you know where they are, wherever they are gets really aggressive in terms of retaining them in.
So these are just the challenges that are for frontline folks are dealing with these days in the market, but I think that stuff sorts itself out over time. And we've seen some nice growth really across the EM growth opportunity across the different loan types here. And I think you're going to see loan growth across the different loan types over the course of the year as things stabilize.

Woody Lay

That's really helpful details, and thanks for taking my questions.

Operator

Thank you.
Adam Butler, Piper Sandler.

Adam Butler

Good morning, everyone. This is Adam on for Matthew Clark. And if I could just start on the deposit side, looks like there was some remix into interest-bearing during the quarter with NMT's down there slightly faster pace than last quarter. I was just curious to get your updated expectations on? And do you expect that will slow going into the second quarter or just kind of how you're seeing deposit flows move around right now?

Scott Wylie

Yeah, thanks, for the question, Adam, we and again, you know, hard to predict. We were thinking that our DDA shift into interest-bearing accounts had really stabilized in Q4 because we saw it actually grow, the DDAs were growing. And then we see a $48 million decline in those DDAs in the US in Q1.
And you don't like obviously very disappointing trends. So we did a deep dive on that. And what we found is about 40% of that decrease our just kind of operating account fluctuations. So it's people using their money. And at quarter end, it was $20 million lower than it started to come in and about 40% was people shifting out into interest-bearing accounts.
And then the remaining 20% was on people that had DDAs related to home construction projects that are funded here. And you know, the cash from the borrower and a construction project goes in before our loan does. So they're using those funds to pay their equity, essentially these construction projects. So that was about 20% of it.
So that's that's kind of the mix. So hopefully as we go forward through the year, we're going to see a lot less of that. Maybe the fluctuations are positive other quarters of the negative and whatnot. So so that would be kind of the general outlook.
Now having said that, historically, we've seen some deposit declines in Q2 because we had clients making on tax payments. And so that's going to be a headwind for Q2, but that's a normal thing here and underlying, you know, hopefully we continue to grow deposits and some of those are DDAs and we can retain the DDA mix that we have today.

Adam Butler

Okay. Thank you. Thank you for that. I was Thank you for the clarification there. If I could just switch over to your NII outlook. If loans trend flat over the next quarter. Is it fair to assume that an eye stays relatively flat or maybe troughs in the second quarter? And then beyond there with your growth outlook maybe start to step up again?

Scott Wylie

Yeah David and his team do a really granular look at that from bottom-up tenants, largely with a flat interest rate outlook. We originally had started the year thinking maybe 25 bps decline midyear and 25 bps later in the year. And we've now redone that was just one decline for a rate cut late in the year. But David, you want to walk through how we expect that name to play out in the coming months?

David Weber

Yeah, I think your comments are fair on that the two components that we need is we need to continue to see loan production at these higher rates than our average loan yields, which are in the mid-fives to help churn that loan portfolio. Obviously, the the volume of loan production we had in the first quarter really wasn't enough, frankly, to have a material impact there.
So we need to see that continue to churn. And then certainly stabilization of our DDAs is a big component of really stabilizing our total average cost of deposits. And we've seen as far as the pricing pressures on existing accounts. It feels like that has certainly declined, but the mix shift has been unfavorable for us from a funding standpoint. So we certainly need to see that at stabilization of the DDAs, which those two dynamics will give us the ability to see net expansion in the second half of the year, we'll call it.

Adam Butler

Okay. That makes sense. Thanks for the color there. And then just one last one for me. It was good to see the pickup in mortgage production during the quarter. And I think as you alluded to in the presentation was attributable potentially to the originators that were hired this year.
How much of that do you think was was attributable to them the original team? And do you think that level is sustainable. I think it was $1.2 million this quarter, [$1.3 million] this quarter. Do you think that's sustainable throughout the year or will go up?

Scott Wylie

Sure. What's going to happen with the 10-year treasury Adam.

Adam Butler

good question.

Scott Wylie

(laughter) well to give a little more serious answer. We've hired, I think, seven or eight new MLOs since late last year, and they're a total of about 25 or so MLOs that are active producers. So so that's a pretty significant increase. You know, maybe a third of the MLO force is new over the last 90 days. Actually, we've been pleasantly surprised that their productivity, they a lot of times, you don't take three months or six months to kind of build up our pipeline and get it going.
And we're actually seeing them producing some nice results already in Q1 and going into Q2. The real production in Q2. The improved earnings in Q1 I mean came from a combination of volume and rate. And so we saw a nice improvement in the gain on sale. We saw a nice increase in volume. And yes, I was looking back at how we did it monthly mortgage department review this morning.
And as looking back over the last 12 months and you know, there were many months last year where we were losing $250,000 in a mortgage operation contribution and we made $250,000 in March. And that's just I mean, obviously, $6 million swing annualized is a very big number for us.
So it is really great to see if we see rate stability, it seems like we could have a better and better year this year as the year progresses. You know, last year obviously was a record low production in the industry for like 30 years. And so we're hopeful that that improves as we go through the year this year. And now we have some more MLOs to support that.
Julia, you actually had to answer that question yourself record market share? Yes, it is much closer to it than I am flattening out, standardized amendments. Any of the key points there and right now, and that's meant that.

Adam Butler

Well, it's great to hear, and I hope the momentum within the team continues. And thanks for taking my questions.

Scott Wylie

Yeah.

Operator

Thank you.
Ross Haberman, RLH investments.

Ross Haberman

Good morning, Scott. Scott, how are you guys? My questions have been answered. Thank you. I just wanted to go back, I think you said 700,000 in this quarter related was legal with the again, was that mostly related to the non-performers and hopefully that will begin to moderate over the next couple of quarters. As is as these nonperformers are resolved, that would not be a good assumption

Scott Wylie

And that's what I said. And David's nodding his head. Yes. So think proprietarily, correct, yes.

Ross Haberman

And and the $0.5 million you lost, are your insured, does insurance cover any of that, I think you said it was the check, was it checkout or something?

Scott Wylie

(inaudible) is the boiler forestry issue right now, and we spend a lot of time and effort on training people and managing that and we put additional controls in place. And I can't tell you how many we catch because it's a lot of them.
But we did have a couple that got biases this quarter and none of go into your expense numbers in the quarter is we know that happy about it right and not happy to talk about it, but I think in terms of understanding what our core expenses are, that was part of Q1.

Ross Haberman

what so that would fall under your deductible. So you don't get reimbursed for that type of stuff because that would fall on you had talked about something. Okay.

Scott Wylie

Correct.

Ross Haberman

And how the new branches coming, you had that operation, I believe, in Arizona and in Montana, how are they coming in terms of generating business as well as -- or are they generating the any sort of deposit level that you can you can talk about?

Scott Wylie

Yeah. So the process of opening an office de novo is upper is a project and you can't get a branch approved unless you have a location, you have the people and you get the regulatory approval, not so ITO in Bozeman, for example, we hired a team there and we had an LPO that was producing loans. But then once you have the team in place.
You have a new office built out, which takes, you know, like a year and a growth market like that, then you can convert it into a full service brands. We're a profit center as we described them and then and then they can start taking deposits. When did that open is a full service. It was six months ago now something like that. And we think that that's I'm going to be a really nice success story.
We've got a great team there. They've identified lots of good opportunities. They've got a nice book that they're building a business. We held a client of and the prospect event, Tom up there a February. I want to say that was very well attended versus a lot of interest, I think, in that market and what we're doing because it's different in others and that there's no other First Western in Bozeman. So um, so I certainly think that that's going to be fine, Arizona.
You've been and rebuilding the teams there since you asked about that. And I think that that's going to be on a better trajectory some of the other new offices. I think our Western Wyoming offices that came with the acquisition a couple of years ago are really seeing a lot of traction and in making nice progress of available office, which is our most recent resort market.
That's probably what, five years old now something like that, Julie, and it's not really he's getting some great traction in the Vail Valley. And again, very differentiated from anything else in that market. So these things take time off and they take investment and they take persistence, but they're showing nice results, and I think they'll be great long term produces for the shareholders here.

Ross Haberman

I just one one follow up question about the not the nonperformers. You think you'll be able to get I guess there was the one large non-performer with a lot of different parts to to it. I think you said you you've gotten control of for for the parts. There's three left, I think how will you will you be able to resolve the other three you you think in calendar '24?

Scott Wylie

I think that's a reasonable expectation.

Ross Haberman

Okay. Thanks a lot. I appreciate it. have a good weekend.

Scott Wylie

Yeah thanks, Ross.

Operator

Thank you. And I'm currently showing no further questions at this time. I'd like to hand the conference back over to management for closing remarks.

Scott Wylie

Great. Thank you Norma. well, we've consistently said this year that this was going to be difficult to predict given the economic uncertainty, but we have seen a number of positive trends as expected in Q1, your net interest income and net declines appear to be slowing. Fee income has definitely recovered nicely. Operating expenses, particularly if adjusted for some of these elevated workout in other Q1 expenses that we talked about that we hope are nonrecurring expenses are well controlled.
Our AUM exceeded $7 billion and fees were up. Our asset quality is improving. NPAs are down as we work through our one remaining large workout credit, as we've talked about. With the improved loan-to-deposit ratio and continued core deposit growth, we should be able to get the balance sheet back on track for at least modest growth this year.
As these trends, together with our many internal initiatives we have underway will drive higher earnings and improved efficiency and in the quarters to come. So thanks, everybody, for dialing in, and we sure appreciate your interest in First Western. Have a great day.

Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.