First Western Financial, Inc. — Q1 2019 Form 10-Q
Business context and reporting period. Unaudited results for the three months ended March 31, 2019, compared with Q1 2018; balance-sheet comparisons are with December 31, 2018. First Western is a Denver-based financial holding company providing private banking, trust and investment management, insurance, and residential mortgage services, principally in Colorado, Arizona, Wyoming, and California. It reported $5.8 billion of assets under management (AUM) at quarter-end.
Financial performance and condition
| Metric | Q1 2019 | Comparable / change |
|---|---|---|
| Total income before non-interest expense | $14.8 million | $14.8 million in Q1 2018; down 0.6% |
| Net interest income | $8.0 million | Up 8.3% year over year |
| Net interest margin | 3.03% | 3.25% in Q1 2018 |
| Net income | $1.6 million | $1.2 million in Q1 2018; up 37.2% |
| Net income available to common shareholders | $1.6 million | $0.6 million in Q1 2018 |
| Basic and diluted EPS | $0.21 | $0.11 in Q1 2018 |
| Operating cash flow | $(5.6) million | $1.5 million provided in Q1 2018 |
- Interest income rose 22.7% to $11.1 million, supported by average loan growth of $103.6 million and an increase in average loan yield to 4.46% from 4.20%. Deposit interest expense increased to $2.9 million from $1.2 million; average cost of funds rose to 1.23% from 0.74%. Net interest spread narrowed to 2.62% from 2.99%.
- Non-interest income fell 4.3% to $7.0 million: trust and investment fees decreased 5.7% to $4.7 million and bank fees decreased 52.6% to $0.3 million; mortgage sale gains increased 16.4% to $1.5 million.
- Non-interest expense declined 5.1% to $12.6 million, mainly reflecting lower salaries and employee benefits. Provision for credit losses was $0.2 million, versus a $0.2 million recovery in Q1 2018. No charge-offs or recoveries were reported in either period.
- Total assets were $1.145 billion, up 5.6% from year-end. Loans held for investment were $929.9 million, up 4.2%; available-for-sale securities were $53.6 million, up 22.7%. Cash and cash equivalents were $69.8 million, down from $73.4 million at year-end.
- Deposits increased 4.3% from year-end to $978.1 million. Borrowings were $26.9 million, including $20.4 million of FHLB borrowings and $6.6 million of subordinated notes. The Bank had $331.6 million of additional FHLB borrowing capacity and unused federal funds lines; management said it was in compliance with borrowing covenants.
- Shareholders’ equity was $119.7 million. The Bank was categorized as well capitalized; its CET1 and total risk-based capital ratios were 10.36% and 11.26%, respectively.
- Non-performing assets were $19.4 million, or 1.69% of total assets, versus $19.7 million and 1.82% at year-end. The allowance for loan losses was $7.6 million, 0.82% of loans. Real estate secured 72.6% of the loan portfolio.
- Net cash used in investing was $43.7 million, primarily reflecting net loan originations and securities purchases; financing provided $45.7 million, principally from deposit growth and net FHLB borrowing. Ending cash was $69.8 million, compared with $37.1 million at March 31, 2018.
Material changes versus comparable periods
- Common-shareholder earnings rose substantially, in part because preferred stock dividends of $0.6 million reduced Q1 2018 common earnings but there were no preferred dividends in Q1 2019; the preferred shares had been redeemed in July 2018.
- Net interest income grew, but faster deposit-cost increases compressed net interest margin. Average interest-bearing deposits increased $165.4 million and their average rate rose to 1.53% from 0.78%.
- AUM increased to $5.781 billion from $5.358 billion a year earlier, principally due to market gains; trust and investment management fees nevertheless declined, partly due to closed accounts following attrition of a prior profit-center president.
- Capital Management’s pre-tax loss narrowed to $0.1 million from $0.5 million, and Mortgage moved to $0.1 million of pre-tax income from a $0.2 million loss, reflecting expense reductions and improved mortgage margins.
Outlook, risks, contingencies, and unusual items
- The filing provides no quantified earnings or revenue guidance. Management states that first-quarter results are not necessarily indicative of full-year results.
- Key stated risks include geographic concentration; real estate values and commercial credit; interest-rate changes and rising deposit costs; deposit retention and liquidity; trust-client retention and investment performance; competition for clients and professionals; cybersecurity and third-party technology; regulation, litigation, and execution of growth or acquisition strategies.
- The company adopted lease accounting in Q1 2019, recording a right-of-use asset of $12.2 million and lease liability of $15.8 million at March 31. Operating lease costs, net of sublease income, were $1.1 million for the quarter.
- Management expects adoption of CECL on January 1, 2020 to require an opening retained-earnings and allowance adjustment, but could not estimate its amount. The impact will depend on portfolio composition and economic conditions.
- Non-accrual loans classified as troubled debt restructurings totaled $12.4 million; total TDR principal was $17.5 million. During the quarter the company extended $0.3 million to a TDR borrower for weather-related operational needs, with $1.5 million of pledged cash collateral. A separate $1.2 million residential loan was 90 days delinquent but still accruing.
- Management reported no legal proceedings expected to have a material adverse effect and no material change to previously disclosed risk factors. Disclosure controls were deemed effective; no material change in internal control over financial reporting was reported.
- On May 1, 2019, after quarter-end, the company granted time-vesting and financial-performance units to employees; potential maximum unrecognized compensation expense was approximately $0.8 million and $1.4 million, respectively.
Important facts for investors to verify
- Whether loan growth and higher asset yields can offset continued deposit repricing and margin pressure.
- Progress in resolving the $19.4 million of non-performing assets, especially the larger TDR exposures, and whether the allowance remains adequate.
- Drivers of lower trust and investment fees and bank fees, and whether AUM market gains translate into sustained fee growth.
- Liquidity and funding trends, including deposit mix, use of FHLB advances, and the effect of off-balance-sheet credit commitments.
- The eventual CECL transition adjustment and the effects of lease obligations and subsequent equity awards on earnings and capital.