Q4 2019 Earnings Call
2019 earnings conference call at this time, all participants are not listen only mode.
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I would now like then the conference just because today, Tony Laci Investor Relations. Please go ahead Sir.
Thank you Joe Good morning, everyone and thank you for joining us today for first Western Financial's fourth quarter 2019 earnings call.
Joining us from first Western's management team or Scott, why we chairman and Chief Executive Officer, Julie Core Camp Chief Financial Officer.
Well, we use a slide presentation as part of our discussion this morning.
We've not done so already please visit the events and presentations page first Western's Investor relations website to download a copy of the presentation.
The management team will discuss the fourth 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 and 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 actually see filings, which are available on the company's website I.
I would also direct you to read the disclaimers in our earnings release, an 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 no 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.
I'd like to turn the call over to Scott Scott.
Thanks, Tony.
Good morning, everybody. Thanks for dialing in and we know it's a busy time.
For everybody.
We completed 2019 with another good quarter of execution delivering strong earnings despite the seasonal slowdown in our mortgage business.
On a year over year basis, our net income increased by 49% in the fourth quarter well as increased just over 45%.
As I mentioned on our last call what do I top priorities was enhancing our loan growth to match. The success, we've had a growing deposits and assets under management.
Had a strong pipeline alone opportunities entering the fourth quarter and I'm pleased to report that we're very successful in closing on these opportunities which resulted in a record level loan production for the company.
We had 146.1 million of loan production, the fourth quarter, which topped our previous record for quarter by more than 40 million.
Our markets are healthy and we've expanded the new markets such as they all Dalian Brookfield and most importantly, the new business thrown out since we've added over the last couple of years are becoming worse season, a generating more consistent pipelines.
The combination of all these factors resulted.
In the strong loan production, we saw in the fourth quarter.
We continue to experience a high level of payoffs and Paydowns. However, this strongly production helped us more than offset the run off in the portfolio and grow our gross loans at an annualized rate of 30.8%.
We're still relatively small institution that our loan production can still be subject to some lumpiness. So we don't expect to maintain this 30% plus level growth each quarter.
But we are encouraged that our increased focus on loan production is gaining traction and should help us grow revenues and improve earnings with the liquidity that we're adding through our deposit gathering efforts.
When negative in the quarter was the most of our loan production occurred late in the quarter. So we didnt see much benefit yet in our net interest income.
We did have to take a higher level of provision to account for the growth.
But this should set us up to see a nice increase in net interest income heading into the first quarter.
Aside from the loan production or other business development efforts were very successful as we delivered another good quarter core deposit growth and the U.M. growth.
Our average deposits increased 50.2 million or 19.3 annualized.
19.3% annualized.
Are you M increased another 71 million in the fourth quarter, putting us at 18% growth for 2019.
Looking at our performance for all of 2019, we believe we had a very strong year of growth and value creation for the full year, our average gross loans.
Average total gross loans increased 14% our average deposits in the fourth quarter were 24.2% higher than the previous year in our tangible book value per share increased 14.3 person.
More importantly, we achieved this growth while maintaining our strong credit profile as our nonperforming loans were 36% lower at the end of 2019 that they were.
At the end of the prior year.
Moving on to slide four we provide additional details on our fourth quarter earnings.
Relative to last year, we continue to see strong improvement in earnings driven by higher revenue and well controlled expenses.
Turning to slide five look at trends in our loan portfolio.
Our gross loans held for investment increased at an annual growth rate annualized growth rate of 30.8%.
Well, we had a record quarter of loan production. We also had a record level of payoffs and paydowns.
We had 82.7 million in payoffs and Paydowns, an increase of words 11 million from the prior quarter.
Q4 year over year, we grew 14% in average gross outstandings inline with our previously stated mid teen outlook.
In terms of lump of growth in the portfolio, we had nice contribution for most of our major lending areas.
We also had a particularly strong quarter.
Growth in our residential mortgage portfolio and also had nice increases in commercial industrial and commercial real estate lending.
Turning over to slide six well take a closer look at deposits.
Our average deposits increased 50.2 million compared to the prior quarter, which represents an annualized growth rate of 19.3%.
Most of that growth came in our lower cost categories, such as non interest bearing and now accounts.
Because of the strong growth we had in core deposits early in 2018, we had the opportunity reposition our deposit portfolio during the fourth quarter and run off some of our higher cost time deposits.
This resulted in a decline in overall deposits on a period end basis, but had favorable impact on our overall deposit mix in funding costs.
Turning to the trust and investment management slide on slide seven.
Our assets under management increased 71 million in the fourth quarter to 6.19 billion.
Positive performance of the U.S. equity markets accounted for much improvement well new accounts contributed 79.8 million of assets in the fourth quarter, and we had 87.3 million and contributions into existing accounts.
On our third party divestment management platform, 61% of our managers.
Beat their respective index over a one year and 74% or head over three year period. This is particularly encouraging is active managers generally trail in such markets Insulates us from markets as we see.
So for the full year, we'd had about 314 million new client assets with Florida exceeded the outflows from find departures in 2019 and contributed or overall growth and assets under management.
Now I'll turn the call over to Julie for further discussion of our financial results Julie Thanks, Scott.
Scott has already discussed we are pleased to report another quarter of solid financial performance. The quarter also highlighted the value in our diverse revenue mix as the residential mortgage rate mortgages were seasonally slower we saw a reduction in gain on mortgage installed that we saw a nice expansion in our net interest income and insurance revenues.
I'll begin on slide eight and first restaurants revenue trends.
Gross revenue of 16.2 million, but a slight decrease from the prior quarter, but at 13.9% from the fourth quarter of 2018.
Relative to prior quarter, we saw a decline in non interest income as expected due to seasonally slower mortgage activity in the fourth quarter, but this is partially offset by growth in net interest income.
As a result, our revenue mix is just about 50 50 in the quarter between fee in spread income inline with our historic next.
Moving to slide nine we can take a closer look at the net interest income and the margin.
Our net interest income increased 3.1% from the prior quarter.
Increase is primarily due to lower interest expense, resulting from a decline in our cost of funds.
Net interest margin declined to 2.91% and 2.95% last quarter.
Scott mentioned earlier, our loan production was backend loaded this quarter. So they continue to carry excess liquidity throughout most of the quarter that weighed on our margin.
We had a 23 basis point decline in our yield on earning assets, which reflects the impact of the excess liquidity as well as the effect of repricing and our loan portfolio. Following the most recent interest rate cuts and a higher mix of residential mortgage loans in our portfolio.
This was offset partially by a 19 basis point decline in our cost of funds, which reflects improvement in our deposit mix that Scott discussed as well as our success in passing through a portion of the interest rate cuts try depositors.
Looking ahead, assuming no change in the fed rate.
Fundraising, we expect to see more stability in our net interest margin as any pricing and our loan portfolio substantially complete and we should make more progress and redeploying our excess liquidity into higher yielding assets.
Moving to slide 10, we can take a closer look at non interest income.
Total noninterest income decreased 6.4% from the prior quarter due to seasonally slower mortgage activity.
We funded 200.4 million in mortgages, recognizing a gain of 2.6 million in the fourth quarter, we just compared to funding 20 226.5 million for a gain of 3.3 million in the prior quarter.
The lower amount of loan fundings drove the decline and gain on sale income this quarter, although we saw a slight increase in our average premium on sale, which partially offset the decline in loan fundings.
Turning to slide 11, and our expenses.
Our total non interest expense decreased 2.7% from the prior quarter.
The decrease was primarily due to lower salaries and benefits expense, resulting from lower equity compensation expenses related to earn out payments in the mortgage business.
The lower level of mortgage activity this quarter impacted the amount of the earn out paid in the fourth quarter.
As mortgage activity increases into the second quarter, we will see a corresponding increase in those earn out payments.
Most of our other expense items are within the normal range the variance compared to the prior quarter.
We would expect an increase in expenses in the first quarter due to seasonal increases in compensation expense and normalizing of certain accruals such as our FDIC insurance. However, we are expecting that and expenses should increase full year 2019 to 2020, and then mid single digit.
Our tax rate also improved from 24.5% in Q3, 211% in Q4.
This decrease is primarily attributed to some onetime credits we recognized on our 2018 tax return tax planning has been an increased focus and through that analysis, we were able to recognize onetime krach relating primarily to R&D expenses. He had incurred over the course of several years.
Also made investments in projects during the first fourth quarter.
It should slightly reduced tax expense in the future.
We expect it to normalize back to a range of 24% to 26%.
With revenue and expenses being fairly similar to the prior quarter.
Our efficiency ratio was relatively unchanged at 80.5%.
From a long term longer term perspective.
We continue to realize more operating leverage in the business as we gain scale and control expenses.
Our efficiency ratio has trended positively from 88.2% for the full year 2017 down to 85.4% for 2018 and your 80.6% for 2019.
Moving on to slide 12 and asset quality.
We thought generally stable trends in the portfolio with decreases in nonperforming loans and nonperforming assets as I really as our resolution of nonperforming credits outpaced the inflows we had in the quarter.
Had a nominal amount of net charge offs in the quarter.
And to cover that small amount of charge offs as well provide for this strong growth we had in loans during the quarter, we recorded a provision for loan loss of 447000.
Now I'll turn the call back over to you Scott.
Thanks Julie.
Moving to slide 13, I'll provide a few comments on our outlook.
Heading into 2020, we're going to continue to put more emphasis on asset generation to complement the success. We've had in growing total deposits on assets for investment management business.
One of the things we're working on as a commercial bank initiative designed to build expertise that will enable us to target specific vertical markets.
First vertical market, we're targeting as medical and dental practices, we've hired a leader for this market, whose developing commercial banking products and services specific for the unique needs of these practices.
We intend to replicate the same model for other vertical markets as we move forward on this initiative.
We also expect to see our expansion into the new markets paying more dividends this year.
Back to see a nice contribution from our bail daily office as it continues to ramp up and generate more awareness for our unique value proposition.
We also recently hired a market president to focus on the Broomfield area, which we where we have previously had a presence.
Brookfields about halfway between bolder and Denver has similar demographics to a number of our other most successful markets.
The housing market remains healthy and Colorado, which should continue to present good opportunities for mortgage production.
For the full year, we anticipate mortgage activity will be relatively consistent with what we saw in 2019.
With the continued growth in revenue and additional scale. We expect to added 2020, we should be able to realize additional operating leverage.
Further improve our efficiency ratio.
In closing, we feel like we have a number of catalysts in place that will drive another year of strong earnings growth and positively impact our level of profitability.
And we believe we're well positioned to steadily enhance the value of our franchise in the coming years.
So with that.
Happy to take your questions.
Well, please open up the call.
Thank you I sat minded to ask a question you'll need to press star one on your telephone.
The withdraw your question past the punky, please standby, while we compile the candidate roster.
Our first question comes from Brady Gailey with KBW. Your line is now open.
Hey, Thank you good morning, guys weren't ready point.
So Scott it was great to see a.
Pick up in the level of buybacks you repurchased about the 0.5% of the company how should we think about buybacks and 2020.
Well, we were a lot more active in the fourth quarter.
Buying back about 43000 shares.
We don't have a predetermine level for how active we want to be.
In general we believe that the best use of our capital supported the continued growth of the business. So as we move forward the through the year, we'll continually evaluate what our best opportunities are deploying capital in growing the business.
We're buying back the Soc.
Okay.
Alright, and then Oh, Julie all on the net interest margin that's running around to 90.
It sounds like there's some moving parts for your expected to be relatively stable around that level for the year 2020.
You're right Brady there some.
Moving parts and puts and takes on that.
I think the positive side, we're seeing lower rates on our deposits and we have excess liquidity that we can reinvest into higher yielding assets on the negative side that rates on our new loan production are lower than what's been rolling off in the portfolio, which has been putting some pressure on our average loan yield.
So for US I think as we look in 10 moving into that 2020 year, we would expect the impact at the positive factors to away the negative factors and likely lead to some margin expansion I'm, assuming kind of no no change in the fed funds rate.
Okay.
And.
Yeah, I heard you guys say that expenses should be up by a mid single digit growth level I think in the past we've talked about expenses more flattish. So just wondering what what the change draws I know you announced the medical and dental practice groups and maybe that plays and.
To it but it just feels like before you were talking about kind of flat expenses and now we're expecting a little bit of growth there.
You know.
We do see some inflation pressure on a number of our cost areas and we have added some expense that will show up in in this expense forecast that we've talked about for.
2020.
We do anticipate significant operating leverage from those expenses.
Something in that.
In excess of two and a half times.
Operating leverage for the incremental expense. So I think you know we're going to continue to grow the business at the rate we have add new offices, Ed business lines and do all the things we're doing realistically, we're not going to be able to hold.
<unk> expenses at a prior year levels Forever I think you know the question for US is whether we could.
This money a profit profitably and so short term.
Operating leverage and with the results we've seen from 29 season, I think we feel pretty confident that Oh, we'll be able to continue to do that.
Alright, Thanks, Scott Julie.
Thank you.
Hi, Linda to ask a question you will need to press star one on your telephone.
Our next question comes from Gordon Maguire with Stephens. Your line is now open.
Good morning.
Good morning Party Gordon.
So on the medical and dental practice vertical it sounds like this is still in development phase.
So when would you expect to be fully online and on long there and contributing.
Well the expenses already online.
The revenues from it will grow through 2020, I mean, that's yeah. So it's a project that we have.
Many of the products and services, we need to be competitive there, we don't have a ball yet.
And and I can tell you that the leader that we brought in for that group has been very actively.
Calling and has a good strong pipeline. So I think we'll see good results in 2020 from now.
So youre already on the ground with a few products and hoping to build out some more correct.
And then you alluded to other verticals of interests and any color on what those might be.
We haven't determined that yet so.
Okay.
I just want to get an update on the Los Angeles fixed income team I guess, you're still holding that goodwill and held for sale. So is the expectation to still seeking new location for the team.
We're still.
Hopeful of finding a good owner for them that can provide the distribution that they need to grow the business beyond the things that we are having them doing for us.
The performance of that group continues to be very strong in terms of the.
That's what management results.
No the mutual funds that they advice for us so continue to do really well as well.
Got it.
And Julie Thanks, Thanks for the color on the NIM trajectory, just triangulating, a little bit with the run off in Cds. It looks like maybe only partially impacted.
Part of the quarter.
Last quarter, you gave a spot rates do you have that number.
Hi, Thank you and so our spot rates at the end of the fourth quarter, where.
0.96% compared to 1.13% at the end at the third quarter. So we continue to see pretty.
Good decline in those cost of funds.
Good.
That's that's all I had guys. Thank you.
Thank you.
Next question comes from Ross Haberman at IHOP H. investments. Your line is now open.
Good morning, Scott Scott how are you good morning rough.
A quick question I I Miss the mid part where you were talking about the margin or the spread or what's your expectation that's a assuming that rates they sort of in this flattish low.
Level for the rest of this calendar year, what's your expectation for that.
Marching towards the NIM for the rest of the year without.
That assumption.
Yeah, Julie addressed that in a in the queue and eight here a little bit I mean, we.
And hope to see a stronger recovery in the NIM in Q4 than what we've seen we do think that there are some pluses and minuses to the outlook for 2020, but we feel like on a net basis.
We're going to have some margin expansion in 2020, assuming rates stay flat.
And just one sort of overall.
Macro view what is what do you see in in terms of your over your different markets any sort of slow slowness.
Or asset quality.
In Queens, which are concerned about or again, the overall macro environment both on the residential.
On the commercial loan.
Demand is still is still as good as is because it has done this past year.
Well, obviously coming off a record quarter in terms of loan growth, we're not seeing.
Any problems in terms of generating the kind of mid teen growth that we would like to see in the loan portfolio I do think that it's interesting you know we've talked I feel like on every single call about the fact that with a company as small as ours, yet so it's going to be volatile if you look at Q and.
Quarter in numbers.
Worth in Q3, we saw net decline Q4, we saw record production record growth.
But it is interesting to me if you take a little bit longer view of that.
And you look at the average total loans in Q4 2018 average total loans acute Q4 2019.
14% growth, which is I think a nice indication that we're making progress in line with what we head into.
Anticipated in terms of the economic activity you know, Colorado has definitely slowed from the pace. It was going at which was probably not sustainable, but it's still growing nicely, we're still seeing a strong entrepreneurial activity.
Diverse economic growth here are we still see alodie in migration to Colorado from high cost eight southern Co.. So so lots of positive fundamentals I think the bigger challenge for.
Financial institutions in Colorado is the competitive environment here continues to be very challenging other loan and deposit side and I think you know with some of the big acquisitions that we've seen.
That's really driving.
A lot of competitive pressure and of course, you know that shows up in in loan yields and structuring. So I think one of the challenges for institutions, including first Western is to you know resist the temptation to.
B b as competitive as are.
Most competitive.
Other institutions in this market and a and b disciplined and trigger credit standards and I think you know you see in our results a significant improvements in.
The asset quality, you don't continued very low.
Credit losses, and such so I think we're doing it we're certainly mindful of it and I think we're doing a nice job of managing that Chris.
Just one final question are you happy with your overall mix of loans today in terms of the residential and non and if not what are you going to skew or focus more on.
Oh.
I mean.
Calendar year in terms of of adjusting that mix.
Yeah, Great question, we would like to shift more towards commercial loan production and we've talked about some of the initiatives.
That we have in place to do that but having said that we do think it's important for us to put our liquidity work. So if we don't see enough attractive opportunities you have to see an eye space, we will continue.
With the same mix of production, we saw last year and I do think that up.
We have a nicely diversified mix that we can continue to build on into 2020.
Thanks, the best of luck.
Thank you Ross.
Thank you I'm not showing any further questions at this time and I'd like to turn the call back over to management for any closing remarks.
Great well I just like to thank everybody again for joining us on the call. We really appreciate you're making time and appreciate the questions and for your support for first Lester.
Have a great weekend.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.