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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2020

OR

  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________

Commission File Number 001-38595

FIRST WESTERN FINANCIAL, INC.

(Exact name of registrant as specified in its charter)

Colorado

37-1442266

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)

1900 16th Street, Suite 1200
Denver, CO

80202

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: 303.531.8100

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

    

Trading Symbol

    

Name of each exchange on which registered

Common Stock, no par value

MYFW

The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer 

Accelerated filer

Non-accelerated filer 

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

Shares outstanding as of
July 31 2020

Common Stock, no par value

7,951,749

Table of Contents

FIRST WESTERN FINANCIAL, INC.

TABLE OF CONTENTS

Page

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

6

Condensed Consolidated Balance Sheets as of June 30, 2020 (Unaudited) and December 31, 2019

6

Condensed Consolidated Statements of Income (Unaudited) for the Three Months and Six Months Ended June 30, 2020 and June 30, 2019

7

Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the Three Months and Six Months Ended June 30, 2020 and June 30, 2019

8

Condensed Consolidated Statement of Changes in Shareholders’ Equity (Unaudited) for the Three Months and Six Months Ended June 30, 2020 and June 30, 2019

9

Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2020 and June 30, 2019

10

Notes to Condensed Consolidated Financial Statements (Unaudited)

11

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

40

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

66

Item 4.

Controls and Procedures

67

PART II. OTHER INFORMATION

67

Item 1.

Legal Proceedings

67

Item 1A.

Risk Factors

67

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

70

Item 3.

Defaults upon Senior Securities

70

Item 4.

Mine Safety Disclosures

70

Item 5.

Other Information

70

Item 6.

Exhibits

71

SIGNATURES

72

Important Notice about Information in this Quarterly Report

Unless we state otherwise or the context otherwise requires, references in this Quarterly Report to “we,” “our,” “us,” “the Company” and “First Western” refer to First Western Financial, Inc. and its consolidated subsidiaries, including First Western Trust Bank, which we sometimes refer to as “the Bank” or “our Bank.”

The information contained in this Quarterly Report is accurate only as of the date of this Quarterly Report on Form 10-Q and as of the dates specified herein.

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements. These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance. These statements are often, but not always, made through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would” and “outlook,” or the negative version of those words or other comparable words or phrases of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control, particularly with regard to developments related to COVID-19. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements.

There are or will be important factors that could cause our actual results to differ materially from those indicated in these forward-looking statements, including, but not limited to, the following:

The impact of the COVID-19 pandemic and actions taken by governmental authorities in response to the pandemic;
geographic concentration in Colorado, Arizona, Wyoming and California;
changes in the economy affecting real estate values and liquidity;
our ability to continue to originate residential real estate loans and sell such loans;
risks specific to commercial loans and borrowers;
claims and litigation pertaining to our fiduciary responsibilities;
competition for investment managers and professionals and our ability to retain our associates;
fluctuation in the value of our investment securities;
the terminable nature of our investment management contracts;
changes to the level or type of investment activity by our clients;
investment performance, in either relative or absolute terms;
changes in interest rates;
the adequacy of our allowance for loan losses;
weak economic conditions and global trade;
legislative changes or the adoption of tax reform policies;
external business disruptors in the financial services industry;
liquidity risks;
our ability to maintain a strong core deposit base or other low-cost funding sources;

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continued positive interaction with and financial health of our referral sources;
retaining our largest trust clients;
our ability to achieve our strategic objectives;
competition from other banks, financial institutions and wealth and investment management firms;
our ability to implement our internal growth strategy and manage the risks associated with our anticipated growth;
the acquisition of other banks and financial services companies and integration risks and other unknown risks associated with acquisitions;
the accuracy of estimates and assumptions;
our ability to protect against and manage fraudulent activity, breaches of our information security, and cybersecurity attacks;
our reliance on communications, information, operating and financial control systems technology and related services from third-party service providers;
technological change;
our ability to attract and retain clients;
unforeseen or catastrophic events, including pandemics, terrorist attacks, extreme weather events or other natural disasters;
new lines of business or new products and services;
regulation of the financial services industry;
legal and regulatory proceedings, investigations and inquiries, fines and sanctions;
limited trading volume and liquidity in the market for our common stock;
fluctuations in the market price of our common stock;
potential impairment of goodwill recorded on our balance sheet and possible requirements to recognize significant charges to earnings due to impairment of intangible assets;
actual or anticipated issuances or sales of our common stock or preferred stock in the future;
the initiation and continuation of securities analysts coverage of the Company;
future issuances of debt securities;
our ability to manage our existing and future indebtedness;
available cash flows from the Bank; and
other factors that are discussed in “Item 1A - Risk Factors” in our Annual Report on Form 10-K.

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The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in the section titled Risk Factors in Part I, Item 1A of our Annual Report on Form 10-K, filed with the U.S. Securities and Exchange Commission (“SEC”) on March 12, 2020, and in the section titled Risk Factors in Part II, Item 1A of our Form 10-Q filed with the SEC on April 30, 2020. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Accordingly, you should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise. New factors emerge from time to time, and it is not possible for us to predict which will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

FIRST WESTERN FINANCIAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands, except share amounts)

June 30, 

December 31, 

    

2020

    

2019

ASSETS

 

 

  

Cash and cash equivalents:

 

  

 

  

Cash and due from banks

$

4,404

$

4,180

Interest-bearing deposits in other financial institutions

 

187,272

 

74,458

Total cash and cash equivalents

 

191,676

 

78,638

Available-for-sale securities, at fair value

 

47,018

 

58,903

Correspondent bank stock, at cost

 

1,295

 

585

Mortgage loans held for sale

 

69,604

 

48,312

Loans, net of allowance of $10,354 and $7,875

 

1,412,086

 

990,132

Premises and equipment, net

 

5,201

 

5,218

Accrued interest receivable

 

5,108

 

3,048

Accounts receivable

 

4,616

 

5,238

Other receivables

1,543

1,006

Other real estate owned, net

 

658

 

658

Goodwill

 

24,191

 

19,686

Other intangible assets, net

 

76

 

28

Deferred tax assets, net

 

6,035

 

5,047

Company-owned life insurance

 

15,268

 

15,086

Other assets

 

23,141

 

16,544

Assets held for sale

 

3,010

 

3,553

Total assets

$

1,810,526

$

1,251,682

LIABILITIES

 

  

 

  

Deposits:

 

  

 

  

Noninterest-bearing

$

398,063

$

240,068

Interest-bearing

 

1,008,869

 

846,716

Total deposits

 

1,406,932

 

1,086,784

Borrowings:

 

  

 

  

Federal Home Loan Bank Topeka and Federal Reserve borrowings

 

222,313

 

10,000

Subordinated notes

 

14,444

 

6,560

Accrued interest payable

 

205

 

299

Other liabilities

 

27,080

 

20,244

Liabilities held for sale

 

135

 

117

Total liabilities

 

1,671,109

 

1,124,004

COMMITMENTS AND CONTINGENCIES

 

  

 

  

SHAREHOLDERS’ EQUITY

 

  

 

  

Preferred stock - no par value; 10,000,000 shares authorized; 0 issued and outstanding

 

 

Convertible preferred stock - no par value; 150,000 shares authorized; 0 shares issued and outstanding

 

 

Common stock - no par value; 90,000,000 shares authorized; 7,939,024 and 7,940,168 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively

 

 

Additional paid-in capital

 

143,498

 

142,797

Accumulated deficit

 

(4,925)

 

(14,955)

Accumulated other comprehensive income (loss)

 

844

 

(164)

Total shareholders’ equity

 

139,417

 

127,678

Total liabilities and shareholders’ equity

$

1,810,526

$

1,251,682

See accompanying notes to condensed consolidated financial statements.

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FIRST WESTERN FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(in thousands, except per share amounts)

Three Months Ended June 30, 

 

Six Months Ended June 30, 

    

2020

    

2019

 

    

2020

    

2019

Interest and dividend income:

 

  

 

  

 

  

 

  

Loans, including fees

$

12,202

$

10,600

$

23,204

$

20,818

Investment securities

 

224

 

331

 

519

 

641

Federal funds sold and other

 

44

 

243

 

259

 

765

Total interest and dividend income

 

12,470

 

11,174

 

23,982

 

22,224

Interest expense:

 

  

 

  

 

  

 

  

Deposits

 

1,319

 

2,995

 

3,712

 

5,904

Other borrowed funds

 

355

 

219

 

543

 

389

Total interest expense

 

1,674

 

3,214

 

4,255

 

6,293

Net interest income

 

10,796

 

7,960

 

19,727

 

15,931

Less: provision for (recovery of) credit losses

 

2,124

 

(78)

 

2,491

 

116

Net interest income, after provision for (recovery of) credit losses

 

8,672

 

8,038

 

17,236

 

15,815

Non-interest income:

 

  

 

  

 

  

 

  

Trust and investment management fees

 

4,609

 

4,693

 

9,340

 

9,363

Net gain on mortgage loans

 

10,173

 

3,262

 

12,654

 

4,718

Bank fees

 

221

 

341

 

589

 

630

Risk management and insurance fees

 

333

 

194

 

429

 

662

Income on company-owned life insurance

 

91

 

96

 

182

 

189

Total non-interest income

 

15,427

 

8,586

 

23,194

 

15,562

Total income before non-interest expense

 

24,099

 

16,624

 

40,430

 

31,377

Non-interest expense:

 

  

 

  

 

  

 

  

Salaries and employee benefits

 

6,690

 

7,699

 

15,172

 

15,317

Occupancy and equipment

 

1,515

 

1,398

 

2,955

 

2,805

Professional services

 

1,231

 

1,036

 

2,254

 

1,813

Technology and information systems

 

993

 

1,016

 

1,962

 

2,085

Data processing

 

1,037

 

742

 

1,884

 

1,429

Marketing

 

253

 

441

 

668

 

719

Amortization of other intangible assets

 

38

 

142

 

40

 

315

Goodwill impairment

1,572

1,572

Net loss on assets held for sale

553

Other

 

887

 

613

 

1,803

 

1,206

Total non-interest expense

 

12,644

 

14,659

 

27,291

 

27,261

Income before income taxes

 

11,455

 

1,965

 

13,139

 

4,116

Income tax expense

 

2,759

 

561

 

3,109

 

1,085

Net income available to common shareholders

$

8,696

$

1,404

$

10,030

$

3,031

Earnings per common share:

Basic

$

1.10

$

0.18

$

1.27

$

0.39

Diluted

$

1.10

$

0.18

$

1.26

$

0.39

See accompanying notes to condensed consolidated financial statements.

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FIRST WESTERN FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(in thousands)

Three Months Ended June 30, 

 

Six Months Ended June 30, 

    

2020

    

2019

 

    

2020

    

2019

Net income

$

8,696

$

1,404

$

10,030

$

3,031

Other comprehensive income items:

Net change in unrealized gains on available-for-sale securities

 

1,931

 

981

 

1,334

 

2,043

Income tax effect

(330)

(253)

(326)

(528)

Total other comprehensive income items

1,601

728

1,008

1,515

Comprehensive income

$

10,297

$

2,132

$

11,038

$

4,546

See accompanying notes to condensed consolidated financial statements.

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FIRST WESTERN FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)

(in thousands, except share amounts)

    

Shares

    

    

    

Accumulated

    

Convertible

Additional

Other

Preferred

Preferred

Common

Paid-In

Accumulated

Comprehensive

Stock

    

Stock

    

Stock

Capital

Deficit

Income (loss)

Total

Balance at April 1, 2019

 

 

 

7,968,420

$

141,738

$

(21,337)

$

(733)

$

119,668

Net income

 

 

 

 

 

1,404

 

 

1,404

Settlement of share awards

15,446

(110)

(110)

Other comprehensive income, net of tax

 

 

 

 

 

 

728

 

728

Stock-based compensation

 

 

 

 

467

 

 

 

467

Balance at June 30, 2019

 

 

 

7,983,866

$

142,095

$

(19,933)

$

(5)

$

122,157

Balance at April 1, 2020

 

 

7,917,489

$

143,081

$

(13,621)

$

(757)

$

128,703

Net income

 

 

 

 

 

8,696

 

 

8,696

Settlement of share awards

21,535

(170)

(170)

Other comprehensive income, net of tax

 

 

 

 

 

 

1,601

 

1,601

Stock-based compensation

 

 

 

 

587

 

 

 

587

Balance at June 30, 2020

 

 

 

7,939,024

$

143,498

$

(4,925)

$

844

$

139,417

Balance at January 1, 2019

 

 

 

7,968,420

$

141,359

$

(23,199)

$

(1,285)

$

116,875

Net income

 

 

 

 

 

3,031

 

 

3,031

Settlement of share awards

 

 

 

15,446

 

(110)

 

 

 

(110)

Adoption of ASU 2018-02

235

(235)

Other comprehensive income, net of tax

 

 

 

 

 

 

1,515

 

1,515

Stock-based compensation

 

 

 

 

846

 

 

 

846

Balance at June 30, 2019

 

 

 

7,983,866

$

142,095

$

(19,933)

$

(5)

$

122,157

Balance at January 1, 2020

 

 

7,940,168

$

142,797

$

(14,955)

$

(164)

$

127,678

Net income

 

 

 

 

 

10,030

 

 

10,030

Other comprehensive income, net of tax

 

 

 

 

 

 

1,008

 

1,008

Settlement of share awards

21,535

(170)

(170)

Stock repurchases

(22,679)

(370)

(370)

Stock-based compensation

 

 

 

 

1,241

 

 

 

1,241

Balance at June 30, 2020

 

 

 

7,939,024

$

143,498

$

(4,925)

$

844

$

139,417

See accompanying notes to condensed consolidated financial statements.

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FIRST WESTERN FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

    

Six Months Ended June 30, 

2020

2019

Cash flows from operating activities

 

  

 

  

Net income

$

10,030

$

3,031

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

Depreciation and amortization

 

552

 

1,011

Deferred income tax expense

 

(1,314)

 

(516)

Stock-based compensation

 

1,241

 

846

Provision for loan losses

 

2,491

 

116

Net amortization of investment securities

 

231

 

71

Stock dividends received on correspondent bank stock

 

(12)

 

(19)

Increase in cash surrender value of company-owned life insurance

 

(182)

 

(189)

Net gain on mortgage loans

 

(12,654)

 

(4,718)

Origination of mortgage loans held for sale

 

(541,222)

 

(228,313)

Proceeds from mortgage loans

 

526,355

 

212,371

Loss on assets held for sale

553

Loss on impairment of goodwill

1,572

Net changes in operating assets and liabilities:

Accounts receivable

 

633

 

(213)

Accrued interest receivable and other assets

 

(2,444)

 

(2,584)

Accrued interest payable and other liabilities

 

6,588

 

(59)

Net cash used in operating activities

 

(9,154)

 

(17,593)

Cash flows from investing activities

Activity in available-for-sale securities:

Maturities, prepayments, and calls

 

12,662

 

3,831

Purchases

 

 

(10,390)

Purchases of correspondent bank stock

 

(698)

 

(1,237)

Redemption of correspondent bank stock

2,095

Purchases of premises and equipment

 

(523)

 

(280)

Net cash paid on acquisitions (Note 2)

(61,316)

Loan and note receivable originations and principal collections, net