First Western Financial Inc (MYFW) 2019 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the First Western Financial Third Quarter 2019 Earnings Conference Call.

(Operator Instructions) Please be advised that today's conference is being recorded.

(Operator Instructions)

I would now like to hand the conference over to your speaker today, Mr. Tony Rossi, from Financial Profiles.

Please go ahead, sir.

Thank you, Katharine.

Good morning, everyone, and thank you for joining us today for First Western Financial's Third 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.

The management team will discuss the third quarter results, and then we'll open up the call for 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.

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

Scott?

Thanks, Tony, and good morning, everybody.

Just before we jump into the deck today, I wanted to make a couple of introductory comments.

We've now been a publicly reporting company for more than a year, and I'm really proud of the progress our team has made in this first year.

We've demonstrated some good operating leverage in our business model.

In addition, we made really solid progress in the long-term drivers of earnings growth, adding clients, strong loan production, deposit fee growth, integrating our mortgage team, and we've even opened a new office, up in the Vail Valley.

On a year-over-year basis, our net income increased 68% in Q3 while EPS was up 58%.

Our tangible book value is up 13.2% year-over-year.

Deposits are up 26.2%, and total loans, including mortgages held for sale, are up 13.7%.

So overall, it's been quite a solid first year as a public company.

So let's turn now to the deck and Slide 3, which summarizes the third quarter.

Our third quarter performance represents another strong quarter of execution on the strategy and business model we put in place to drive profitable growth.

We generated net income of $2.4 million or $0.30 per diluted share.

As I noted before, on a year-over-year basis, this represents an increase of 68% in net income and 58% in earnings per share.

Our third quarter results included some expenses related to an equity compensation earnout for EMC, our residential mortgage lending business that we purchased in the fall of 2017, and the sales process for our Los Angeles fixed income team that we announced last quarter.

These noncore items impacted our earnings per share by about $0.05 in the quarter.

So adjusted for those acquisition and disposition expenses in Q3, EPS would be $0.35 a share.

With our higher profitability, we're also driving strong growth in our tangible book value per share, which increased 3.6% or 14.4% annualized during the third quarter.

We continue to have strong momentum in business development and attract high net worth clients to First Western.

This resulted in very strong deposit growth, 41% annualized in the third quarter and increases in our assets under management.

As a result of the growth in our trust and investment management business, our assets under management surpassed $6 billion for the first time.

We also had another very good quarter of mortgage production, which continues to make a strong contribution to our overall profitability.

Taking a look at the trends in the loan portfolio, we continue to have strong loan production, but our overall loan growth was impacted by a significant increase in payoffs and paydowns.

Net runoff in the portfolio increased 60% from last quarter and hit the highest level we've seen in our history.

From our credit quality standpoint, we continue to see stable trends with slight increases in substandard loans and had another quarter of 0 net charge-offs.

And we announced in July, we reached an agreement to sell our Los Angeles-based fixed income team.

We'd hoped to complete that transaction in the third quarter, but that time line proved to be a little too tight.

We're now expecting this sale to close in the fourth quarter.

And upon closing, we continue to expect to have a positive impact to tangible common equity somewhere in the $3.3 million to $3.9 million range.

We incurred about $140,000 professional fees related to sales during the third quarter.

So when that deal is closed, we'll see some relief in terms of those expense levels.

Moving to Slide 4. We provide additional detail on our third quarter earnings.

Relative to last year, we continue to see strong improvements in earnings driven by higher revenue and well-controlled expenses.

Turning to Slide 5, we look at trends in the loan portfolio.

Our total gross loans, including mortgage loans held for sale, increased $20.2 million from the end of the prior quarter, representing an annualized growth rate of 8.3%.

On an average basis, our total loans were up 12.5% year-over-year.

We've added a new chart to this Slide to show the quarterly trends in loan production and net runoff.

We continue to have strong loan production, with our third quarter originations increasing 5.3% from the prior quarter to $55.4 million.

Average loan yields increased 2 basis points from 4.53% to 4.55% quarter-over-quarter.

New loan production had an average rate of 4.63% in Q3 compared to 4.38% in Q2.

However, our net runoff increased to $71.3 million from $44.7 million in the prior quarter, and that's up 244% from the third quarter of last year, which impacted our net growth in total loans held for investment.

Since the beginning of 2018, our quarterly runoff has averaged about $35 million.

So our experience in the third quarter was double what we've typically seen over the prior 7 quarters.

We've done an analysis to identify the drivers of this increase in payoffs, and the primary factor was related to client liquidity events.

It's hard to predict when these kind of client liquidity events are going to occur, but there is a good chance that they won't be as large of a factor in the fourth quarter.

A smaller contributor to payoffs is an increase in refinancings.

The rate of payoffs related to refinancings has accelerated since the Fed began cutting interest rates, and we're seeing competitors being very aggressive in pricing residential mortgages and nonowner-occupied CRE loans, which is where we're seeing higher levels of paydowns.

Okay.

Moving over to Slide 6, we'll take a closer look at deposits.

Our period end total deposits increased to $104 million, which represents an annualized growth rate of 41% and 26% on a year-over-year basis.

We saw the strongest growth in money market deposit accounts, which was largely attributable to new high net worth client relationships, particularly in Denver and Boulder.

When we add new high net worth clients, we typically see an initial bump in deposits, then a portion of those funds will be moved into investment management accounts over the coming months.

Turning now to trust and investment management on Slide 7. Our assets under management increased $148 million in the third quarter to $6.12 billion.

Positive performance in the U.S. equity market accounted for some of the improvement, while new accounts contributed $20 million in -- of new assets into the third quarter, and we had $46 million in contributions into existing accounts.

As I just indicated, some of this inflow from new clients is initially held in deposits but will ultimately move over to investment management and further increase our assets under management.

Through the first 9 months of the year, we added $236 million in new client assets, which has far exceeded the outflows from client departures this year and contributed to our overall growth in AUM.

So now I'll turn the call over to Julie for further discussion of our financial results.

Julie?

Thanks, Scott.

As Scott has already discussed, we are pleased to report another quarter of solid financial performance.

Deposit growth is strong, trust and investment management fee income increased and new loan production was consistent with prior quarter, although offset by outsized paydowns, and we had another great quarter of performance from our residential mortgage business.

The details on earnings can be seen in the next few slides.

So I'll begin with Slide 8 and First Western's revenue trends.

Gross revenue of $16.6 million was relatively flat from the prior quarter and increased 15% from the third quarter of 2018.

In the third quarter, mortgage activity was fairly consistent with last quarter.

We also saw a nice growth in trust and investment management fees that contributed to the increase in noninterest income from the prior quarter.

With a strong quarter of fee income, noninterest income accounted for more than 50% of our total revenue in the third quarter.

That diversity in our business mix continues to be a source of strength for us as we see changing economic conditions, we are able to provide services that generate diversified revenues for the bank.

Moving to Slide 9. We'll take a closer look at net interest income and the margin.

Our net interest income was consistent with prior quarter and is up 2% from a year ago.

Our net interest margin declined to 2.95% from 3.10% last quarter.

As we typically experience whenever we have a large quarter of deposit growth, we have some excess liquidity that weighs on our margin.

As we redeployed that liquidity into higher-yielding assets, we expect to see a positive impact on our margins.

We also saw a decrease in our earning asset yield contributing to the decline in margin.

This was primarily due to an unfavorable mix shift in earning asset balances.

Our loan yield increased 2 basis points, and our cost of funds increased 3 basis points to 1.33% in the third quarter.

This represents a decline in the rate of increase that we have been seeing in funding costs.

We have reduced deposit rates across the board after each of the Fed rate cuts, however, it took a while to pass through that rate cuts to our index deposits, so we did not get the full impact in the third quarter.

Our spot rate for deposit costs was 1.11% at December 30 compared to 1.27% spot rate at June 30.

So we are starting at a lower point in the fourth quarter, which should have a positive impact on our net interest income and our margins.

Moving to Slide 10.

We will take a look at noninterest income.

Our total noninterest income increased 2.4% from the prior quarter due to an increase in trust and investment management fees and a gain on sale of securities, and it's up more than 32% year-over-year.

Mortgage revenues remained inconsistent quarter-over-quarter, and our mix of mortgage production in the third quarter was 46% new purchases and 54% refinancings.

This large and growing fee base of First Western, now over 52% of revenues, continues to mitigate risks from NIM or other spread income-related concerns.

Turning to Slide 11.

We'll look at our expenses.

Excluding the goodwill impairment charge we recorded last quarter, our total noninterest expense increased 2.7% from the prior quarter.

The increase is primarily due to higher salaries and benefits expense, resulting from $500,000 of equity compensation expenses relating to the earnout payments.

Now that our mortgage business has reached a higher level of productivity and profitability, the earnout milestones from that acquisition are being met.

We expect an additional $400,000 of earnout expense to be recognized over the next 2 quarters, assuming that mortgage volume and income remain flat compared to the September 30, 2019 results and using the August 31 MYFW stock price.

Outside of this earnout expense, we would expect our ongoing expense discipline to allow total noninterest expense to remain relatively flat for the foreseeable future.

As Scott indicated earlier, we also had $140,000 in nonrecurring professional fees related to the sale of the LA fixed income team that we recognized in the third quarter.

We also track our efficiency ratio, excluding earnout expense and nonrecurring professional fees, to give us a better sense of the core trends in the business.

In the third quarter, this efficiency ratio was trending favorably at 77.2%.

Moving on to Slide 12 and asset quality.

We saw generally favorable trends in the portfolio with minor increases in nonperforming and substandard loans.

Our loss experience continues to be very low, and we had another quarter, our 12th in a row, of 0 net charge-offs.

We recorded a provision for loan losses of $100,000 in the third quarter, which was primarily attributed to the small increase in substandard loans.

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

Okay.

Thanks, Julie.

Moving to Slide 13.

I'll provide a few comments on our outlook.

For most of our history, we've been focused on building the company by acquiring new clients that provide deposits and assets for our investment management business.

We've been very successful in that regard as reflected in our growth in deposits and AUM.

As I mentioned earlier, our total deposits have increased 26% over the past year, which resulted in reducing our loan-to-deposit ratio from 98% a year ago to 84% last quarter.

So to reach a full potential earnings power, we need to increase our focus on loan generation.

The markets in which we operate continue to have very healthy economic conditions.

So loan demand is out there.

We're going to be focusing more resources on loan production, and we plan to do that over the next few quarters.

In the near term, we expect loan production among our existing business development officers to remain strong, but payoffs may present a headwind for loan growth.

As we work to moderate the payoffs, we're also working to deliver higher level loan growth that we experienced in the third quarter.

We expect that our mortgage business will continue to be a source of strength.

With the success we're having with that area, we've been able to attract some highly productive mortgage loan officers and continue building out our team.

So while we typically would see a seasonal decline in mortgage production in the fourth quarter, we do expect -- and we still do expect a slight decline, we should be able to offset some of that impact from the contribution of new members we've added to mortgage group.

We've also been seeing good initial results from our expansion into the Vail Valley.

Our market presidents filled up the team with some very good talent, and we built up a nice pipeline of loan opportunities there.

We're very pleased with the progress we're making in this market, and Vail Valley is on pace to be our fastest office to breakeven in our history.

We also continue to make adjustments to optimize our business model and improve our efficiency.

In addition to sale of LA fixed income team, we also sold a small noncore third-party administration product line during the fourth quarter.

Both of these transactions are expected to increase and enhance efficiencies and allow us to focus more of our resources on our core business activities.

In closing, with the momentum we've been enjoying in bringing in new clients, we feel good about our opportunities to drive additional revenue growth over the long term.

This should drive additional operating leverage and further improvements in our level of profitability in the years to come.

With that, we're happy to take your questions.

Katherine, go ahead and open up the call.

(Operator Instructions) And our first question comes from Brady Gailey with KBW.

Maybe we could just start with loan growth.

I know in the past, we've talked about being mid- to high teens level of loan growth for you guys, but I hear you on the impact of payoffs.

How do you think we should think about that loan growth target for 2020?

Well, I can tell you that what we're seeing today, our pipeline is line with what we saw earlier in the year.

Our activity has been strong.

I think so far this month, our net loan growth is up about $20 million month-to-date.

So I would expect that we'll continue to be able to produce loan growth like we have seen our last year or 2. Obviously, we've talked before about the fact that this is a small company and sometimes the quarter-to-quarter look gives a misleading trend line.

I mean obviously, we're not happy to see net loan down quarter-over-quarter in Q3, but I don't think that, that reflects the product -- as I talked about in the comments, I mean, it doesn't really reflect the productivity that we're seeing from our teams, this economic strength in the market, our ability to continue to track them and build client relationships.

I mean those are all still very positive.

And I think we're really reluctant to go out and say, gee, we're not going to see a payoff like we saw in Q3 because we don't know, there is no way of gauging that.

One thing we did take a close look at is if we were getting payoff because we're not being competitive and we're not paying attention to clients, that would be an area for concern.

So we did take a deep dive into what was causing these payoffs.

And as I said in my comments, it was really more kind of one-off liquidity event for clients than it was related to payoffs.

So we're definitely paying attention to it.

We think we can continue to grow at a rate that's higher than other banks and higher than the underlying growth in the market.

We continue to have very small market share, and we have strong production teams and really good geographical locations.

All right.

And then on the deposit growth, you saw this quarter, if you look at period end balances, they were up about $100 million.

How fast do you think those deposits will move out of the deposit base and be invested?

Well, I think a significant percent of them are going to stay in as deposits.

I mean they come into company as deposits.

I mentioned in the slide deck that some of them are going to move out.

We know what some of that is.

I would say, less than half of it are going to be moving into AUM.

Typically, that takes a period of months.

I think that expecting that to move out, over the next 12 months would be a reasonable expectation.

And again, in our business model, that moves from balance sheet onto fee income.

So it's, I think, a win-win for investors when we see that kind of growth.

And I hope it was clear in our prior comments.

And I think if you look back a year ago and we were seeing, gee, we think we can grow loans in the teens.

And frankly, one of the restraints we were worried about at that time was whether we could grow deposits at that kind of rate.

And to see the success we've had in deposit growth, particularly here in this last quarter with falling rates, I mean, I think that, that's a really great problem to be dealing with here, right?

I think it's a pretty high-class problem for us.

And then finally for me.

A very small amount of share buybacks here in the quarter.

Average price was $14 a share.

So to me, it feels like you all are interested in buying back stock when it's $14 or less.

So with the stock as long as it's hanging in here around the $16 level, the buyback is not of interest to you?

We have a 10b5-1 plan in place, and we have not disclosed the criteria for that program.

Your statements that you made about what actually happened in Q3 are factually correct.

It was a relatively small number of shares that we purchased back and the average price was $14.

(Operator Instructions) And we have a question from Gordon McGuire with Stephens.

Scott, you announced the Vail expansion last quarter.

I'm wondering if you can give some color about the opportunity to follow that up with some more revenue-generating expansion.

Can you just provide an update on what markets you're looking at and what business segments?

And just how hiring your team discussions are going right now?

Sure.

I guess I should admit that, that hasn't really played out the way I would've thought a year ago.

I thought that there was going to be a pretty big opportunity for us to pull people out of some of the acquired banks and give them a strong growing local bank to come to.

And really, we haven't seen that.

We've seen pretty fierce bidding in the market for those people when they have been willing to move and very high prices for them with -- in cases that we've been involved in, guarantees upfront and guaranteed bonus payment for 3 years and significant increases in base pay.

And so that really has not played out the way that I had hoped or expected.

What we have seen that's been interesting is just the general market turmoil in both the Colorado and Arizona markets and -- in the banking area, and so we have had opportunities to hire some really great people, not necessarily just out of the acquired banks.

So certainly Vail Valley was an example of that.

We were really pleased to be able to attract Mike Glass to us.

He has a great reputation and following in Vail Valley and as I said, in my comments, and that's going to be, I think, our fastest breakeven.

And that really is an important, I think, part of the answer to your question because for us, we want to be sensitive to earnings growth here and make sure that we're making progress on this core operating leverage stuff that we talked about a lot a year ago and have been, I think, delivering nicely on, especially in the last couple of quarters.

So we have to be careful that we don't sort of spend that earnings growth in new offices.

And so I would say we're very mindful of that.

Having said that, when we see the success -- early success we're having in Vail and we see this market disruption, we are talking to a handful of really interesting new leaders for us that I hope we can attract in 3 different Metro Denver markets that could become anyone of them the next Vail for us.

So actually, we are looking for continued expansion opportunities when we can do it in a way that fits with our earnings targets and fits with our strategy.

And would those -- if you were to get any talent adds from that, would that be included in the kind of flattish expense guide over the near term?

Well, obviously those are going to be relatively expensive people, and they're going to be an incremental expense.

It seems like we've been able to manage that pretty well with the Vail team, and I think we can expect to manage that pretty well, going forward.

I mean, I think these people do pay for themselves pretty quickly, and we're focused on building solid long-term revenues and earnings growth story.

And I think that each of these 3 people that I mentioned a minute ago are pretty exciting additions to us for our long-term revenue and earnings growth story for sure.

Got it.

And just Julie, on that flattish expense levels, was that off of the $13.4 million?

Or was that excluding the earnout and the nonrecurring professional expenses?

Excluding those.

Okay.

Good.

And then just last one for me.

Mortgage, the volumes were up pretty meaningfully, but the corresponding fees didn't see as much of a jump.

I'm curious if there was anything lumpy in there, what you saw from the gain on sale pricing this quarter?

So there wasn't really anything lumpy.

Our margins are remaining pretty consistent quarter-over-quarter.

It's just volume versus pipeline versus lost loans that you get a little bit of volatility depending on how the income statement rolls through.

But from an earnings perspective, we're seeing pretty consistent numbers, and then our product lines are pretty strong going into the fourth quarter.

So we're feeling pretty good about that progress.

And I'm showing no further questions at this time.

I would like to turn the call back to management for any closing remarks.

All right.

Well, we don't have any further closing comments.

Thanks, everybody, for dialing in.

We do appreciate your time and you taking an interest in First Western.

So thanks, again, for dialing in.

Have a great day.

Ladies and gentlemen, this concludes today's conference call.

Thank you for participating.

You may now all disconnect.

Everyone, have a great day.