8-K: First Western Financial Reports Mixed Fourth Quarter Results Amidst Strategic Shift

First Western Financial reported a decrease in net income for the fourth quarter of 2023, despite significant deposit growth and a reduced loan-to-deposit ratio.

Summary

• First Western Financial, Inc. announced its financial results for the fourth quarter of 2023, showing a net income available to common shareholders of $0.3 million, or $0.03 per diluted share.
• This is a decrease compared to $3.1 million, or $0.32 per diluted share, in the third quarter of 2023, and $5.5 million, or $0.56 per diluted share, in the fourth quarter of 2022.
• Total deposits increased to $2.53 billion, a 4.5% rise from $2.42 billion in the previous quarter.
• The loan-to-deposit ratio improved to 100.7% from 105.1% in the prior quarter.
• The company's pre-tax, pre-provision net income was $4.1 million in Q4 2023, down from $4.6 million in Q3 2023.
• Net interest income decreased to $16.3 million, a 2.6% drop from $16.8 million in the third quarter of 2023.
• The net interest margin decreased to 2.37% from 2.46% in the previous quarter.
• Non-performing assets increased to $59.7 million, or 2.00% of total assets, compared to $56.1 million, or 1.87% of total assets, in the prior quarter.
• The company recorded a provision expense of $3.9 million for credit losses in the fourth quarter, compared to $0.3 million in the third quarter of 2023.
• Assets under management increased to $6.75 billion as of December 31, 2023, up from $6.40 billion in the previous quarter.

Sentiment

Score: 4

Explanation: The sentiment is moderately negative due to the significant decrease in net income and earnings per share, despite positive developments in deposit growth and asset management. The increase in credit loss provisions and non-performing assets also contribute to the negative sentiment.

Positives

• Total deposits saw a significant increase, reaching $2.53 billion, indicating successful deposit gathering efforts.
• The loan-to-deposit ratio improved to 100.7%, aligning with the company's year-end goal.
• The company maintained disciplined expense control, keeping operating expenses below initial expectations for 2023.
• Assets under management increased by $357.2 million during the quarter, reaching $6.75 billion.
• The company's capital ratios remain strong, exceeding regulatory minimums.
• New loan production focused on clients that also bring deposits to the bank.

Negatives

• Net income available to common shareholders decreased significantly to $0.3 million in Q4 2023.
• Diluted earnings per share dropped to $0.03 in Q4 2023.
• Net interest income decreased by 2.6% to $16.3 million.
• The net interest margin decreased to 2.37%.
• Non-performing assets increased to $59.7 million, or 2.00% of total assets.
• The company recorded a $3.9 million provision for credit losses in the fourth quarter, a significant increase from the previous quarter.

Risks

• The company faces risks related to changes in the economy affecting real estate values and liquidity.
• There are risks associated with the company's ability to continue originating and selling residential real estate loans.
• The company is exposed to risks specific to commercial loans and borrowers.
• Fluctuations in the value of investment securities and changes in interest rates pose risks.
• The adequacy of the allowance for credit losses and the ability to maintain a strong core deposit base are ongoing risks.
• The company is exposed to integration risks in connection with acquisitions.

Future Outlook

The company believes it is positioned to perform well in any economic scenario in 2024, with a focus on prudent risk management, core deposit gathering, and disciplined expense management. They anticipate solid earnings growth in 2024, even with modest balance sheet growth, and expect net interest margin expansion as interest rates decline.

Management Comments

• Scott C. Wylie, CEO of First Western, stated that while an increase in the estimated provision for credit losses reduced profitability in the fourth quarter, the company continued to execute on strategic priorities.
• Mr. Wylie also noted that the company's deposit focus resulted in 18% annualized growth in total deposits during the quarter.
• Management believes they are positioned to perform well in any economic scenario that emerges in 2024.
• The company will prioritize prudent risk management and be conservative in new loan production while focusing on core deposit gathering.

Industry Context

The results reflect a challenging environment for regional banks, with increased deposit costs impacting net interest income and profitability. The focus on deposit gathering and conservative lending practices aligns with industry trends aimed at managing risk and maintaining liquidity in an uncertain economic climate.

Comparison to Industry Standards

• The decrease in net interest margin to 2.37% is below the average for many regional banks, which have been experiencing margin compression due to rising deposit costs.
• The increase in non-performing assets to 2.00% of total assets is higher than the average for well-capitalized banks, indicating potential credit quality concerns.
• The deposit growth of 4.5% is a positive sign, as many banks are struggling to retain and attract deposits in the current environment.
• Compared to peers like Zions Bancorporation and Western Alliance Bancorporation, First Western's net income performance is weaker this quarter, reflecting the impact of increased credit loss provisions.
• The company's focus on wealth management and trust services is similar to other regional banks seeking to diversify revenue streams, but the flat non-interest income this quarter indicates challenges in this area.

Stakeholder Impact

• Shareholders will be negatively impacted by the decrease in net income and earnings per share.
• Employees may be affected by the company's focus on expense management.
• Customers may benefit from the company's focus on deposit gathering and relationship expansion.
• Creditors may be concerned about the increase in non-performing assets and credit loss provisions.

Next Steps

• The company will host a conference call and webcast on January 26, 2024, to discuss the financial results.
• The company will continue to prioritize prudent risk management and focus on core deposit gathering.
• The company will concentrate on working through credits placed on non-performing status to continue achieving immaterial losses.

Key Dates

Keywords

financial results, deposits, net income, loan-to-deposit ratio, asset management, credit losses, net interest margin, non-performing assets, capital ratios, banking