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Q1 2016 Shareholder Update

Fellow Shareholders:

Last week we had our annual shareholder meeting, which is always a welcome opportunity to review our progress and future plans.  Thanks to everyone that made the effort to attend in person, and our webinar broadcast was well attended also, so thanks to those of you that took the time to listen in.

We covered four topics at the annual meeting:

  1. How we are doing at implementing our strategy
  2. Our 2015 operating progress and results
  3. Our 2016 priorities and progress
  4. A valuation and liquidity outlook

We had some good questions from the attendees as well, plus some messages from the webinar participants.  Here are the highlights from the discussions.

FW Strategy and Progress

By now you are all familiar with FW’s mission “to be the best private bank for the Western wealth management (WM) client”.  I reviewed briefly our eleven year history of growth and expansion.  To those of you that have been through this entire adventure with us, we have come a long way through adversity in the economy, financial markets, regulatory climate and capital markets that none of us ever imagined.  In spite of that, FW today is profitably growing and expanding, with almost $1b in assets, $5b in trust and investment management assets, thirteen locations, over 250 associates and several thousand clients.

Our niche strategy has become very interesting to competitors and the financial markets – our 54% of revenues in the form of fee income, mostly recurring, is far beyond what our competitors have accomplished.  The WM niche in particular is very desirable these days.  For us, with the post-recession changes to our industry, especially the massive re-regulation still underway (including 20,000 pages of new regulations from Dodd Frank so far), the impetus to grow has never been stronger.  While FW has responded effectively to the many environmental changes, the “sweet spot” for banks today is in the $5 to $10 billion range, with over $200mm in revenues – three to four times the size of FW today.  To do that, we’ll need 25 or so more locations, with the talent and capital to support that scale.

2015 Progress

I showed a slide from last year’s meeting that listed our 2015 business plan priorities, then showed our results against those objectives:

  • Revenue growth – revenues were up 15% or $6.8mm year over year (YoY);
  • Earnings growth – pretax earnings were up $4.7mm YoY;
  • Organic growth – Assets were up 14%, deposits up 21% and loans were up 17%;
  • Expansion – We added new locations in Aspen, plus mortgage offices in old town Ft Collins and in North Scottsdale;
  • Operating leverage – Came in at over 300% for the year; and,
  • Expense control – As expenses grew just 5% YoY.

We discussed all the 2015 operating results, which I won’t repeat here as we covered them in our last quarterly shareholder update.  With the very positive momentum from 2015, we are expecting continued good news in 2016, which YTD is certainly what we are seeing.

2016 Outlook

For 2016, we talked about the four ways FW has traditionally grown, our recent success and next steps in each area.  These include organic growth, innovation, expansion and acquisition.  I showed our performance through Q1 vs last year’s progress through March:

  • Loans are up 17%, while deposits are up 30%;
  • Core revenues (excluding one-time items) are up 22% to a $53mm run rate;
  • Operating expenses are up 14% year over year with our new products, particularly mortgages, and offices; and,
  • Pretax, pre-provision earnings were $1.2mm in Q1, up fourfold from a year ago and running at a normalized pace over $6mm.

Assuming our growth trends continue in assets and revenues, our earnings should continue the big ramp up we saw last year into 2016 and beyond.

Valuation and Liquidity Update

Bank valuations have recovered from their recession lows, but over the FW investment period, it has been a difficult cycle – for the 12 years since we opened in March of 2004, the KBW NASDAQ Bank Index is down about 30% to today.  I noted last year in response to a shareholder question that if you compare FWFI’s roughly 2.5x price performance to the two longstanding public banks in Colorado over the same period, COBZ went from $13.62 in March of 2004 to $12.39 last Friday.  GBNK went public in October of 2005 at a split adjusted price of $60 and closed at $16.49 Friday.

More importantly, looking forward our valuation is trending positive and the market is looking favorably at our type of high fee, niche WM institution.  FWFI’s closest comparisons have sold (CNY) or traded at attractive multiples (FRC now is over 22 LTM and 17 NTM P/E).   Other, more mature high fee banks like UMB, TMP, BPFH and FFWM, albeit with lower fee income to revenue ratios than FWFI, trade at forward multiples in the mid-teens.

We are focused on growing revenues and earnings with a path to an attractive valuation and options for liquidity in 2017.  There are a number of things that need to happen for this to all work out, some internal and many external, but so far our progress has been good.  With the earnings improvements trends from 2015 and 2016, FWFI is set up for the opportunity of attractive valuations and liquidity to come.  Assuming our earnings ramp continues as planned, our plan targets 2017 earnings per share (EPS) in the $2.00 to $2.25 range, with further earnings gains of as much as $1 per share into 2018.

We successfully completed our first ever PCAOB audit in Q1 for 2015, a requirement for an IPO, and have strengthened our internal risk, finance, accounting and compliance teams to becoming FDICIA and SOX compliant.  While there is much work to be done, with these earnings trends and forward price market multiples, there is certainly good potential for FWFI.

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

Scott Wylie
April 2016