Yahoo Finance First Western Financial, Inc. (NASDAQ:MYFW) Q1 2024 Earnings Call Transcript
First Western Financial, Inc. (NASDAQ:MYFW) Q1 2024 Earnings Call Transcript April 19, 2024
First Western Financial, Inc. isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day and thank you for standing by and welcome to the First Western Financial First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentations, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Tony Rossi of Financial Profiles. Sir, please go ahead.
Tony Rossi: Thank you, Norma. Good morning, everyone, and thank you for joining us today for First Western Financial's first quarter 2024 earnings call. Joining us from First Western's management team are Scott Wylie, Chairman and Chief Executive Officer; Julie Courkamp, Chief Operating Officer; and David Weber, 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.
Various factors could cause actual results to be materially different for many 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: Thanks, Tony, and good morning everybody. During the fourth quarter, while continuing to prioritize prudent risk management and conservative approach to new loan production, we were able to deliver a higher level of profitability than our originally reported $0.03 a share in Q4. This improvement is encouraging, although not at the level of profitability that we target. We executed well on our strategic priorities, which resulted in positive trends in a number of key areas, including further lowering our loan-to-deposit ratio, generating a higher level of non-interest income, primarily driven by our wealth management and mortgage banking businesses, an improvement in our asset quality with a decline in non-performing loans and zero net charge-offs in the quarter.
The higher level of profitability combined with our prudent balance sheet management resulted in an increase in our tangible book value per share and increases in our risk-based capital ratios. As we indicated in our last call, the primary focus in the near-term is on core deposit gathering in order to further improve our level of liquidity, which is reflected in our balance sheet trends in the first quarter. We remain conservative in new loan production, maintaining our disciplined underwriting and pricing criteria while prioritizing lending to clients that provide full banking relationships, including deposits and wealth management business. This approach, along with lower level loan demand due to higher interest rates, resulted in a lower level of loan production in the quarter.
Loan payoffs continue to be at relatively the same level we've been seeing, but we also saw lower level of draws on existing credit lines that we've seen in the past few quarters. This resulted in a decline in total loans during the first quarter, most notably in the areas of commercial and industrial loans. In terms of asset quality, we continue to make progress on the resolution of loans that were put in non-accrual status over the past several quarters. This included a pay down of one of the loans that comprised our largest non-accrual relationship following the sale of one of the properties that we had as collateral and a second already in Q2. As we've indicated, this process will take some time and the sale of various collateral part pieces will proceed on different schedules, but based on the progress we're making we expect to see continued successful resolutions with minimal loss incurred.
Aside from the existing non-accrual loans, the rest of the portfolio is performing well and we had a decline in past due loans during the first quarter. This continues a positive trend we've been seeing in this area. As compared to the first quarter of 2023, past due loans are down 59%. As we announced during the first quarter, we successfully charged-off the other large non-accrual loan after the guarantor filed for bankruptcy. So the full extent of the losses on this loan have already been incurred and are reflected in our income statement. And as we pursue our recovery efforts, there will only be positive potential impact from here on out. We also sold off a third, smaller non-accrual loan last quarter at a small premium, further reducing our problem loans to the lowest percent of total loans over the past three quarters, down to 1.86%.
Moving to Slide 4, we generated net income of $2.5 million, or $0.26 per diluted share in the quarter and pre-tax pre-provision net income of $3.7 million. Q1 earnings in EPS were about 16% higher than the average of the prior four quarters using our originally reported Q4 earnings as we showed positive trends in several areas of our operations. With our higher level of profitability and prudent balance sheet management, we had a 1% increase in our tangible book value per share this quarter. Now I will turn the call over to Julie for some additional discussion of our balance sheet and trust and investment management trends. Julie?
Julie Courkamp: Thank you. Turning to Slide 5, we'll look at the trends in our loan portfolio. Our total loans decreased by $56 million – decreased $56 million from the end of the prior quarter. We continue to be conservative and highly selective on our new loan production, focusing primarily on non-CRE lending opportunities and clients that also bring deposits to the bank. This resulted in $31 million in new loan production in the first quarter, which was a lower level than we have had in the past several quarters, combined with payoffs continuing at a relatively consistent level and a lower level of draws on existing credit lines than we had been seeing, primarily due to clients being cautious about interest, increasing debt levels at higher rates and until economic conditions improve.
This resulted in the decline in total loans that we saw in the first quarter. The largest decline came in our C&I portfolio, which was partially attributed to a loan that we sold during the quarter. We continue to be disciplined in our pricing criteria. However, the average rate on our new loan production dropped a bit this quarter to 6.95%, which is primarily due to one large cash secured origination. Moving to Slide 6, we'll take a closer look at our deposit trends. Our total deposits were up slightly during the quarter. We continue to have success in new business development and added $17 million in new deposit relationships during the first quarter with average deposits up $83 million or 14% annualized quarter-over-quarter. We had the largest growth in our money market accounts, which reflects the expansion of existing client relationships as well as clients moving funds into money market accounts from time deposits.
Turning to Trust and Investment Management on Slide 7, we had a $388.5 million increase in our assets under management in the first quarter, primarily due to market performance. This continues the positive trend we are seeing in AUM, which has increased 12% or $750 million over the past year. Now I will turn the call over to David for further discussion of our financial results.
David Weber: Thank you. Turning to Slide 8, we'll look at our gross revenue. Our gross revenue increased 4.6% from the prior quarter, primarily due to an increase in our non-interest income. As expected, this reversed the downward revenue trends we saw in 2023. Now, turning to Slide 9, we'll look at the trends in net interest income and margin. Our net interest income decreased 1.6% from the prior quarter due to an increase in interest expense resulting from a higher average cost of deposits. Our net interest margin decreased 3 basis points to 2.34%, driven by an increase in interest-bearing deposit cost and an unfavorable mix shift in our deposit portfolio, offset partially by an increase in the average yield on interest earning assets.
The rate of decline in NIM has decelerated over the past four quarters, nearing a point of stabilization. During March, we repaid $31 million of borrowings from the Bank Term Funding Program, which will reduce our level of borrowings in the second quarter. We continue to have $10 million of borrowings outstanding from the BTFP, but the rate is locked for one year so we will not see a rate increase on these borrowings. Now turning to Slide 10, our non-interest income increased 19.7% from the prior quarter. We generated increases in trust and investment management fees, net gain on mortgage loans and bank fees, which were partially offset by a decrease in risk management and insurance fees, which are seasonally higher in the fourth quarter each year.
The increase in net gain on mortgage loans was due to two factors. First, loan production increased to $91 million from $67 million in the prior quarter as we saw an increase in home buying activity in our markets, as well as the contribution of production from new MLOs we had added this year. And second, we had an increase in our average gain on sale margins. Now, turning to Slide 11 and our expenses. Our non-interest expense increased to $19.7 million, primarily due to the seasonal impact of higher payroll taxes and higher incentive compensation, which returned to a more normalized level as a result of our increase in profitability and we had higher legal costs in the quarter. For the next few quarters, we expect to manage core operating expenses carefully as in 2023, with the main variable being the level of incentive compensation, which will be dependent upon our financial performance.
Now, turning to Slide 12, we'll take a look at our asset quality. Our non-performing assets declined $5.1 million, which was primarily due to the sale of a non-performing construction loan at a gain and the paydown of our largest non-performing relationship following the sale of a property that we had as collateral. The remainder of the portfolio continues to perform well and we had a decline in past due loans and zero losses in the quarter. With the decline we had in loans, our level of allowance to adjust to total loans increased five basis points to 1% at March 31. I also want to note that multifamily loans represent just 7% of our total loan portfolio. These loans are performing well and none of the loans are to borrowers for rent controlled properties.
Now I'll turn it back to Scott. Scott?
Scott Wylie: Thanks David. Turning to Slide 13, I'll wrap up with some comments about our outlook. While economic conditions remain uncertain, we'll continue to prioritize prudent risk management and conservative approach to new loan production, while continuing to make progress on resolving the credits that were placed on nonperforming status over the past few quarters, which we continue to expect to result in immaterial losses. However, with the strength of our balance sheet, we're well positioned to capitalize on increased loan demand once borrowers have more confidence in the economic outlook and interest rates start to move lower. Our business development focus will remain on full banking relationships with high quality clients that need the multiple products and services that we can provide in banking, wealth management and other areas.
These are what we consider to be our core clients and they've historically resulted in highly profitable relationships and strong asset quality. Over the past several quarters, we've had good success in achieving our goal of reducing our loan-to-deposit ratio, and we'll continue to prioritize core deposit gathering to further increase our liquidity. We also expect the positive trends we saw in the first quarter in the areas of wealth management and mortgage banking to continue. We've recently added some new MLOs in the mortgage business which should contribute to higher levels of loan production, particularly as we move into the seasonally stronger period for home buying. With the increase in our tangible book value per share and risk-based capital ratios in the first quarter, along with the improvement in asset quality, we have the flexibility considering adding additional options for capital utilization, which we'll continue to discuss with the board as market conditions evolve.
As always, we'll act in the best interest of shareholders. Given the strength of the balance sheet and the franchise we built, we believe we're well positioned to continue adding attractive full banking relationships, growing our balance sheet over long-term, increasing revenue and realizing more positive operating leverage, which should result in further increases in our level of profitability and additional value being created for our shareholders. With that, we're happy to take your questions. So Norma, please open up the call.
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