Q3 2020 First Western Financial Inc Earnings Call
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Thank you Sidney.
Good morning, everyone and thank you for joining us today for first western financials third quarter 2020 earnings call.
Joining us from first west or its management team or Scott, why we chairman and Chief Executive Officer, and Julie <unk> Chief Financial Officer.
We will use a slide presentation as part of our discussion. This morning, if you have.
If you have not done so already please visit the events and presentations page first Western's Investor relations website to download a copy of the presentation.
Before we begin I'd like to remind you that this conference call contains forward looking statements with respect to the future performance and financial condition of first western financial that involve risks and uncertainties, including the impact of the COVID-19 pandemic there.
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 FCC 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.
I'd like to turn the call over to Scott Scott.
Okay, Thanks, Tony and good morning, everybody.
Ray pleased with our performance this quarter as well.
As we continue to deliver record earnings despite the ongoing impact of COVID-19 pandemic.
We continue to execute on the vision that we communicated at the time of our IPO in 2018.
We're a unique wealth manager built on a private bank platform. It was emerging at that time from a period of capital constrained.
Yeah, We said, we would realize strong operating leverage as we grew our balance sheet through both organic growth and acquisition.
Investments Weve made in both banking talent and technology are having a positive impact we expected on new business development, resulting in the consistent addition of new clients as we take market share and drive growth in both net interest income and non interest income.
In the third quarter, our gross revenue increased 18% from the prior quarter, resulting in a $9.6 million in net income.
<unk> dollar 20 in earnings per share.
<unk> record levels of profitability for the company.
We had another very strong quarter mortgage activity, but outside that area were seeing positive contributions across the rest of our operations.
Our established offices continue to gain scale and improve profitability for bringing in new clients and ramping up quickly in new markets, such as Vail Valley and Brookfield.
One of our goals entering this year has been to build the first western brand, which we have supported with increased marketing and sales investment and it's clearly paying dividends.
Our marketing efforts are generating more leads and with a compelling value proposition that we offer.
We're having a great deal of success in converting those leads into new client relationships.
Another goal this year, which we talked about our earnings call. In January was the implementation of our commercial banking initiative that was designed to grow our commercial client base shift our loan portfolio to towards more cnine commercial real estate loans and.
He had low cost transaction deposits.
The emergence of the COVID-19, pandemic slowed us down a bit but over the last two quarters. We've seen really positive results from this initiative, particularly after the completion of our bank branch acquisition in May.
One of the aspects of this trend transaction that we were particularly excited about what's the opportunity in a number of experienced commercial bankers, including the former Colorado market President for Simmons, who is now heading up our commercial banking initiative.
We're seeing very encouraging results, so far and the balance sheet growth that we saw in the fourth in the third quarter was largely due to the addition of new commercial relationships, where we're getting both loans and deposits.
From an offensive standpoint the curve.
The current environment, it's been very favorable for us in terms of growing our client roster and taking business away from larger competitors.
At the same time from a defensive standpoint in terms of managing through the impact of the pandemic, we continued to be well positioned and see good trends in asset quality.
With a conservatively written underwritten portfolio and very little exposure to industries that have been most impacted by the pandemic.
We continue to project very low loss content in our portfolio.
During the third quarter, our total active called loan modifications declined by 62% and at September Thirtyth represented just 4% of our total loans.
In our nonperforming loans declined by 14% from the end of the prior quarter.
We continue to implement enhanced monitoring and portfolio reviews to ensure that we have a good understanding of how where borrowers are being impacted by the pandemic for.
For the most part the information we're getting is very positive. It indicates our clients have been able to make adjustments to adapt to the current environment and continue performing well.
With that let's move over to slide four where we.
Where we show a significant jump that we've seen this year in terms of our level of profitability.
Well clearly we're getting a bump this year from our mortgage activity were more focused on the balance sheet growth and the improving operating leverage that we've been able to generate this.
This underscores our success in creating a sustainable path to improving profitability.
And returns that will enable us to replace their earnings generated from the mortgage activity. When this refinancing boom inevitably runs its course.
Turning to slide five well look at the trends in the loan portfolio our tone.
Our total loans held for investment increased 83 million or 23.6% annualized from end of the prior quarter.
We had loan production of 142 million in the quarter, which was partially offset by 83 million in payoffs and paydowns.
Most of the growth in the portfolio is due to the traction we're getting in our commercial bank initiative.
The year over year trend shows the shift in our loan portfolio away from residential loans towards business related loans as a result of the branch acquisition the relationships added through the P. P. P program and the progress, we're making with our commercial Bank initiative.
Appeared to a year ago mortgage loan residential mortgage loans.
<unk> declined from 40% of total loans to 30% of total.
Moving to slide six well take a closer look at our deposit trends, our total deposits increased 157 million or 44.4% annualized growth from the end of the prior quarter.
The growth was almost entirely attributable to growth in commercial DTA relationships the increase.
The increase in DTA relationships has helped offset some of the.
Run off that we saw in P.P.P. related deposits as clients deployed those funds.
As of September Thirtyth, we had just 29 million in PPP related deposits remaining on our balance sheet.
With the success, we've had in adding commercial transaction accounts weve seen significant improvement in our deposit mix with non interest bearing deposits increasing to 30% of total deposits from 21% just a year ago.
Turning to trust and investment management on slide seven our total assets under management increased 379 million into returned above the 6 billion dollar Mark.
The increase this quarter was primarily due to a combination of improved market conditions and additional contributions made to existing client accounts.
Now I'll turn the call over to Julie for further discussion of our financial results Julie.
Thanks, Scott good morning, turning to slide eight.
We provided an update on our participation in the PPP program and how it impacted various metrics in the third quarter.
We had a net impact of 800000 and the color relating to this program and have 2.1 million in fees remain to be recognized.
We have now started the process of assisting our clients and applying for forgiveness and adds on October 16th we had submitted 85.2 million to the S. I've learned to they ask for forgiveness and received approval on 2.1 million.
We also have a total of 5.5 million inland under 50000 that have not yet been forgiven that will apply under the simplified process and now I'd ask again.
Turning to slide nine we'll look at our gross revenue as Scott mentioned, we had a very strong quarter of revenue growth with increases coming in both net interest income and non interest income.
On slide 10, we look at the trends in net interest income and margin I know.
Our net interest income increased 2.1 million or 19.7% from the prior quarter. The growth was due to an increase in average loan balances, resulting from our organic loan growth.
Our net interest margin declined three basis points to 3.07%, primarily due to a declining yield and earning assets.
This was primarily offset by an 11 basis point decline in our cost to deposits.
However, when the impact of TPP loans and purchase accounting adjustments are excluded our net interest margin increased by one basis point from the prior quarter.
The significant deposit inflow, we had in the quarter resulted in a build up of liquidity with our average cash and cash equivalents, increasing by more than 100 million.
Our net interest income should benefit from the redeployment of this excess liquidity into higher yielding assets. However, we expect our net interest margin to remain flat in the near term our debt.
Our ability to deploy the excess liquidity further decrease deposit costs, along with TPP forgiveness should help to drive improvement in NIM and the longer term.
Turning to slide 11, our non interest income increased 16.9% from the prior quarter.
The increase is primarily due to the record quarter of net gain on mortgage loans sold that we had.
Aside from that impact the general increase in economic activity and the addition of clients from the branch acquisition earlier. This year are contributing to growth in our bank fees.
On slide 12, we provide some additional detail on our mortgage operations we have.
We had another record level of production in the quarter with approximately 376 million of originations for sale and another 42 million originated for portfolio.
Purchase demand was stronger during the quarter, an increase to 41% of total originations up from 27% last quarter.
With the increased volume and improved mortgage sale margin, we continue to see a significant spike in the profitability of our mortgage operation.
We generated 10.2 million and net income on revenue of 12.3 million in the second quarter.
Turning to slide 13, and our expenses.
Our non interest expense increased 31.5% from the prior quarter.
Increase was primarily due to the deferred loan origination expense related to <unk> PLM that reduced our expense levels in the second quarter.
The full quarter impact of the branches and personnel that were added in the branch acquisition, along with an increase in incentive compensation and vendor cost due to the growth in the balance sheet also contributed to the increase.
On the balance sheet growth in mortgage activity generating a significant increase in revenue we continue to see improvement in our efficiency ratio relative to the prior year.
And the third quarter, our efficiency ratio was 53.4% down from the 80% range that we have had during 2019.
We also completed the branch consolidations from the Simmons transaction in August.
Following these consolidation we expect our quarterly run rate for non interest expense to be in the range of 16.7 to 16.9 million, excluding expenses or reductions relating to the sale of the L.A. fixed income team.
Now turning to slide 14, we'll look at our asset quality.
We saw generally stable to improving trends across the portfolio in the third quarter.
Nonperforming assets decreased by 1.7 million and dropped to 53 basis points of total assets from 67 basis points at the end of the last quarter.
Once again, we continue to see a very low level of losses in the portfolio and had minimal charge offs this quarter.
Turning to slide 15.
We recorded $1.5 million of provision expense in the third quarter, which primarily reflects the growth we had in the portfolio as well as the ongoing uncertainty presented by the COVID-19 pandemic.
This increased our allowance to adjusted total loans to 1% when PBP loans and acquired loans are excluded.
Turning to slide 16.
We have provided an update on our loan modifications at September Thirtyth, we had 44 modified loans totaling 66.7 million.
Which represents a decline of 62% from the end of the prior quarter.
This amount only one loan for 750000 represents a second 90 day modification.
We only had two new modification requests made during the third quarter.
Given the lack of new modification requests and the trend of almost all borrowers being able to return to regular payment schedule. Following the expiration of their deferral period, we would expect our total modifications to continue declining over the remainder of the year.
Turning to slide 17, we have some additional information our loan modifications. We continue to remain in close contact with borrowers who have received a loan modification and receive updated financial data on a regular basis.
At this point almost all of our remaining modifications our commercial land.
We continue to have very little exposure to the industries that have been less impacted by the pandemic with our largest concentration a modified loans being an office property in the commercial real estate portfolio now.
Now I will turn the call back over to Scott.
Okay. Thanks Julie.
Turning to slide 18, I want to provide some comments about our near term outlook.
We expect the positive trends, we're seeing to continue and drive strong earnings and further increases in or tangible book value.
So far this year, we've added $2.23 to our tangible book value per share, which represents an increase of 17%.
Outside of our operating performance, we have a couple of other items that will positively impact our tangible book value going forward.
First we'll continue to recognize fees, we burn through the PPP program and second as we announced last month.
We've resolved the issues that prevented the closing the sale of our L.A. fixed income team last year and have a new agreement in place.
The sale should not have a significant impact on earnings but it.
But it will have a positive impact on tangible common equity of three to 3.3 million at the time of closing, which we expect before the end of the year.
The collective impact of the P.P.P. fees and the sale of the L.A. fixed income team will be another boost to our tangible book value.
The significant increase in tangible book value per share were generating illustrates our strong commitment to creating shareholder value.
During a period of unprecedented stress on our economy, we've been able to strengthen our capital position without doing anything that's been dilutive to shareholder value either from an earnings or a tangible book value perspective.
As a company with high insider ownership you can be assured that our interests are highly aligned with shareholders and we.
We evaluate all decisions from the perspective of what we'll preserve and grow the long term value of our franchise.
Looking at other trends remain very diligent and staying in close contact with our borrowers through the duration of the pandemic at this point, we aren't seeing anything that would point to any meaningful deterioration in asset quality.
Starting in the fourth quarter will also start to recognize the full impact of the synergies from the Q2 branch acquisition following that Q3 consolidation of those locations.
We also expect our net interest income the benefit from the redeployment of this excess liquidity into higher yielding assets. However.
However, we expect that it.
Yeah that is net interest margin over the short term to remain flat.
And from a business development standpoint, we continue to have strong pipeline in both our residential mortgage and commercial banking area.
Going forward, we anticipate our commercial bank initiative to be a primary driver of additional balance sheet growth.
In addition.
To the commercial bankers that we added from the branch acquisition, we're working on a number of another other initiatives that will increase our ability to attract commercial clients of the bank.
First we're continuing to build expertise in niche industries I mentioned earlier this year, we hired a leader.
To develop commercial banking products and services, specifically for mental medical and dental practices.
The pandemic slowed down the ramp up of that initiative, but as things have opened back up we're getting more traction in this area and see encouraging results. We intend to replicate the same model for other vertical markets as we move forward on this initiative.
And following the process as we developed for participating in the PPP program. We're planning to meet remain active in SP, a lending, which will expand the addressable market for commercial banking team.
And finally, we're actively participating in the main street lending program, which we believe will further add to our roster of commercial clients.
The progress we're making this year in the commercial Bank initiative has.
Create as much a much more diversified business mix that should lead to consistently generating strong returns over the long term.
And as we continue to gain scale through organic growth and additional strategic acquisitions. We believe that our model will solidify first western is a high performing financial institution and create significant value for our shareholders in the future.
With that we're happy to take your questions.
Citi. Please go ahead and open the call.
Certainly ladies and gentlemen, if you have a question at this time. Please press star one on your telephone removed himself from the queue.
The pound key once again.
Once again its star one question.
Our first question comes from the line of Brady Gailey with KBW.
Your line is open.
Thank you good morning, guys.
Good morning Brady.
So loan growth.
It was very robust in the quarter.
Yeah, I know you've done a lot as you said.
Banking team, let me just talk about it.
Fixations for loan growth.
Going forward I mean, I'm just some.
Yeah, it's probably not going to be at this run rate what do you say.
It would be inappropriate run rate for you guys over the next year or so.
Well as you know we've seen kind of two sides of loan growth at first Western one is you know the gross loan growth, which has been strong and then the net loan growth there.
That comes after we see the pay off so you don't see they are sold.
They also over the last five quarters in the $80 million range, you know our production over the last.
Over the last five quarters or four quarters really more than a 140 average rate. So I think that with the infrastructure. We have in place we could expect that to continue at about that rate.
Okay.
All right and then.
When you guys talk about flat net interest margin from here.
Maybe just.
Talking about what what base you're looking at is that the reported margin or is that excluding PDP or excluding the accretable yield what what's the base that you're looking at when you say flat from here.
Sure. So I think our expectation is from our base levels, excluding PDP and acquisition, we would expect that to kind of remain flat at that level.
So as PPP rolls off we're going to see an increase in net net interest margin yes.
Reported yet.
Yep Okay.
And then you've had such great growth this year.
And you know you've made a lot of money from earnings, but if you look at the Tc ratio.
You know that we've moved from eight and a half or so.
At year end last year down to about 6.3% TCV.
So maybe just give us an update on your capital base, how you're thinking about it and if you're if there's any upcoming plans related to your capital strategy.
Sure well as you know we raised a small amount of sub debt and in the first quarter and certainly would look at some additional subject given where rates are today.
I think that that could be something attractive.
The.
The the TC gains that we've we booked this year were offset somewhat by the Simmons.
Goodwill that we booked yet and so you don't in spite of that the fact that we've earned a two.
Two and a quarter I think year to date in in increase Tc.
Bodes well for the future I think the extent that we can continue to have the strong core earnings and then you know we'll have to see what happens in mortgages.
In terms of this whole refi boom that we've seen.
But but I think you know our projections right now indicate that we can continue to grow our tangible book.
And Tc ratios.
At a pace that will support our a or b.
Our balance sheet growth and we're not anticipating a a need for a common raise at this point.
Okay, and then finally with me I mean as you're happy.
More success on the commercial banking side from a growth perspective, as you said mortgage loans that moved from about 40% of loans down to 30.
Should we expect to continue to see that mix.
Mix shift happen further several mortgage loans will continue to decline from the 30% level going forward.
I don't think so I think that the mix that we're at now at 40%. We were feeling like that was getting a little outsized than I think at the in the range. It is now that that's more a comfortable range for us So I wouldn't expect a further.
Trend like that.
All right great. Thanks for the color guys great quarter.
Thanks Brady.
Thank you and once again, ladies and gentlemen to ask a question you May press star one to queue up.
Our next question comes from.
Ross Haberman with our L H investments.
Your line is open.
Hi, Scott its got nice quarter again.
It's sort of a sense of the general economic activity.
Again, it's just sort of on hold I guess or and the two new branches, which you were talking about Dale and the other one.
Absolutely.
In this quarter they were more to know and when do you think they'll be net.
Net contributor to the bottom line. Thank you.
Okay, well thank you.
Thank you for that three in one question Ross.
[laughter].
Let's start with the no need to apologize of the let's start with the overall economic situation.
Situation you know, we're very fortunate in our markets.
Because I think we have a combination of.
Typically high percentage of workforce that can work remotely and manage this pandemic without you know seeing a whole lot of economic disruption in there.
In their personal financial lives and so Oh, I think that that's been a big factor for us in all the improvements that we've seen continued improvements we've seen in basically every credit metric that we look at it first question, we talked about that a little bit in the deck. In addition to the comments that we've made I think.
The second factor, that's really benefiting or the economic.
The economic.
Situation in our markets and particularly with respect to our business model is this in migration that were seeing from the coast not only into the front range and in Arizona, the urban markets, but in the resort markets, we're seeing a very strong.
The impact to it and I think you know one of the one of the interesting takeaways in our mortgage operation is in Q2.
You saw you know.
Pretty extraordinary shift in our business mix, where we were seeing a lot of refineries and so you wonder what do you what goes what happens when all that goes away.
As it always does and I think Q3 is an interesting example, I mean, it's really back almost to the mix that we had in Q3 of 2019.
In the <unk> and yet our volumes are still you know almost three times higher than they were a year ago. So I think the efforts we have made in mortgage and the investment we've made in mortgage in infrastructure and an additional ml lows in the productivity of that team is really going to.
It's really going to benefit our ability to produce.
Just on the purchase side as we move back to a more traditional first western mix of 70 525, something like that so so overall I think the economic.
The trends that we're seeing in our markets are Uh huh.
Complimentary and benefiting our business model with respect to your question about the the new locations I mean, that's been a very interesting development for.
Development for Us this year, we thought that Vale would take a longer time to get traction that it has it's taken off quite nicely frankly, I think that's benefited from this in migration that we've seen and all the activity unveil we've seen a really.
Demand for residential.
Housing up there that we haven't really seen in 20 years.
20 years or something like that and so being out in front of that a big part of that with you know a team that's been in the Vail daily for 20 years and been leading financial institutions up there just really shows how nicely our business model plays out interesting in Broomfield, which is a suburban Denver location that's really.
Got halfway between Denver Boulder, and this is a market that we had targeted a year and a half ago and we decide to try something new in that market, which is essentially incubate. The team that's opening in broomfield in an existing location, which in this case was older and that has turned out to be a really nice success for us because we built a nice.
Business in Broomfield, and we haven't even finished our tenant improvement in our space at Brookfield, yet. So so the shop is up and running the team's working nicely. We're building a nice revenue base for the for them and they haven't even moved into their permanent space. Yet. So so to really interesting success stories that will be.
Well to build on with a new locations hopefully into 2021.
And just sorry, one one final technical question the gain on the sale this quarter from the L.A. I said Matt.
That's it manage then transaction that three to 3.3 is that or is that a pretax or post tax number.
Yes.
Julie you want to address the mechanics of that sure I said that I'm going to just come out of our held for sale asset which is effectively in our goodwill balances on the PC. He has come down by 3 million 3.3, and that will occur in the fourth quarter. When we close on that transaction that just doesn't run through the income.
Stephen Ross it runs through the balance sheet and the big benefit there is additional Tc.
So I'll start with an additional three to 3.3 million <unk> added to the shareholders equity without any tax leakage.
Okay, since you're saying correct.
Okay. Thanks, guys again a real.
Really nice quarter.
Well. Thank you yeah, thanks Ross for questions.
Ladies and gentlemen, I'm not showing any further questions. At this time I would now like to turn the conference back to management for any closing remarks.
[noise] Oh sure Ah Thank you city.
Just would like to thank everybody for joining us on the call today, we sure appreciate all the support and look forward to speaking with you again next quarter if not before.
Thanks, everybody and stay safe.