First Western Financial Inc (MYFW) 2019 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First Western Financial Q1 2019 Earnings Conference Call.

(Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Tony Rossi from Financial Profiles.

Mr. Rossi, you may begin.

Thank you, Josh.

Good morning, everyone, and thank you for joining us today for First Western Financial's First Quarter 2019 Earnings Call.

Joining us from First Western's management team are Scott Wylie, Chairman and Chief Executive Officer; and Julie Courkamp, Chief Financial Officer.

We'll use a slide presentation as part of our discussion this morning.

If you have not done so already, please visit the Events & Presentations page of First Western's Investor Relations website to download a copy of the presentation.

Management team will discuss the first quarter results, and then we will open up the call for questions.

I'd like to note that Scott and Julie are in separate locations today, so there may be a bit of a delay in responding to your questions.

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.

With that, I'd like to turn the call over to Scott.

Scott?

All right.

Thanks, Tony.

Good morning, everybody.

Thank you for taking the time to dial in this morning.

We appreciate it.

I'll start on Slide 3 with the overview of the first quarter.

We produced solid results in the first quarter driven by our continued momentum in business development and new client acquisition.

We reported net income available to common shareholders of $1.6 million or $0.21 a share -- per diluted share in earnings.

On a year-over-year basis, this represents an increase of 160% in net income and 91% in earnings per share.

We entered 2019 with a very strong platform in place from a business development standpoint, and we're seeing strong experienced leadership in place in each of our profit centers now, a full marketing team in place for the first time in a year, and the business development offices that we had in 2017 and '18 had become acclimated and more productive as they gain experience at First Western.

As a result, we're able to continue the business development momentum we had the latter half of 2018 and deliver another strong quarter of balance sheet growth.

In the first quarter, our gross loans increased at a 16.7% annualized rate, and our total deposits rose at a 17.2% annualized rate.

When looking at average balances, our deposits were up 46% on an annualized basis quarter-over-quarter.

We saw excellent balanced growth across our loan production with strong increases in all major categories, except for commercial real estate where we're trying to limit the exposure there.

Despite our first quarter seasonality in the housing market, we saw solid mortgage production growth and return to profitability in that segment.

Importantly, our credit quality remained exceptional with 0% net charge-offs for the 10th consecutive quarter as we continue to grow our balance sheet.

The positive trends we saw in most areas of our operations continued to offset the decline we saw in net interest margin during the first quarter primarily due to higher deposit costs.

On Slide 4, we provide more detail about our first quarter earnings.

We continue to successfully execute on our growth drivers and deliver the high level of profitability we've seen since completing our initial public offering last summer.

We produced first quarter EPS of $0.21, off $0.01 from the previous quarter despite a $0.09 per share swing in incentive and payroll tax accruals but still up $0.10 from a year earlier.

We're seeing strong growth in interest-earning assets, although it's being offset, to some extent, by higher deposit cost resulting from higher rates given to new large depositors and significant inflows of trust deposits.

We had a higher level of revenue during the first quarter but also higher noninterest expense primarily associated with the expenses related to the noted increases in variable compensation costs.

This resulted in a slight decline in reported net income from the prior quarter.

Moving to Slide 5. We'll take a look at trends in our new -- in our loan portfolio.

We had $64 million in new loan production in the first quarter.

Given that the first quarter is typically seasonally slow, this was a solid quarter of production.

Our growth is well diversified with notable increases across all our major portfolios, with the exception of commercial real estate where we're limiting our concentration level.

Our business development offices have been more focused on developing commercial lending relationships, and we're pleased with the growth we're seeing in that area in particular.

Payoffs were less of a headwind this quarter.

We had $25 million in net run-off in the portfolio in the first quarter, down from $67 million in the prior quarter.

With the strong production and lower level of payoffs, we increased our period-end total loans by $42 million to $950 million or about 18% annualized quarter-over-quarter.

We'll continue to Slide 6 with a closer look at deposits.

Our period-end total deposits were $978 million, an increase of about $40 million from the prior quarter.

We have several large new client wins that contributed to the increase in money market deposits this quarter, including a large new client that was taken from a competitor in Colorado that's pretty much part of the disruption taking place in our markets.

While getting these clients in the door is very important as they have large net worth, somewhat more than $100 million, it is initially expensive.

As we're able to expand our services with these clients, we typically make the overall relationships more profitable, which helps to offset the higher rate we must pay on their initial deposits.

And this brings up an important point about our business model.

Unlike other banks, we aren't focused exclusively on protecting our interest -- net interest margin.

We're comfortable paying a higher rate to win the initial deposit relationship even if that results in short-term NIM compression because we have a broad platform of products and services that we will cross-sell to enhance the profitability of the long-term relationship.

In many cases, as the clients deepen their relationship with First Western, we can reduce that initial exception pricing deposit rate that was given and still retain their business.

So we recognize that net interest margin is a very important metric, it isn't nearly as meaningful for us as it is for most other banks that are far more reliant on spread income than we are.

Turning to our trust and investment management slide, #7.

Our assets under management increased $546 million in the first quarter to $5.78 billion.

A portion of the increase was due to the strong performance in the U.S. equity markets in the quarter, and new accounts contributed $53 million in the first quarter as well.

Now I'd like to turn the call over to Julie for further discussion of our financial results.

Julie?

Thank you, Scott.

I'll begin with Slide 8 and our revenue trends.

Our gross revenue of $14.9 million was up nearly 5% from the previous quarter.

Our continued growth in average loan balances helped us maintain a strong level of net interest income.

Noninterest income in the quarter was nearly 10% driven by our strong mortgage activity, which returned that segment to profitability this quarter.

Moving to Slide 9. Let's take a closer look at our net interest income and the margin.

Our net interest income increased approximately 1% from the prior quarter lifted by higher interest-earning asset balances primarily in loans.

This was offset by a decline in our net interest margin to 3.03%.

As Scott mentioned earlier, our average deposit balances increased at an annualized rate of 46% in the first quarter.

When we experience this level of deposit inflow from our new customer wins, it places significant near-term pressure on our margin due to the higher initial deposit rates being paid and the excess liquidity that results in a temporary drag on our interest earning asset yield.

Over time, as we redeploy the liquidity in the higher-yielding assets, the pressure on our margin moderates.

During the first quarter, we had a 17 basis point increase in our cost of funds from 1.06% to 1.23% driven primarily by the inflows of high rate, high beta deposits coming into our money market account.

We also had a 11 basis point decrease in our average yield on interest-earning assets to 4.20% from 4.31% in the quarter.

This is primarily attributed to an unfavorable short-term shift in our mix of earning assets as we had higher balances of deposits held at other financial institutions this quarter.

Our balance sheet is slightly liability-sensitive at this point.

So we believe if the fed does move in a rate-cutting mode again, we would be in the favorable position from a margin standpoint.

We also have some flexibility to move trust cash off our balance sheet.

So as we continue to focus on growing our noninterest-bearing deposit base, we should be able to better manage the impact of trust deposits on our funding cost going forward.

Let's turn to Slide 10, and we'll take a look at the noninterest income.

Our total noninterest income increased 9.8% primarily due to an increase in gain on mortgage loans sold resulting from a higher volume of loan sales.

With mortgage rates trending lower in the quarter, we saw a pickup in demand for refinancing.

In the first quarter, refinancing accounted for 35% of our total mortgage production.

This is up 22% from the prior quarter -- from what we experienced in the prior quarter.

Our trust and investment management fees declined from the previous quarter due mostly to the lower starting point for our AUM balances.

Looking ahead, we expect gains on mortgage loans to continue to rise as we have added production capacity by hiring additional mortgage loan originators and as we move into the seasonally stronger quarters for the housing market in Colorado.

Turning to Slide 11 and our expenses.

Total noninterest expense increased 8.2% from the prior quarter due primarily to an increase in compensation cost.

The increase in compensation was primarily attributed to higher bonus accruals and payroll taxes when compared to Q4 2018.

The higher expense is exceeding our revenue growth and pushed our efficiency ratio up to 83.2% compared to 80.6% in the prior quarter.

But over the long term, looking at the year-over-year comparison, our efficiency ratio was still well below the 89.1% level from the first quarter of 2018, which reflects the success we are having in driving more efficiencies as we scale the business.

Looking ahead, we expect to see modest increases in operating expense as we continue to make investments in business development efforts that we expect to positively impact our revenue generation going forward.

Moving on to Slide 12 and asset quality.

Nonperforming assets totaled $19.4 million or 1.69% of total assets at the end of the first quarter, down from $19.7 million or 1.82% of total assets from the previous quarter.

We continue to experience very low levels of credit losses, thanks to economic strength across our footprint and our strong underwriting.

We had 0 net charge-offs in the first quarter, and we recorded a provision for loan loss of approximately $200,000 for the first quarter, which was related to the growth in our loan portfolio.

Now I'll turn this call back over to Scott.

Okay.

Thanks, Julie.

Picking up on Slide 13, I'll provide some insight on our outlook for the rest of 2019.

We're steadily increasing loan production, attracting new clients and positioning the company for long-term growth, the momentum we've seen in business development should drive further increases in revenue, with the second half of 2019 is expected to be stronger than the first half of the year.

Our loan pipeline is strong and well balanced, which should lead to good diversification in our portfolio as it continues to grow.

We anticipate mortgage production will be another source of strength during the summer months.

With mortgage rates trending lower, we should have a bit more wind at our back, driving demand for both new purchases and financings -- refinancings.

We also expect to realize more operating leverage later in the year as we hold our expense growth below our revenue growth.

Finally, we expect to see more opportunities to add banking talent and new clients due to the dislocation in the Colorado and Arizona banking markets.

We think our unique business model, combining attractive wealth management platform with a trusted adviser bank offering, proven local expertise, give us a strong competitive advantage in terms of attracting both clients and bankers.

We're not necessarily just seeing opportunities from the recently acquired banks either.

In general, the dislocation has created quite a bit of overall movement in the market, and we're evaluating opportunities to do some lift-outs of banking teams that we feel could be additive to our franchise.

If we're successful in executing on these lift-outs, we would see a bump-up in our noninterest expense and near-term negative impact on our efficiency ratio as these teams start generating revenues here.

But we think these types of lift-outs are great investments for the company that will continue to accelerate our growth and pay good long-term dividend.

In closing, we've got off to a good start to the year.

And based on the trends we're seeing, we feel confident about our ability to deliver higher-level earnings as we move through 2019.

So with that, we're happy to take your questions.

Operator, please go ahead and open up the call.

(Operator Instructions) Our first question comes from Brady Gailey of KBW.

I wanted to start with AUM.

I know it was up nicely late quarter, but I think it was mostly due to the market performance.

If you exclude the market performance, I think AUM was down a smidge on a linked-quarter basis.

I've seen some press releases out there.

You all have lost some wealth managers to competitors.

Maybe just talk about how you're thinking about the growth rate, excluding any sort of market fluctuations, the core growth rate in AUM from here and maybe talk about any efforts on the hiring front as far as bringing in new wealth managers.

Sure.

I think that's like a 5-point question, but I'll try and work through it here.

Brady, I'm trying to get the organization to focus less on AUM and more on fee income because they're not always correlated in our business.

We have some high margin, higher fee AUM business where we're actively managing that money, providing wealth management services and others that are lower like custody business.

So I think you really have to separate the question from asset management AUM growth because, in a way, it's really not that relevant to what we care about, which is growth in relationships and the number of clients and the fees that we're earning from them.

In terms of the specific fee question, I think we grew $53 million in new client wins in the first quarter, and the shrinkage was less than that.

Look, Julie, I'll let you correct that, if that's not right.

So I think we did have good net growth in new clients in Q1.

But again, we're concentrated on trying to grow fees, and we have a number of initiatives around that.

I think we worked on improving margins.

We're trying to be more disciplined in the organization about enforcing minimums.

We've added some significant new services over the last 3 months that are going to drive higher margins in the wealth management area, I think, over time.

And then, of course, we've talked before on these calls about all the things we're doing in terms of new business.

So hiring the business development officers was an important step in that area.

I think some of the technology changes that we've made here in the first quarter are going to give our portfolio managers that are spending a lot of time on servicing, have some more time for new business marketing and selling efforts.

Of course, we brought in this new marketing team that I mentioned in our prepared comments, and that's fully staffed now.

So there are a number of initiatives underway to make sure that we see the same kind of growth on the fee business side that we'd like to see, which should be in line with what we're seeing on the balance sheet side as well.

So I think I hit all the major points there, Brady.

Did I miss anything?

Yes, that was great, Scott.

But I also wanted to ask about just the outlook for the net interest margin.

I understand what's happening, and you're bringing in these new higher-cost deposits, hoping to cross-sell them on everything else that First Western has to offer.

But as you look forward, just talk about the magnitude of additional increases in deposit costs and how you think about either your net interest forecast off of this 1Q lower level.

Yes.

So obviously, this is something we spend a fair amount of time looking at because we want to make sure that we understand and are managing it.

I said in my prepared comments that it's less important to us at First Western than banks that are much more dependent than us on NIM, but that doesn't mean it's not critical for us to pay attention to this.

So what we saw in Q4 was, if you look at a month-by-month basis, increasing deposit cost pressure that caused narrowing of our NIM throughout Q4, and we knew that, that was going to be a factor going into Q1, which we talked a little bit about in January.

I think the question for me when I first started looking as this is what's the trend month-by-month going into Q2.

And is that going to be -- is the downward trend from Q4 to Q1 going to continue into Q2?

And it seems like what we're seeing is that, that bottomed out kind of mid-quarter, and it seems to have turned itself around nicely.

And our expectation is that our -- which we have said before, it's consistent with what we said before is that our Q -- our 2019 NIM should be in line with our 2018 NIM, assuming no interest rate -- short-term interest rate changes.

So I think what we know today seems like that's still in the right ballpark.

Certainly, we saw a lot lower NIM in Q1 than we would have liked, but it was consistent with the trends we're seeing in Q4, and it seems to have reversed itself at this point.

And Julie mentioned in her comments that there are a couple of factors here.

One I talked about, which is the cost of bringing in people and then getting them comfortable and cross-selling and taking -- reducing some of those premiums that we typically pay for new clients.

But then also, when you grow, we grew over 40% in average deposits, Q4 over Q1, Q1 over Q4.

And with that kind of growth, you end up with some inefficiencies just in the balance sheet.

And so we had more liquidity on average in Q1 than we had last year, and it just ends up in a much lower margin, so your overall NIM looks a lot thinner than what it is once it all stabilizes and gets invested and lent out, whatnot.

All right.

And then, the last question for me is just an update on the $11 million nonperforming energy loan that was added a couple of quarters ago.

Yes.

So it's not an energy loan.

It's a loan to an entrepreneur who is in the energy business but -- primarily, but it's kind of a private banking loan to that guy.

I can tell you that it has continued to perform as expected.

It's still nonaccrual, and it's still a NPL.

He has paid down that loan by $4.1 million since the end of Q1.

So that's down below $7 million today.

And obviously, we'll be able to report that at the end of Q2.

(Operator Instructions) Our next question comes from Matt Olney of Stephens.

Can you hear me?

Yes, better now.

Okay.

Great.

On the fee income piece, you mentioned mortgage was stronger this quarter.

Can you talk about how much of that was from better mortgage volumes versus better margins?

I think last quarter, you talked on the call about taking some proactive steps to improve the margins, passing along some of those fees.

Are we seeing this yet in the first quarter?

Or is that still on the come?

So Julie, if I could make a general comment, and then turn it over to you for a numerical answer for Matt, that would be great.

So I would phrase this more as Q4 was a weak quarter than Q1 was a strong quarter.

I mean, typically, Q1 is not a particularly strong quarter in mortgages in Colorado.

And so I think seeing a nice bounce back from the fourth quarter disappointment was really great to see.

I believe it was more volume than rate, and Julie can speak to that.

But it also did reflect the fact that we've been bringing in new MLOs and a couple of those who joined in Q1, and so we're seeing some momentum from that.

And then, as I mentioned in our comments, the -- a little bit better tailwind from the rates.

Julie?

Yes.

So exactly what Scott said and consistent with what you said, Matt.

In Q4, we were seeing a nice increase in our margin on purpose.

And then in Q1, as we were wanting to get the production on, we slightly declined that margin in an effort to get more production on.

And we've done a nice job of managing both sides of that.

We did about $93 million in total mortgage funding.

About 80% of that we sold off; and 20%, we put on the portfolio and are seeing some really good momentum into the busier season.

So we're feeling like that's a pretty good trend for us.

Okay.

That's helpful.

And then also, on the loan yields, it looks like the average loan yields were flat, maybe moved down a smidge versus the fourth quarter.

Any color or anything you can share?

And what will be the outlook from here on those core loan yields?

So you're right on that.

New loan production, we saw a little bit of a decline from quarter 4 to quarter 1 but nothing that's anything that's systemic or really driven by us reducing rates.

It's just the mix that we saw coming into the portfolio.

Our internal projections keep us pretty consistent, if not increasing a little bit, as we work to switch over to more of a C&I lending portfolio and less what we did in 2018 of 1 to 4 family.

Yes, Matt, I would just add to that.

When we look at this day-to-day and month-to-month, you see a lot of variance in the new production depending on the loan type.

And again, it's just part of being a smaller institution.

If you have a big month in February of loans that are secured with cash collateral, you may see a lot lower new production rate, not because it's a change in strategy, just a law of small numbers, I guess.

So if you look at Q1, as Julie said, it's down slightly from Q4 but it's up significantly from Q3.

And so I think the underlying trends there are really positive.

Okay.

And then, I guess, sticking with that loan growth, very strong quarter in 1Q.

A lot of banks talk about seasonality in 1Q working against them.

Can you talk about, in your markets with your strategy, the seasonality impact?

And can you hold these levels?

Or could even accelerate from here?

What were your expectations on loan growth from here?

I think loan growth in Q4 and Q1 was in line with our expectations.

I would tell you, we do expect to be able to continue that.

Again, at our size, pipelines aren't always that great of a predictor of what happens the next day, week, month or quarter.

But our pipelines are up significantly like 50% if you do an apples-to-apples comparison on where we were April 1 versus January 1. So I think that we should be able to continue to be in the level that we've seen the last couple of quarters.

And then, you mentioned the expectation is to achieve some improved operating leverage in 2019.

Are there any corporate goals for the year or for the back half of the year that you can share with us as far as kind of what your goal would be, whether it's efficiency ratio or ROA?

Julie, you want to speak to that?

Yes.

There -- and consistent with what we've been talking about, our efficiency ratio, we're trying to get more in line with our high-fee bank peers.

So we're hoping pretty much in line with what we've said in the past is getting that to levels that are closer to them.

And obviously, part of that is making sure that we have growth for the future as well, so balancing both ROA and efficiency ratio as we're, as we mentioned in our prepared comments, looking to add -- as lift-out opportunities come from the markets that we're in and the opportunities that we're seeing, making sure we're balancing both of that.

And on the lift-out discussion, help us think about the financial impact of that.

What would your expectation be, maybe a range as far as when you'd expect -- if you were successful in bringing over those teams, how quickly could you get those teams to breakeven and then profitable?

It depends.

And I know that's not a satisfying answer, but each one is different.

We have a really interesting opportunity that we're working on where a team would join an existing office.

And obviously, in that case, you really only have the incremental cost of the folks, and you give them incentives to get productive quickly.

And so that's something that can breakeven their second quarter in a good scenario of having them on board.

There's another opportunity that we're working on that would be a new location, and then, obviously, you got the incremental cost there and probably a little bit of incremental sort of shoe leather cost of getting the office open and the regulatory approval and all that other stuff.

So what we found typically with our de novo offices just from scratch, not really a whole lift-out team, those take something more like 18 months to get them to breakeven.

If you can lift a team out, that gets it going faster.

Obviously, it could be a lot quicker than that.

And then, if you can take a team and put them in an existing office, it can be even quicker.

And our next question comes from Ross Haberman of RLH Investments.

Just had a follow-up question regarding the NIM.

You did a very nice explanation why it dropped in terms of bringing in new customers and having basically to pay for them.

Over the next couple of quarters, do you see further drop as you push to bring in new customers?

Or do you think sort of a moderation of that NIM as the new customer acquisition sort of moderates?

Well, I would tell you, our expectation is that we won't see a further deterioration in the NIM.

In fact, I spoke about our expectation that we can get that back in line with where it was last year over the course of 2019.

I had to tell you that if we could grow deposits in the mid-40s on an average balance basis, quarter-over-quarter for a few quarters, that would be pretty remarkable.

So I don't really expect that to happen, so I wouldn't really expect this sort of deposit pressure going forward.

So we're certainly not anticipating that.

Specifically, can I ask you the type of specials you're offering today?

And that's my final question.

The kind of what that we're offering today?

I'm sorry.

Deposit specials or money market specials or something in order to bring in these new relationships.

Let me take a general crack at that, and then Julie, if you want to add some more specific color, that would be helpful.

Generally, what happens with our type of client is we're not advertising a special rate in the window.

We never do that.

What happens is we're calling on prospects, and we're talking to referrals that we get.

And as part of getting them to move, we'll pay them a rate that's above the rate fee.

And we call that exception pricing.

And so then we flag those exception prices that we've made, and we review those every month in ALCO and then periodically look at how we can bring those more in line with our standard pricing over time.

So that's kind of the mechanics of how it works.

If it's already a trust and investment management relationship or a lending relationship and they're adding deposits, then we have a whole profitability model that we use for client profitability, and we'll use that to help drive the pricing.

As well, that's kind of, I guess, qualitatively how we do it.

Julie, do you want to speak to the specific question about specials that are going right now?

Yes.

Just like you said, Scott, we're not running currently specials, and it's not typically what we do to attract deposits.

It's a relationship model, and that's really how we go about the entire aspect of the business, including deposit.

And we have a relationship pricing process that we go through to make sure that each client has the profitability that we need to sustain the margins that we want.

And I'm not showing any further questions at this time.

I would now like to turn the call back over to management for any further remarks.

Well, great.

Thank you, and thanks, everybody, for dialing in today.

We really appreciate your support and your interest in First Western.

Have a great weekend.

Thank you.

Ladies and gentlemen, thank you for participating in today's conference.

This does conclude today's program, and you may all disconnect.

Everyone, have a wonderful day.