Q3 2019 Earnings Call
Financial third quarter 2019 earnings conference call at this time, all participants' lines are in listen only mode.
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Now I'd like to hand, the conference over to your speaker today.
Sure Tony Rossi for financial profiles. Please go ahead Sir.
Thank you Catherine 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 or Scott Wiley, Chairman and Chief Executive Officer, and Julie Core Camp Chief Financial Officer, we use a slide presentation as part of our discussion. This morning, if you have not done so already please visit the.
Then some presentations page 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 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.
Factors I discussed in the company's FCC filings, which are available on the company's website.
I would also direct you to read the disclaimers in our earnings release in 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 GAAP to non-GAAP measures 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 data today.
One of the make a couple of introductory.
Comments, you know, we've now been a public publicly reporting company for more than a year.
I'm really proud of the progress our team has made in this first year.
It was demonstrated some good operating leverage in our business model.
In addition, we made really proctor solid progress in the long term drivers of earnings growth.
Adding clients a strong loan production deposit fee growth integrating our mortgage team. We've even opened a new office opened the Vale Bailey.
On a year over year basis, our net income increased 68% Q3, Willie P.S. was up 58% our tangible book value is up 13.2% year over year deposits are up 26.2% total loans, putting words in held for sale are up 13.7. So overall.
Well, it's been quite a solid first year as a public company.
So, let's turn now to the deck and a slight free which summarizes the third quarter.
Our third quarter performance represents another strong quarter of execution on the strategy. The business My we put in place to drive profitable growth.
We generated net income of 2.4 million or 30 cents 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 earn out 40, M.C., 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 non core items impacted earnings per share by about five cents in the quarter. So adjusted for those acquisition and disposition expenses in Q3, EPS would be 35 cents a share.
With a higher profitability, while also driving strong growth in our tangible book value per share, which increased 3.6% or 14.4% annualize during the third quarter.
We continue to have strong women on business development in fact high net worth clients the first western.
This resulted in very strong deposit growth, 41% annualized in the third quarter and increases.
You know assets under management.
As a result with 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 mortgage production, which continues to make a strong contribution to our overall profitability.
Taking a look at the trends in the loan portfolio. We can that continue to have strong loan production, but overall loan growth was impacted by significant increase in payoffs and paydowns.
That run off in the portfolio increased 60% from last quarter and hit the highest level, we've seen in our history.
From a credit quality standpoint, we continue to see stable trends were slight increases in substandard loans. It had another quarter zero net charge off.
We announced in July we reached an agreement to sell our Los Angeles pay fixed income team, we hope to complete that transaction in the third quarter, but that timeline proved to be a little too tight.
We're now expecting this sale to close the fourth quarter and upon closing we continue to expect to have a positive impact the tangible common equity somewhere in a 3.3 to 3.9 billion dollar range.
We've heard about 440000 professional fees later this sale during the third quarter. So when that deals both we'll see some relief in terms of those expense levels.
Moving to slide four we provide additional detail on a third quarter earnings.
Relative to last year.
We continue to see strong improvements in earnings driven by higher revenue well controlled expenses.
Turning to slide five we'll 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 that run off.
We continue to have strong loan production with our third quarter originations, increasing 5.3% from the prior quarter to 55.4 billion.
Average loan yields increased two 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, net Renault increased to 71 point Threemillion.
From 44.7 million the prior quarter, 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 run off has averaged about 35 million. So our experience in the third quarter was double what weve typically seen over the prior seven quarters.
We've done an analysis identify the drivers of this increase in pay off in the primary factor was really the decline liquidity events hard to predict when these kind of client liquidity events are going to occur.
But there's a good chance that they won't be as larger factor in the fourth quarter.
A smaller contributed the payoffs as an increase in refinancings the rate of pay off related to refinancings has accelerated since the fed began cutting interest rates.
And we're seeing competitors being very aggressive pricing residential mortgages and non owner occupied CR reloads, which is where we're seeing higher levels of paydowns.
Okay moving over to slide six will take a closer look the deposits.
For a period and total deposits increased 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 in Boulder.
Well, we had new high network clients, we typically see an initial bump in deposits that 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 seven our assets under management increased 148 million in the third quarter to 6.12 billion.
Positive performance of the U.S. equity market accounted for somebody improvement well new accounts contributed 20 million in a new assets into the third quarter, we had 46 million in contributions into existing accounts.
As I just indicated some of the inflow from new clients is initially held in deposits, but will ultimately move over to investment management and further increase or assets under management.
Through the first nine months of the year, we had a 236 million a new plant assets, which is far and Alex exceeded the outflows from played departures. This year contributed to our overall growth in a U M.
So now I'll turn the call over to Julie for further discussion of our financial results Julie Thanks, Scott.
And Scott has already discussed we're pleased to report another quarter and solid financial performance.
The growth and strong traction investment management fee income increased and new loan production was consistent with prior quarter, although offset by outside Paydowns and we had another great quarter performance from our residential mortgage banker.
The details on earnings can be seen in the next few fight.
I'll begin with lighting and first western's revenue trend.
Gross revenue of 16.6 million was relatively flat from the prior quarter and increased 15% from that third quarter of 2018.
In the third quarter mortgage activity was fairly consistent with last quarter. We also saw nice growth and trust investment management fees that contributed to the entry and non interest income from the prior quarter.
With a strong quarter a fee income noninterest income accounted for more than 50% of our total revenue in a third quarter.
That diversity in our business mix continues to be a source of strength for us at refi changing economic condition. We are able to provide services that generate diversified revenues for the bank.
Moving to slide nine.
Well take a closer look at net interest income and American.
Our net interest income is consistent with prior quarter and is up 2% from a year ago.
Our net interest margin declined to 2.95% and 3.10 last quarter.
We typically experience whenever we had a large part our deposit growth we had some excess liquidity that weighed on our margin.
As we bring to redeploy that liquidity into higher yielding assets, we expect to see positive impact on our margin.
We also saw a decrease in our earning asset yield contributing to the decline of margin.
This is primarily due to an unfavorable mix shift in earning asset balances.
Our loan yield increased two basis points.
And our cost of funds increased three basis point to 1.33% in a third quarter.
This represents a decline in the rate of increase that we haven't seen in funding costs.
We have reduced deposit rates across the board after you to the fed rate cuts.
However, it took a while to pass through that rate cuts to our index deposit.
We did not get the full impact in that third quarter.
Our spot rate for the public costs with 1.11% at December thirtyth compared to 1.27% spot rate at June Thirtyth.
We are starting at a lower point in the fourth quarter, we should have a positive impact on our net interest income and our margin.
Moving to slide 10.
Take a lot at non interest income our total noninterest income increased 2.4% from the prior quarter.
Two an increase in trust and investment management team and a gain on sale security.
And if not more than 20, 32% year over year.
Mortgage revenues remain consistent quarter over quarter, and our mix of mortgage production in the third quarter was 46% new purchases and 54% refinancing this large and growing TV set first western now over 52% of revenues continues to mitigate risk for men or other spread income related concerns.
Turning to slide 11.
Well 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 500000 of equity compensation expenses relating to earn out payments.
Now that our mortgage business has reached a higher level of productivity and profitability the earn out milestones from that acquisition.
Our being Matt.
We expect an additional 400000 embryonic stem to be recognized over the next two quarters, assuming that mortgage volume and income remained flat compared to September 30, a 2900 results and using the August 31, my of studies stock price.
Outside of this AD expense, we would expect our ongoing expense discipline to allow total non interest expense to remain relatively flat for the foreseeable future.
As Scott indicated earlier, we also had 100 I'm 40000, a nonrecurring professional fees related to sell at the L. <unk> fixed income team.
That were recognized in the third quarter.
We also track our efficiency ratio, excluding are not expense and nonrecurring professional fees to give us a better sense at the core trends in the business.
And a third quarter. This efficiency ratio is trending favorably at 77.2%.
Moving on to slide 12 and asset quality.
We said generally stable trends in the portfolio with minor increases and nonperforming and substandard loans.
Our loss experience continues to be very low and we had another quarter I call Center Roe.
Net charge offs.
We recorded a provision for loan losses of 100000 in the third player, which was primarily attributed to the small increases substandard loans now I'll turn the call back over to Scott.
Okay. Thanks Julie.
Well, we dislike 13 will provide a few comments on our outlook.
Most of our history, we've been focused on building a company like acquiring new clients that provide deposits in essence Ferguson management business is a very successful in that regard that's reflected in our growth in deposits I know you will.
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.
The increase our focus on loan generation.
The markets in which we operate continue to have very healthy economic conditions. So little demand is out there we're gonna be focusing more resources on loan production, we plan to do that over the next few quarters.
In the near term, we expect loan production among our existing business development office remains strong.
Payoffs may present.
Headwind for loan growth.
As we work to moderate the payoffs were 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 spring.
With the success, we're having with that area, we've been able to attract some highly productive mortgage off work loan officers.
Continue building out our team.
So what we typically would see a seasonal decline in mortgage production in the fourth quarter. We do expect yeah. We still do expect this looks like the decline or we should be a loss at some of that impact from the contribution of new members. We've added the mortgage group.
We've also been seeing good initial results from our expansion into Vale Bailey, our market presidents filled up the team with some very good talent and we built up a nice pipeline of loan opportunities there.
Very pleased with the progress we're making this market and Vale is on pace to be our fastest office.
To break even in our history.
We also continued to make adjustments to optimize our business model and improve our efficiency.
In addition to the sale of elite fixed income team. We also sold a small non core 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 a resources on our core business activities.
In closing with a momentum we've been.
Enjoying in bringing a new clients, we feel good about or opportunities to drive additional revenue growth over the long term.
They should drive additional operating leverage and further improvements.
Our level profitability in the years huh.
That we're happy to take your questions.
Good for go ahead and open up the call.
Thank you as a reminder to ask a question you would need to press star one when you touched on telephone.
Withdraw your question press the pound key again, that's star wanted to ask a question. Please standby, while we compile the <unk> roster.
And our first question comes from Brady Gailey with KBW. Your line is open.
Thank you good morning.
One of Brady.
But maybe we could just start with loan growth I know in the past we've talked about the mid to high teens level of loan growth for you guys.
You know what I hear you have on the impact of pay offs. How 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 you know our pipelines in line with what we saw a 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 you know I would expect that we'll continue to be able to produce loan growth like we've seen over the last year to obviously, we've talked before about the fact that there's a small company and sometimes the quarter to quarter look I guess a misleading.
Trend trend line I mean, obviously, we're not happy to see.
Net loans down quarter over quarter in Q O Q3, but I don't think that that reflects.
Though productive they talked about in the comments I mean, it doesn't really reflect the productivity that we're seeing from our teams the economic strength in the market our ability to continue to attract and build client relationships. I mean, those are all still very positive and.
I think.
Yeah, we're really reluctant to go out and say Gee, we're not gonna see a pay off like we saw in Q3, because we just don't know there's no way up gauging that a one thing we did take a close look at is if we were getting payoffs because we're not being competitive and we're not paying attention to clients or you know that would be an area for concern and 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 events for clients than it was related to pay off.
So we're we're definitely pay attention to it we think we can continue to grow.
At a rate that's higher than other banks and higher than.
In the underlying growth in the market you know, we continue very small market share and we have a strong.
Production teams in really good geographical location.
Alright, and then the.
On the deposit growth you saw this quarter. If you look at period end balances. They were all about $100 million, how how fast do you think those deposits will you know move out of the deposit base and be invested.
Well I think.
A significant percentage them are gonna stay in as deposits I mean, they come into the company is deposits I mentioned in the in the.
Slide deck that some of them are going to move out we know what some of that is I would say.
You know.
Less than.
Half of it are going to be moving in the U.M. typically that takes.
A period of months, you know 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.
Oh, no balance sheet onto a fee income. So it's a it's I think a win win for investors when we see that kind of growth in <unk>.
I hope it was clear in or prior comments about I think.
If you look back a year ago, and we were saying Gee, we think we can grow loans.
As in the teams.
And and frankly, one of the restraints, we're worried about at that time, what's whether we could grow deposits is that it at that kind of rate and to see the success, we've had and deposit growth, particularly here in this last quarter with falling rate.
I mean, I think that that's a really.
Great problem to be dealing with here right I think.
As a pretty high class problem for us.
And then finally from me.
You know very very small amount of share buybacks here in the quarter.
Yeah average price was 14, a share but to me it feels like Youre interested in buying back stock was 14 or less so with the stock is ours is hanging in here around the 16 dollar level. The buyback is not of interest to you.
You know we have a tenbfive one.
We had in place and we have not disclose the criteria for that program your.
Statements that you made about what actually happened in Q3 or or factually correct. The you know that was a relatively small number of shares that we purchased back in the average price with 40.
Alright, thanks for the color.
Thank you and us as a reminder.
Press Star one on your Touchtone telephone to ask a question.
And we have a question from Gordon Maguire with Stephens. Your line is open.
Good morning.
Good morning.
Scott a you announced avail expansion last quarter I'm wondering if you could give some color about the opportunity to follow that up with some more revenue generated.
Revenue generating expansion.
Can you just provide an update on what markets, you're looking at what business segments, and just how how hiring or team discussions are going right now.
Sure.
I guess.
I should admit that that hasn't really played out the way I would have 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 a and it 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 a very high prices.
For with.
You know in cases that we've been involved in you know guarantees upfront and guaranteed a bonus payments for three 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 it's just a general market turmoil.
And in both.
Colorado, and Arizona markets and in in a 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 Bailey wasn't example that we were really pleased to be able to attract.
Mike glass to us he has a great reputation and following unveil valley and as I said in my comments and that's going to be I think our fastest breakeven and that really isn't important I think.
Part of the answer to your question because for US you know 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 it, especially 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 that having said that when we see the success early success, we're having unveil yeah. We see this market disruption you know we are talking to a handful of really interesting newly.
Leaders for us that I hope, we can attract a in.
Three different Metro Denver markets.
Could become you know any one of them. The next deal for us. So so absolutely 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 any talent adds from that would that be included in the kind of flattish expense god over the near term.
Well you know are obviously those are going to be relatively expensive people, they're going to be an incremental expense. It seems like we've been able to manage that pretty well with the Vale 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.
You know were.
Focused on building a solid long term revenues and earnings growth story, and I think that each of these three people that I mentioned a minute ago are pretty exciting additions to us for our long term revenue earnings growth story for sure.
And just Julie on that a flattish expense levels was that off of the 13.4 million or was that excluding the earn out and the perfect.
<unk> expenses.
Excluding the okay.
And then just last one from me mortgage volumes were up pretty meaningfully.
The corresponding fees that you see as much as much of a job I'm curious if there was anything lumpy in there or 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 inch chest volume versus pipeline record locked loans that you know you're digging a little bit as volatility depending on how the income statement role. It's true that from an earnings perspective, we're seeing pretty consistent.
Number and then our pipeline there pretty strong going into the fourth quarter. So we're feeling pretty good about that cracker.
Thank you.
Thank you board.
Thank you and I'm showing no further questions at this hot I'd like to turn the call back to management for any closing remarks.
But well we don't have any further closing comments, thanks, everybody for down and we do appreciate your time and you're taking an interest in the first western so thanks again for dialing a have a great day.
Ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect everyone. Okay.