Earnings Labs

First Western Financial, Inc. (MYFW)

Q3 2020 Earnings Call· Fri, Oct 23, 2020

$27.85

+0.47%

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Transcript

Operator

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the First Western Financial Q3 2020 earnings conference call. [Operator Instructions] Please be advised, today's conference is being recorded. [Operator Instructions] I would now like to turn the conference over to your speaker, Tony Rossi, please go ahead.

Tony Rossi

Analyst

Thank you, Sydney. Good morning everyone, and thank you for joining us today for First Western Financial's Third Quarter 2020 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 will use a slide presentation as part of our discussion this morning. If you have not done so already, please visit the Events and Presentations page of 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. 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?

Scott Wylie

Analyst

Okay. Thanks, Tony. And good morning, everybody. We're very pleased with our performance this quarter as we continue to deliver record earnings despite the ongoing impact of COVID-19 pandemic. We continue to execute on the vision that we that we communicated at the time of our IPO in 2018. We're a unique wealth manager built on a private bank platform that was emerging at that time from a period of capital constraint. And we said we would realize strong operating leverage as we grew our balance sheet through both organic growth and acquisition. Investments we've made in both banking talent and technology are having the 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 noninterest income. In the third quarter, our gross revenue increased 18% from the prior quarter, resulting in a $9.6 million in net income or $1.20 in earnings per share, both record levels of profitability for the company. We had another very strong quarter of mortgage activity, but outside that area, we're seeing positive contributions across the rest of our operations. Our established offices continue to gain scale and improved profitability for bringing in new clients and ramping up quickly in new markets such as Vail Valley and Broomfield. 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 the compelling value proposition that we offer, we are having a great deal of success in converting those leads into new client relationships. Another goal this year, which we talked about on our earnings call in January, was…

Julie Courkamp

Analyst

Thanks, Scott. Good morning. Turning to Slide 8. We've 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 $800,000 in the quarter relating to this program and have $2.1 million in fees remaining to be recognized. We have now started the process of assisting our clients in applying for forgiveness. And as of October 16, we had submitted $85.2 million to the -- of loans to the SBA for forgiveness and received approval on $2.1 million. We also have a total of $5.5 million in loans under $50,000 that have not yet been forgiven that will apply under the simplified process announced by the SBA. Turning to Slide 9. 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 noninterest income. On Slide 10, we look at the trends in net interest income and margin. 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 3 basis points to 3.07% primarily due to a declining yield in earning assets. This was primarily offset by an 11 basis point decline in our cost of deposits. However, when the impact of PPP loans and purchase accounting adjustments are excluded, our net interest margin increased by 1 basis point from the prior quarter. The significant deposit inflow we had in the quarter resulted in a buildup 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…

Scott Wylie

Analyst

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 our 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've earned through the PPP program. And second, as we announced last month, we've resolved the issues that prevented the closing of the sale of our LA fixed income team last year and have a new agreement in place. The sale should not have a significant impact on earnings, but it will have a positive impact on tangible common equity of $3 million to $3.3 million at the time of closing, which we expect before the end of the year. The collective impact of the PPP fees and the sale of the LA fixed income team will be another boost to our tangible book value. The significant increase in tangible book value per share we're 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 diluted 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 evaluate all decisions from the perspective of what will preserve and grow the long-term value of our franchise. Looking at other trends, we're remaining very diligent in staying in close contact with our…

Operator

Operator

[Operator Instructions] Our first question comes from the line of Brady Gailey with KBW.

Brady Gailey

Analyst

So loan growth was very robust in the quarter. I know you've done a lot, as you said, to add to the commercial banking team. Maybe just talk about expectations for loan growth going forward? I mean I'm guessing it's probably not going to be at this run rate, but what do you think would be an appropriate loan growth run rate for you guys over the next year or so?

Scott Wylie

Analyst

Well, as you know, we've seen kind of 2 sides of loan growth at First Western. One is the gross loan growth, which has been strong, and then the net loan growth that comes after we see the payoff. So we've seen payoffs over the last 5 quarters in the $80 million range. Our production over the last 5 quarters or 4 quarters really more than the $140 million average range. So I think that with the infrastructure we have in place, we could expect that to continue at about that rate.

Brady Gailey

Analyst

Okay, all right. And then when you guys talk about a flat net interest margin from here, maybe just talk about what base you're looking at? Is that the reported margin? Or is that excluding PPP or excluding accretable yield? What's the base that you're looking at when you say flat from here?

Julie Courkamp

Analyst

Sure. So I think our expectation is from our base level, so excluding PPP and accretion. We would expect it to kind of remain flat at that level.

Scott Wylie

Analyst

So as PPP rolls off, we're going to see an increase in net interest margin...

Julie Courkamp

Analyst

Yes, net interest margin.

Scott Wylie

Analyst

That's the reported, yes.

Brady Gailey

Analyst

Yes, okay. All right. And then you've had such great growth this year, and you've made a lot of money from earnings. But if you look at the TCE ratio, that we've moved from 8.5% at year-end last year, down to about 6.3% TCE. 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?

Scott Wylie

Analyst

Sure. Well, as you know, we raised a small amount of sub debt in the first quarter and certainly would look at some additional sub debt. Given where rates are today, I think that, that could be something attractive. The TCE gains that we booked this year were offset somewhat by the Simmons goodwill that we booked. And so in spite of that, the fact that we've earned 2 1/4 I think year-to-date in increased TCE bodes well for the future, I think, to the extent that we can continue to have the strong core earnings. And then we'll have to see what happens in mortgages in terms of this whole refi boom that we've seen. But I think our projections right now indicate that we can continue to grow our tangible book and TCE ratios at a pace that will support our balance sheet growth. And we're not anticipating a need for a common raise at this point.

Brady Gailey

Analyst

Okay. And then finally with me, I mean as you're having more success on the commercial banking side from a growth perspective, as you said, mortgage loans have moved from about 40% of loans down to 30%. Should we expect to continue to see that mix shift happen further, so mortgage loans will continue to decline from the 30% level going forward?

Scott Wylie

Analyst

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. And 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.

Operator

Operator

[Operator Instructions] Our next question comes from Ross Haberman with RLH Investments.

Ross Haberman

Analyst · RLH Investments.

You've got a nice quarter again. Could you give us a sort of a sense of the general economic activity? How are things beginning to sort of unfold, I guess, or -- and the 2 new branches which you're talking about, Vail and the other one, at -- in this quarter, would you say they were marginal? And when do you think there'll be a net contributor to the bottom line?

Scott Wylie

Analyst · RLH Investments.

Okay. Well, thank you for that 3-in-1 question, Ross.

Ross Haberman

Analyst · RLH Investments.

Sorry.

Scott Wylie

Analyst · RLH Investments.

Let's start with that -- no, no need to apologize. Let's start with the overall economic situation. We're very fortunate in our markets because I think we have a combination of a relatively high percentage of workforce that can work remotely and manage this pandemic without seeing a whole lot of economic disruption in their personal and financial lives. And so 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 First Western. And 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 the economic situation in our markets, and particularly with respect to our business model, is this in-migration that we're 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 impact, too. And I think one of the interesting takeaways in our mortgage operation is in Q2. You saw a pretty extraordinary shift in our business mix where we were seeing a lot of refis. And so you wonder 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, and yet our volumes are still almost 3x higher than they were a year ago. So I think the efforts we've made in mortgage and the investment we've made in mortgage, in infrastructure, and in additional MLOs and in the productivity of that team is really going to benefit our ability to produce just on the purchase side…

Ross Haberman

Analyst · RLH Investments.

And just sorry, one final technical question. The gain on the sale this quarter from the LA asset management transaction, that $3 million to $3.3 million, is that a pretax or a post-tax number?

Scott Wylie

Analyst · RLH Investments.

Yes. So Julie, you want to address the mechanics of that?

Julie Courkamp

Analyst · RLH Investments.

Sure. So that's going to just come out of our held-for-sale asset, which is effectively in our goodwill balances. So TCE just comes down by $3 million to $3.3 million. And that will occur in the fourth quarter when we close on that transaction.

Scott Wylie

Analyst · RLH Investments.

So it doesn't run through the income statement, Ross. It runs through the balance sheet. And the big benefit there is additional TCE.

Ross Haberman

Analyst · RLH Investments.

So it's an additional $3 million to $3.3 million added to the shareholders' equity without any tax implications, you're saying?

Scott Wylie

Analyst · RLH Investments.

Correct.

Operator

Operator

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.

Scott Wylie

Analyst

Sure. Thank you, Sydney. I 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, stay safe.

Operator

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect. Everybody, have a good day.