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Fourth Quarter 2016 Shareholder Update

I hope your 2017 is off to a good start.  For First Western, the initiatives and progress I described in the most recent shareholder updates have come together nicely, and we are off to a good start in 2017.

To encourage you to read the details below, here are the main takeaways from this quarterly update:

  1. In 2016, we made a number of significant pre-IPO changes at First Western, which have us well positioned for the growth, valuation and liquidity opportunities ahead. I summarize those in this update.
  2. As previously mentioned, we have always been very focused on shareholder value creation at First Western, but it had been very difficult with the headwinds of that past eight years. Our latest capital raise successfully increased common equity by $12.3mm and placed $6.5mm in new subordinated debt – thank you to the participants.  Our 2016 progress and this capital raise provide the foundational support for our 2017 plan, which I outline below.
  3. Finally, I look beyond the IPO to highlight how and why I believe that being public changes FW’s future – much for the better.

2016 Progress

Last update, I reviewed how the post-election political climate had shifted investor interest back into financials for the first time since the Great Recession.  There is evidence of this shift throughout the public markets, with bank stocks up 30% or so since the election, and investor interest in forming new banks for the first time in eight years.  The timing of this big shift is very fortunate given our progress in 2016 and our plans to raise more capital and accelerate our growth.

We did have significant headwinds throughout pre-election 2016.  These included:

  • Continued reregulation of our industry, including higher capital requirements and added compliance burden;
  • Higher costs from IPO preparation and infrastructure initiatives;
  • A more difficult competitive environment, which increased pricing pressure and created challenges in hiring/retention;
  • Investment style challenges, where First Western’s active manager bias continued to be out of favor with market performance; and,
  • Investor disinterest in our sector, for the above reasons and more, where many equity investors continue to underweight financials.

Nevertheless, we made good progress.  Here are some highlights at FW:

  • Grew assets organically by 7%, or $58.2mm, while staying below Basel III and FDICIA penalty triggers;
  • Increased gross loans outstanding by 9%, or $54mm, while deposits grew 6%, or $44mm;
  • Revenues grew 8.4% to $55.4mm while earnings gains in the first half of 2016 slowed by year end with delayed top line growth and organizational upgrade costs in the latter part of 2016;
  • Improved asset quality with NPLs/loans down from 1.20% to 0.54% year over year, along with good audit results;
  • Proved out new product (Mortgage and TPA services) and locations (Aspen and Jackson Hole);
  • Enhanced holding company and bank capital ratios (e.g. FWFI’s key CET1 ratio grew from 4.8% to 6.2% YoY);
  • Completed important risk management, product and technology upgrades;
  • Co-created updated operating principles and cultural norms, supporting a new “growth enabled culture” at FW;
  • Created and launched our new Executive Team, with new product group and regional presidents; and,
  • Launched upgraded career and training tools through new “First Western University”.

2017 Business Plan Themes

Thanks to those who participated in our first FW common equity capital raise in many years.  We raised almost $20mm of new tier 1 and tier 2 capital, through new subscriptions and conversion of the Preferred D and debentures into common.  As I noted last quarter, this was our first offering of common stock in seven years, so it was nice to get it done with minimal incremental dilution.

We are currently evaluating our 2017 capital plan.  To fund our planned growth through 2018, we will need to raise additional capital, as our growth in assets requires more capital and, unless the Basel III exemption is raised, higher capital ratio requirements will apply as soon as we grow through $1b, which is imminent.  In addition, regulatory capital phase outs accelerate in 2017 for several elements of our current capital stack.

Therefore, we are reviewing the likely best timing for our possible IPO.  On one hand, delaying into 2018 will likely reduce dilution and improve valuations.  However, the public equity market is open and receptive now, and being public sooner would provide improved liquidity and allow FW to accelerate our growth and expansion. Management and the Board are working closely with advisors to get the best outcomes for our shareholders.

Last update I shared some of the themes we expected to build into the 2017 Business Plan.  Here are some highlights of where we are now focusing:

  • Revenue Growth – We have had good success with organic growth.  Our ability to continue our balance sheet growth will depend on our ability to demonstrate expected earnings gains and raise more capital at a fair value.  Our Regional Presidents, Josh Wilson and Dan Thompson, are providing strong leadership to our growth and expansion efforts.
  • Sales Team – We have added eight business development officers, which we call “Client Strategists”, to most of our local offices. These specially trained team members are strengthening our traditional sales and service focus as a dedicated sales force, with centralized oversight and support.
  • Matrix Support – We are also adding specialized central support to our local private bankers, lenders, portfolio managers and wealth planners. This is intended to improve efficiency, productivity, sales results and a better client experience.
  • Revenue Mix – Our new Product Group President, Joe Maslowski, was hired to strengthen our fee generating product teams and continue our industry leading fee growth story. This is already an area of great strength for First Western with a fee income to total revenue ratio nearly double that of our high fee peer banks around the US.
  • Expense control – FW has effectively limited expense growth. While net revenues are expected to grow about 10% in 2017, operating expenses are targeted to grow about 3%.
  • Earnings growth – We believe our operating model can continue to produce a rapid earnings ramp – our three year forecast shows strong earnings gains through the proven operating leverage in First Western’s business model.
  • Cautious expansion – We have previously shared our recent success adding new services and new locations. Our Jackson Hole office is reaching critical mass, and our new Aspen office, now in our permanent home just behind the Hotel Jerome, looks to be the quickest new office ever to produce a positive contribution.  Our new mortgage and third party administrator initiatives launched last and this year, respectively are both contributing nicely as well.
  • Ongoing growth management initiatives – With our recent success in growth and expansion, we are building our organization to ensure that our teams feel well supported. We have made great progress with our new executive team, strengthening our Human Capital function, re-visioning our culture and co-creating new operating principles for a growth enabled culture.

Beyond the IPO

Now that we completed the 2016 capital raise and are moving smoothly (so far) towards a possible IPO, it seems worthwhile to look beyond potentially becoming a public company – what would that do for First Western and our shareholders?

We know that the sweet spot in banks in terms of valuation and efficiency has been in the $5b to $10b asset range – 5x to 10x our current size.  We also know we are in a consolidating industry, where banks that are the consolidators are creating shareholder value well above their peers.  We know we have to be public to better access capital markets for growth capital and to get targets to accept FW stock as acquisition consideration.  And we know that proven ability to organically grow revenues and earnings, to differentiate ourselves in the market, and to produce high levels of fee income all drive premium valuations to earnings and book value.

These factors are each important, as we believe First Western can accelerate our revenue and earnings growth both organically and by acquisition as a public company.  We believe that a higher-than-market premium to book value, which historically is earned by well run, differentiated, high fee banks, will allow First Western to do deals that are accretive to capital and to earnings, driving a solid valuation upside that further supports revenue and earnings growth.

If you would like more information or have any questions, please just give me a call at 303-531-8101 or email me at Scott.Wylie@myfw.com.  Thanks once again for all your support.

Scott Wylie
February 2017