First Western Financial, Inc. — 2018 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2018, compared primarily with 2017. First Western is a Denver-based financial holding company combining private banking, lending, trust, wealth planning and investment management, with operations concentrated in Colorado, Arizona, Wyoming and California. Its common stock began trading on Nasdaq in July 2018.
Financial performance and position
| Metric | 2018 | 2017 | Change / context |
|---|---|---|---|
| Total income before non-interest expense | $57.6 million | $54.5 million | Up 5.7% |
| Net interest income | $30.6 million | $27.6 million | Up 11.1%; net interest margin rose to 3.27% from 3.15% |
| Non-interest income | $27.2 million | $27.7 million | Down 1.9%; 47.2% of total income before non-interest expense |
| Non-interest expense | $50.2 million | $49.5 million | Up 1.4%; efficiency ratio improved to 85.41% from 88.10% |
| Income before tax | $7.4 million | $5.0 million | Up 48.2% |
| Net income | $5.6 million | $2.0 million | Common earnings were $4.3 million; diluted EPS was $0.63, versus a 2017 common loss of $0.3 million and diluted loss per share of $0.05 |
| Operating cash flow | $17.8 million | $(5.4) million | Investing cash flow was $(63.1) million; financing cash flow was $109.1 million |
| Total assets | $1.084 billion | $969.7 million | Up 11.8% |
| Loans / deposits | $894.0 million / $937.8 million | $813.7 million / $816.1 million | Loans up 9.9%; deposits up 14.9%; year-end loans-to-deposits ratio 95.33% |
| Cash and cash equivalents | $73.4 million | $9.5 million | Available-for-sale securities were $44.9 million, down from $53.7 million |
| Borrowings | $21.6 million | $42.0 million | Includes $15.0 million FHLB borrowings and $6.6 million subordinated notes |
| Shareholders’ equity | $116.9 million | $101.8 million | Up 14.8%; consolidated CET1 ratio was 11.35%, and Bank CET1 was 10.55% |
| Assets under management | $5.235 billion | $5.374 billion | Down 2.6%; market change and withdrawals outweighed new relationships and contributions |
Material changes versus 2017
- Higher loan balances and yields drove net interest income growth, while deposit-rate increases lifted interest expense; average interest-bearing deposit cost rose to 1.03% from 0.66%.
- Mortgage gains increased 31.4% to $4.6 million as mortgage loan funding grew. Trust and investment management fees fell 1.5% to $19.2 million. Non-interest income also lacked the $0.8 million legal settlement gain recorded in 2017.
- Credit quality weakened: nonperforming assets rose to $19.7 million from $4.9 million, and nonperforming loans reached 2.13% of loans from 0.52%. The increase was driven chiefly by an $11.3 million cash-, securities- and other-secured loan placed on nonaccrual as a troubled debt restructuring (TDR).
- The company completed its IPO in July, receiving $32.5 million in net proceeds, and redeemed $25.0 million of preferred stock. It also redeemed $6.9 million of subordinated notes due 2020; year-end subordinated notes were $6.6 million, due 2026.
- Net income tax expense declined to $1.8 million from $3.0 million; the effective tax rate was 23.9% versus 59.6%, reflecting the lower corporate tax rate and the prior-year tax-law remeasurement.
Outlook, risks and unusual items
- No specific financial guidance or quantified outlook is provided. Management describes plans to grow existing markets, add locations, deepen client relationships, expand core deposits and consider acquisitions. Management says the IPO improved access to capital to pursue growth and hiring.
- Key exposures include regional concentration (97.5% of loans were to borrowers in Colorado, Arizona, Wyoming or California), real-estate collateral concentration (73.6% of gross loans), competition, interest-rate sensitivity, deposit concentration and reliance on fee income and client investment performance.
- The largest trust client represented 35.4% of AUM and 2.4% of non-interest income. The ten largest depositors represented 21.1% of deposits; certain other trust-client allocations to interest-bearing accounts represented a further 24.6%.
- Interest-rate modeling shifted from asset-sensitive in 2017 to liability-sensitive at year-end 2018. A modeled 300-basis-point increase implied a 6.61% decrease in net interest income and a 16.14% decrease in fair value of equity; actual outcomes may differ.
- The Mortgage segment recorded a $1.2 million pretax loss, versus a $0.4 million loss in 2017; management said it was working on operational changes to improve profitability. Capital Management also remained loss-making, with a $0.7 million pretax loss.
- Goodwill was $24.8 million. Although market capitalization was below book value, management reported that impairment testing did not indicate a reporting unit failed Step 1. Management also identified a prior-year material weakness relating to accounting for a 2017 business combination; it concluded no material weakness existed at year-end 2018, but the relevant remediation controls had not been tested through a 2018 business combination.
- Management reported no material legal proceedings and no material expected losses from ordinary-course claims. The filing identifies LIBOR transition, cybersecurity and third-party technology, regulatory change, and real-estate and borrower credit conditions as risks. The company expects to recognize lease right-of-use assets and liabilities of $12 million to $17 million upon 2019 adoption of the new lease standard; it could not yet estimate the impact of CECL, scheduled for 2020 adoption.
- The company does not anticipate common dividends in the foreseeable future, intending to retain earnings for operations and growth.
Important facts for investors to verify
- Review the status, collateral and expected recovery of the $11.3 million nonaccrual TDR and the other TDRs; compare subsequent-period nonperforming loans, charge-offs and allowance coverage.
- Assess whether deposit growth is sustainable and how deposit pricing, large depositor concentration and the shift to higher-cost funding affect margins and liquidity.
- Track AUM retention and the effect of market movements and client attrition on trust and investment management fees, including the exposure to the largest trust client.
- Evaluate the Mortgage segment’s path to profitability and whether higher origination volumes can offset competitive pressure on sale margins and operating costs.
- Confirm progress on internal-control remediation, goodwill impairment assumptions, and the eventual financial impact of CECL and lease-standard adoption.
- Check subsequent filings for capital and liquidity trends, any regulatory or legal developments, and changes to the company’s stated growth and acquisition plans.