<PAGE> 1
U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999.
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[ ] TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from_______________ to_________________.
Commission file number 000-25295
FIRST WESTERN CORP.
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(Exact name of small business issuer as specified in its charter)
<TABLE>
<CAPTION>
<S> <C>
Nebraska 47-0484682
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(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)
</TABLE>
11210 Huron, Northglenn, CO. 80234
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(Address of principal executive offices, including zip code)
(303) 451-1010
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(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 X No
--- ---
As of June 30, 1999, there were 144,440 shares of the registrant's
common stock outstanding.
Transitional Small Business Disclosure Format (check one):
Yes No X
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FIRST WESTERN CORP.
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
PART I FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements 2
Item 2. Management's Discussion and Analysis of Financial
Condition or Plan of Operation 7
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST WESTERN CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1999 (Unaudited) and December 31, 1998
(In thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
--------- ---------
(Unaudited)
ASSETS
<S> <C> <C>
Cash and due from banks ................................................... $ 14,496 $ 13,892
Interest bearing deposits in other banks .................................. -- 3
Federal funds sold ........................................................ 2,500 13,270
Investment securities:
Available-for-sale, at fair value ....................................... 46,604 27,082
Held-to-maturity, at amortized cost, fair value of $6,336, in 1999 and
$7,249, in 1998 ...................................................... 6,259 7,146
--------- ---------
Total investment securities....................................... 52,863 34,228
Loans held for sale ....................................................... 2,536 5,193
Gross loans receivable: ................................................... 416,162 290,875
Less: Unearned loan fees ................................................ (1,282) (886)
Allowance for loan losses ......................................... (3,621) (2,187)
--------- ---------
Net loans receivable ............................................. 411,259 287,802
Premises and equipment, net ............................................... 9,042 8,308
Preferred securities issuance cost, net ................................... 1,102 --
Other assets .............................................................. 5,585 4,511
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TOTAL ASSETS ..................................................... $ 499,383 $ 367,207
========= =========
LIABILITIES
Deposits:
Demand non-interest bearing ............................................. $ 48,879 $ 44,653
Demand interest bearing ................................................. 19,158 14,919
Time .................................................................... 360,475 259,908
--------- ---------
Total deposits ................................................... 428,512 319,480
Securities sold under agreements to repurchase ............................ 9,563 5,080
Note payable .............................................................. 3,600 8,790
Federal Home Loan Bank borrowings ......................................... 8,593 8,650
Other liabilities ......................................................... 3,154 3,818
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Total liabilities ................................................ 453,422 345,818
Minority interest in consolidated subsidiaries ............................ -- 683
Company obligated mandatorily redeemable preferred securities of subsidiary
trust holding solely Junior Subordinated Debentures ..................... 23,000 --
STOCKHOLDERS' EQUITY
Common stock $1.00 par value; 500,000 shares authorized;
144,440 shares issued and outstanding ................................... 144 140
Surplus ................................................................... 1,376 697
Retained earnings ......................................................... 21,407 19,460
Accumulated other comprehensive income .................................... 34 409
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Total stockholders' equity ....................................... 22,961 20,706
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ....................... $ 499,383 $ 367,207
========= =========
</TABLE>
These consolidated financial statements should be read only in
connection with the accompanying notes to consolidated financial statements.
2
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FIRST WESTERN CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Three months ended June 30, 1999 and 1998 (Unaudited) and
six months ended June 30, 1999 and 1998 (Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
1999 1998 1999 1998
--------- --------- --------- ---------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees ....................................... $ 9,667 $ 5,336 $ 17,642 $ 10,196
Taxable investment securities ............................... 503 157 809 383
Nontaxable investment securities ............................ 110 124 262 243
Dividends on investment securities .......................... 11 18 25 41
Federal funds sold .......................................... 234 207 414 326
--------- --------- --------- ---------
Total interest income ................................ 10,525 5,842 19,152 11,189
--------- --------- --------- ---------
Interest expense:
Deposits .................................................... 4,670 2,502 8,495 4,779
Federal funds purchased ..................................... 21 5 24 6
Securities sold under agreements to repurchase .............. 58 25 101 42
Note payable ................................................ -- 61 84 110
Trust preferred securities .................................. 545 -- 815 --
Federal Home Loan Bank borrowings ........................... 139 107 254 189
--------- --------- --------- ---------
Total interest expense ............................... 5,433 2,700 9,773 5,126
--------- --------- --------- ---------
Net interest income .................................. 5,092 3,142 9,379 6,063
Provision for loan losses ..................................... 514 60 1,429 120
--------- --------- --------- ---------
Net interest income after provision for loan losses ........... 4,578 3,082 7,950 5,943
--------- --------- --------- ---------
Non-interest income:
Fees for other customer services ............................ 463 266 872 497
Net gains from sale of loans ................................ 323 187 594 450
Commissions and fees from brokerage activities .............. 114 28 181 61
Investment securities transactions, net ..................... -- -- -- (4)
Other operating income ...................................... 139 125 252 200
--------- --------- --------- ---------
Total non-interest income ............................ 1,039 606 1,899 1,204
--------- --------- --------- ---------
Non-interest expenses:
Salaries and employee benefits .............................. 1,922 1,164 3,676 2,133
Net occupancy expense of premises ........................... 544 376 1,030 622
Purchased services .......................................... 440 230 755 448
Office supplies ............................................. 119 87 229 152
Minority interest in income of consolidated subsidiaries .... -- (7) -- 60
Other operating expenses .................................... 725 423 1,249 745
--------- --------- --------- ---------
Total non-interest expenses .......................... 3,750 2,273 6,939 4,160
--------- --------- --------- ---------
Income before income taxes ........................... 1,867 1,415 2,910 2,987
Income tax expense ............................................ 626 681 957 1,083
--------- --------- --------- ---------
NET INCOME .................................................... $ 1,241 $ 734 $ 1,953 $ 1,904
========= ========= ========= =========
Other comprehensive income:
Unrealized holding gains (losses) arising during the
period ................................................... (441) 4 (577) 26
Income tax (expense) benefit related to items of other
comprehensive income ..................................... 150 (1) 196 (9)
--------- --------- --------- ---------
Other comprehensive income, net of tax ............... (291) 3 (381) 17
--------- --------- --------- ---------
COMPREHENSIVE INCOME .......................................... $ 950 $ 737 $ 1,572 $ 1,921
========= ========= ========= =========
Income per share:
Basic and diluted earnings per share .......................... $ 8.77 $ 5.24 $ 13.66 $ 13.60
========= ========= ========= =========
Weighted average shares outstanding ....................... 141,480 140,000 142,960 140,000
========= ========= ========= =========
</TABLE>
These consolidated financial statements should be read only in
connection with the accompanying notes to consolidated financial statements.
3
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FIRST WESTERN CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30, 1999 and 1998 (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Six months ended June 30,
------------------------
1999 1998
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(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income ............................................................... $ 1,953 $ 1,904
Adjustments to reconcile net income to cash provided by operating
activities:
Provision for loan losses ........................................... 1,454 130
Provision for losses on other real estate owned ..................... -- --
Depreciation and amortization ....................................... 555 286
Net gains from sale of loans ........................................ (594) (450)
Proceeds from sale of loans held for sale ........................... 31,226 28,394
Origination of loans held for sale .................................. (27,975) (26,935)
Investment securities transactions, net ............................. 175 (16)
Increase in minority interest in consolidated subsidiaries .......... -- (33)
Changes in deferrals and accruals:
Other assets ........................................................ 1,933 165
Other liabilities ................................................... (4,000) (68)
--------- ---------
Net cash provided by operating activities ......................... 4,727 3,377
--------- ---------
Cash flows from investing activities:
Net (increase) decrease in federal funds sold ......................... 10,770 (5)
Net (increase) decrease in interest bearing deposits in other banks ... 3 50
Purchase of investment securities available-for-sale .................. (58,148) (2,436)
Purchase of investment securities held-to-maturity .................... (127) (100)
Proceeds from sale of investment securities available-for-sale ........ -- 500
Proceeds from maturities/paydowns of investment securities ............ 39,039 10,226
Net increase in loans ................................................. (124,734) (45,582)
Expenditures for bank premises and equipment .......................... (1,254) (2,246)
Proceeds from sale of real estate owned ............................... 162 53
--------- ---------
Net cash used in investing activities ............................. (134,289) (39,540)
--------- ---------
Cash flows from financing activities:
Net increase in deposits .............................................. 109,032 34,416
Net increase (decrease) in securities sold under agreements to
repurchase........................................................... 4,483 1,167
Advances from Federal Home Loan Bank .................................. -- 7,500
Payments on Federal Home Loan Bank advances ........................... (57) --
Proceeds from note payable ............................................ 3,600 800
Payments on note payable .............................................. (8,790) (980)
Proceeds from trust preferred securities .............................. 23,000 --
Debt issuance cost .................................................... (1,102) --
--------- ---------
Net cash provided by financing activities ......................... 130,166 42,903
--------- ---------
Net increase in cash and due from banks .................................... 604 6,740
Cash and due from banks at beginning of period ............................. 13,892 10,427
--------- ---------
Cash and due from banks at end of period ................................... $ 14,496 $ 17,167
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest ............................................................ $ 12,452 $ 5,635
Income taxes ........................................................ 1,174 950
Noncash transactions:
Issuance of shares for minority interest of Firstate Bank ............. 683 --
</TABLE>
These consolidated financial statements should be read only in
connection with the accompanying notes to consolidated financial statements.
4
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FIRST WESTERN CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three month period ended June 30, 1999 and 1998 (Unaudited)
1. Summary of significant accounting policies
The accompanying unaudited interim financial statements have been
prepared in accordance with the instructions for Form 10-QSB and do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. All
adjustments that are, in the opinion of management, of a normal
recurring nature necessary for a fair statement of results for the
interim periods presented have been made. The results of operations for
such interim periods are not necessarily indicative of results of
operations for a full year. The statements should be read in
conjunction with the summary of significant accounting policies and
notes to consolidated financial statements included in the registration
statement of the Company declared effective on February 10, 1999 SEC
File Nos.333-67197 and 333-67197-01.
In the opinion of management, the accompanying financial statements
contain all adjustments necessary to present fairly the financial
position of the Company at June 30, 1999 and December 31, 1998, and the
results of operations and cash flows for the three and six month
periods ended June 30, 1999 and 1998.
The consolidated financial statements include the accounts of the
Company's respective subsidiaries. All material intercompany
transactions have been eliminated.
2. Nature of Operations
First Western, a multibank holding company, offers full service
community banking through 12 banking locations in metropolitan Denver
and the Front Range, and two banking locations in western and central
Nebraska. First Western's Colorado bank opened two new branches and a
loan production office during the first six months of 1999.
3. Acquisition
In the first quarter of 1999, the Company exchanged 4,440 shares of its
common stock for the 8.6% of Firstate Bank (Kimball, NE) that it did
not own. Individuals already affiliated with the Company owned such
minority shares. As the Company and its four shareholders at the time
of the exchange owned 99.6% of the Nebraska bank and the remaining 0.4%
was owned by other employees of the Company, it was determined by the
boards of both entities that a book value exchange ratio represented a
fair value for all parties. The fair value determined for this
transaction was $683,000. No goodwill was recognized in connection with
this transaction.
4. Offering of Trust Preferred Securities by FW Capital I
On February 16, 1999, the Company and its wholly owned subsidiary FW
Capital I (the "Trust"), completed the sale of $23.0 million of 9.375%
Cumulative Trust Preferred Securities of the Trust. Net proceeds were
approximately $21.9 million after payment of sales commissions and
other offering costs, and were invested in Junior Subordinated
Debentures maturing February 16, 2029, issued by the Company to the
Trust in connection with the public offering.
Interest on the Junior Subordinated Debentures is paid by the Company
to the Trust. This interest is the sole revenue of the Trust and the
source for distributions by the Trust to the holders of the Trust
Preferred Securities.
For financial reporting purposes, the Trust is treated as a subsidiary
of the Company, and accordingly, the accounts of the Trust are included
in the consolidated financial statements of the Company. The Trust
Preferred Securities are presented as a separate line item in the
consolidated balance sheet under the caption "Company obligated
mandatorily redeemable preferred securities of subsidiary trust holding
solely Junior Subordinated Debentures." For financial reporting
purposes, the Company records distributions payable on the Trust
Preferred Securities as interest expense in the consolidated statements
of income.
The Junior Subordinated Debentures are unsecured and rank junior and
are subordinate to all senior debt of the Company and constitute a full
and unconditional guarantee on a subordinated basis by the Company of
the obligations of the Trust under the Preferred Securities.
5
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5. Comprehensive Income
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards Number 130, ("Reporting Comprehensive
Income"), which is effective for the fiscal years beginning after
December 15, 1997. This statement establishes standards for reporting
and display of comprehensive income and its components (revenue,
expenses, gains and losses) in a full set of general purpose financial
statements. This statement requires that all items that are required to
be recognized under accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the
same prominence as other financial statements. The Company adopted SFAS
No. 130 on January 1, 1998. Amounts formerly presented in Shareholder
Equity as "Unrealized gains on securities available for sale, net of
taxes", are now reflected as "Accumulated other comprehensive income".
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN
OF OPERATION.
The following discussion should be read in conjunction with the Consolidated
Financial Statements and related notes. With the exception of historical
information, the matters discussed below include forward-looking statements that
involve risks and uncertainties. First Western cautions readers that a number of
important factors could affect First Western's actual results and cause actual
results to differ materially from those in the forward-looking statements. These
statements are identified by words such as "may", "will", "should", "believe",
"expect"," anticipate", "estimate", "continue" or similar expressions or
comparable terminology. First Western's future operating results may be affected
by various trends and factors, which are beyond First Western's control. These
include the factors set forth in "Risk Factors" included in the registration
statement of the Company declared effective on February 10, 1999 SEC File Nos.
333-67197 and 333-67197-01 and filed as an exhibit to this Form 10Q-SB.
Accordingly, past results and trends may not be reliable indicators of future
results or trends.
RESULTS OF OPERATIONS
Net interest income for the Company increased $2.0 million (62%) from $3.1
million for the three month period ended June 30, 1998, to $5.1 million for the
three month period ended June 30, 1999 and $3.3 million (55%) from $6.1 million
for the six month period ended June 30, 1998, to $9.4 million for the six month
period ended June 30, 1999. The major components of this increase were:
1. Interest income increased $4.7 million (80%) from $5.8 million
for the three month period ended June 30, 1998 to $10.5
million for the three month period ended June 30, 1999 and
increased $8.0 million (71%) from $11.2 million for the six
month period ended June 30, 1998 to $19.2 million for the six
month period ended June 30, 1999. This is a direct result of
average earning assets increasing $204.5 million (87%) from
$233.7 million for the three month period ended June 30, 1998
to $438.2 million for the three month period ended at June 30,
1999, and increasing $179.8 million (79%) from $227.9 million
for the six month period ended June 30, 1998 to $407.7 million
for the six month period ended at June 30, 1999. Most of the
Company's earning assets (88% at June 30, 1999) are loans, a
large portion of which have floating rates and are tied to the
prime rate.
2. Interest expense increased $2.7 million (101%) from $2.7
million for the three month period ended June 30, 1998 to $5.4
million for the three month period ended June 30, 1999 and
increased $4.7 million (91%) from $5.1 million for the six
month period ended June 30, 1998 to $9.8 million for the six
month period ended June 30, 1999. This is a result of average
interest bearing liabilities increasing $169.6 million (85%)
from $200.1 million for the three month period ended June 30,
1998 to $369.7 million for the three month period ended at
June 30, 1999, and increasing $155.3 million (80%) from $194.1
million for the six month period ended June 30, 1998 to $349.4
million for the six month period ended at June 30, 1999.
3. Net interest margin decreased 0.73% (14% change) from 5.38%
for the three month period ended June 30, 1998 to 4.65% for
the three month period ended June 30, 1999 and decreased 0.72%
(14% change) from 5.32% for the six month period ended June
30, 1998 to 4.60% for the six month period ended June 30,
1999. The sources of these changes are:
a) Yields on earning assets decreased 0.39% (4% change)
from 10.0% for the three month period ended June 30,
1998 to 9.61% for the three month period ended June
30, 1999, and decreased 0.43% (4% change) from 9.82%
for the six month period ended June 30, 1998 to 9.39%
for the six month period ended June 30, 1999. This
reflects the impact of a 0.75% decrease in the
prime-lending rate, which occurred during the second
quarter of 1998.
b) Costs of interest bearing liabilities increased 0.48%
(9% change) from 5.40% for the three month period
ended June 30, 1998 to 5.88% for the three month
period ended June 30, 1999, and increased 0.31% (6%
change) from 5.28% for the six month period ended
June 30, 1998 to 5.59% for the six month period ended
June 30, 1999. This is the result of offering a
higher interest rate on deposits during new branch
promotional campaigns and the impact of interest
expense at 9.375% for $23.0 million of Trust
Preferred Securities.
Provision for loan losses increased by $454,000 (757%) from $60,000 for the
three month period ended June 30, 1998 to $514,000 for the three month period
ended June 30, 1999 and increased $1.3 million (1091%) from $120,000 for the six
month period ended June 30, 1998 to $1.4 million for the six month period ended
June 30, 1999. As a result of a $203.7 million (96%) increase in gross loans
from $211.2 million at June 30, 1998 to $414.9 million at June 30, 1999, the
Company modified its systematic methodology for determining the allowance for
loan losses, providing a better match between period provisions and period loan
originations.
Non-interest income increased $433,000 (71%) from $606,000 for the three month
period ended June 30, 1998 to $1.0 million for the three month period ended June
30, 1999 and increased $695,000 (58%) from $1.2 million for the six month period
ended June 30, 1998 to $1.9 million for the six month period ended June 30,
1999. The major components of the increase were:
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1. Fees for other customer services increased $197,000 (74%) from
$266,000 for the three month period ended June 30, 1998 to
$463,000 for the three month period ended June 30, 1999 and
increased $375,000 (75%) from $497,000 for the six month
period ended June 30, 1998 to $872,000 for the six month
period ended June 30, 1999. This increase resulted from
additional customer accounts at current branches and at new
branch locations.
2. Net gains from sale of loans increased $136,000 (73%) from
$187,000 for the three month period ended June 30, 1998 to
$323,000 for the three month period ended June 30, 1999 and
increased $144,000 (32%) from $450,000 for the six month
period ended June 30, 1998 to $594,000 for the six month
period ended June 30, 1999. The gains increased due to demand
for first mortgages that were sold into the secondary market
with servicing released.
3. Commissions and fees from brokerage activities increased
$86,000 (307%) from $28,000 for the three month period ended
June 30, 1998 to $114,000 for the three month period ended
June 30, 1999 and increased $120,000 (197%) from $61,000 for
the six month period ended June 30, 1998 to $181,000 for the
six month period ended June 30, 1999. This resulted from the
expansion of the Company's brokerage services into additional
branch locations.
Non-interest expenses increased $1.5 million (65%) from $2.3 million for the
three month period ended June 30, 1998, to $3.8 million for the three month
period ended June 30, 1999 and $2.8 million (67%) from $4.2 million for the six
month period ended June 30, 1998, to $7.0 million for the six month period ended
June 30, 1999. The major components of the increase were:
1. Salaries and employee benefits increased $758,000 (65%) from
$1.2 million for the three month period ended June 30, 1998 to
$1.9 million for the three month period ended June 30, 1999
and increased $1.6 million (72%) from $2.1 million for the six
month period ended June 30, 1998 to $3.7 million for the six
month period ended June 30, 1999. The increase is the result
of additional staff hired in connection with opening five
additional branch locations.
2. Net occupancy expense of premises increased $168,000 (45%)
from $376,000 for the three month period ended June 30, 1998
to $544,000 for the three month period ended June 30, 1999 and
increased $408,000 (66%) from $622,000 million for the six
month period ended June 30, 1998 to $1.0 million for the six
month period ended June 30, 1999.
3. Purchased services increased $210,000 (91%) from $230,000 for
the three month period ended June 30, 1998 to $440,000 for the
three month period ended June 30, 1999 and increased $307,000
(69%) from $448,000 for the six month period ended June 30,
1998 to $755,000 for the six month period ended June 30, 1999.
The majority of this increase is related to data processing
services for new branches and costs related to year 2000
compliancy upgrades.
4. Other non-interest expenses increased $302,000 (71%) from
$423,000 for the three month period ended June 30, 1998 to
$725,000 for the three month period ended June 30, 1999 and
increased $504,000 (68%) from $745,000 for the six month
period ended June 30, 1998 to $1.2 million for the six month
period ended June 30, 1999. This increase results from
additional expenses relating to telephone, marketing and FDIC
insurance, and is attributed to the increase in branch
locations.
Net income increased $507,000 (69%) from $734,000 for the three month period
ended June 30, 1998 to $1.2 million for the three month period ended June 30,
1999 and increased $49,000 (3%) from $1.9 million for the six month period ended
June 30, 1998 to $2.0 million for the six month period ended June 30, 1999. The
nominal six months year to date increase is primarily a result of the increased
provision for loan losses.
FINANCIAL CONDITION
Total assets increased $132.2 million (36%) from $367.2 million as of December
31, 1998, to $499.4 million at June 30, 1999. This growth was the result of:
1. Net loans receivable increased $123.5 million (43%),
increasing from $287.8 million at December 31, 1998 to $411.3
million at June 30, 1999. This resulted from an increase in
loan demand in the Company's market areas, the continued
growth of several of the Company's newer branches, and the
opening of two new branches and a loan production office by
the Company during the first six months of 1999.
2. Investment securities increased by $18.7 million (55%),
increasing from $34.2 million at December 31, 1998 to $52.9
million at June 30, 1999. Excess liquidity at the bank
subsidiary level was used for the purchase of callable US
agency bonds with above market coupon rates, short term to
call maturities, and 5 year or less final maturities.
3. Loans held for sale decreased $2.7 million (51%), decreasing
from $5.2 million at December 31, 1998 to $2.5 million at June
30, 1999. The Company originates single family mortgages and
sells them in the secondary market. An emphasis has been
placed on shortening the time from loan closing to investor
funding, thus reducing the outstanding balance in loans held
for sale.
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4. Federal funds sold decreased $10.8 million (81%), decreasing
from $13.3 million at December 31, 1998 to $2.5 million at
June 30, 1999. This is the result of moving excess liquidity
from federal funds sold to short term investments in
securities, taking advantage of higher yields available on
investment securities.
Deposits increased $109.0 million (34%) from $319.5 million as of December 31,
1998 to $428.5 million at June 30, 1999. The change was the result of:
1. An increase in time deposits of $100.6 million (39%),
increasing from $259.9 million at December 31, 1998 to $360.5
million at June 30, 1999. The Company utilized promotional
campaigns, designed around new branch openings, to generate an
increase in certificates of deposit with balances of less than
$100,000.
2. An increase of $4.3 million (28%), in interest bearing demand
deposits, increasing from $14.9 million at December 31, 1998
to $19.2 million at June 30, 1999. This resulted primarily
from the addition of several seasoned bankers who focus on
cash management services, and servicing high net worth
customers.
3. An increase of $4.2 million (9%) in non-interest bearing
demand deposits, increasing from $44.7 million at December 31,
1998 to $48.9 million at June 30, 1999. This resulted from the
addition of the cash management function and cross selling
customers obtained as a result of promotional campaigns.
On February 16, 1999, the Company and its wholly owned subsidiary, FW Capital 1
(the "Trust"), completed the sale of $23.0 million of 9.375% Cumulative Trust
Preferred Securities of the Trust. Net proceeds were approximately $21.9 million
after payment of sales commissions and other offering costs, and were invested
in Junior Subordinated Debentures issued by the Company to the Trust in
connection with the public offering. Interest on the Junior Subordinated
Debentures is paid by the Company to the Trust. This interest is the sole
revenue of the trust and the source for distributions by the Trust to the
holders of the Trust Preferred Securities.
The following table presents, for the periods indicated, an analysis of the
allowance for loan losses and related ratios:
<TABLE>
<CAPTION>
Six Months Ended
----------------------------
June 30, 1999 June 30, 1998
------------- -------------
(in thousands)
<S> <C> <C>
Balance, beginning of period $ 2,187 $ 1,321
Provision for loan losses 1,429 120
Net charge offs (recoveries) (5) (10)
------- -------
Balance, end of period $ 3,621 $ 1,451
======= =======
Ratios:
Allowance for loan losses to total loans 0.87% 0.69%
Allowance for loan losses to non-performing loans 528% 108%
</TABLE>
The allowance for loan losses represents management's recognition of the risks
of extending credit and its evaluation of the quality of the loan portfolio. The
allowance for loan losses is maintained at a level that is considered adequate
to provide for anticipated loan losses, based on various factors affecting the
loan portfolio, including a review of problem loans, business conditions,
historical loss experience and evaluation of the underlying collateral. The
allowance is increased by additional charges to operating income and reduced by
loans charged off, net of recoveries.
9
<PAGE> 11
The following table presents information and ratios of the Company's
non-performing assets as of the dates indicated:
<TABLE>
<CAPTION>
June 30,
------------------
1999 1998
------ ------
(in thousands)
<S> <C> <C>
Loans 90 days or more delinquent and still accruing interest $ 334 $ 692
Non-accrual loans 352 489
Restructured loans -- --
------ ------
Total non-performing loans 686 1,181
Real estate acquired by foreclosure -- 159
------ ------
Total non-performing assets $ 686 $1,340
====== ======
Ratios:
Non-performing assets to total assets 0.14% 0.49%
Non-performing loans to total loans 0.17% 0.56%
</TABLE>
LIQUIDITY
First Western continuously forecasts and manages its liquidity in order to
satisfy cash flow requirements of depositors and borrowers and to allow First
Western to meet its own cash flow needs. Management has identified two major
categories of liquidity:
1) Ongoing business cash flows:
The Company's major source of cash flows is provided by financing
activities, $130.2 million for the six-month period ended June 30, 1999
and $42.9 million for the six-month period ended June 30, 1998. Cash
provided consisted primarily of deposit growth and proceeds from the
issuance of trust preferred securities for the six months ended June
30, 1999, and deposit growth and advances from the Federal Home Loan
Bank for the six months ended June 30, 1998.
The major use of cash flows for the company is in investing activities;
$134.3 million for the six-month period ended June 30, 1999 and $39.5
million for the six-month period ended June 30, 1998. For the six-month
period ended June 30, 1999, the major components of this use were a
$124.7 million increase in net loans, and a net increase of $19.2
million in investment securities. For the six-month period ended June
30, 1998, the major component was a $45.6 million increase in net
loans.
2) Backup sources of liquidity
Management believes it has developed sufficient backup sources of
liquidity to meet the Company's needs for the foreseeable future. These
internal and external sources include, but are not limited to:
a) The ability to raise deposits through branch promotional
campaigns
b) Maturity of overnight federal funds sold ($3 million available
as of June 30, 1999)
c) Sale of available-for-sale securities ($47 million available
as of June 30, 1999)
d) Available borrowing lines ($44 million available as of June
30, 1999)
e) Increased borrowing lines available at the Federal Home Loan
Bank with the purchase of additional Federal Home Loan Bank
stock ($9.7 million available as of June 30, 1999)
DATA PROCESSING SYSTEMS AND YEAR 2000 COMPLIANCE
As a result of computer routines employed by early programers, many existing
software programs and operating systems may be unable to distinguish the year
2000 from the year 1900. Management presently believes that due to modifications
implemented in the first half of 1999 to existing software and conversion to new
software, the year 2000 issue will not pose significant operational problems for
us. Substantially all of our data processing services are provided under a
contract with First Commerce Technologies, an affiliate of the National Bank of
Commerce, Lincoln, Nebraska. First Commerce Technologies has been engaged by us
to ensure that our systems are fully year 2000 compliant. Substantially all of
the year 2000 services of First Commerce Technologies have been completed, and
it provides us with status reports on a monthly basis. Management believes that,
to date, our software programs and operating systems are completely converted,
tested and year 2000 compliant. Implementation of our plan to test in-house and
outsourced software has been completed. Applications considered to be mission
critical were tested during the first quarter of 1999, with successful results.
Compliance audits performed to date on our subsidiaries have been positive and
no specific items of improvement were noted.
In conjunction with the implementation of our year 2000 plan, we have also made
substantial investments in computer hardware and
10
<PAGE> 12
software to keep our banks competitive in the marketplace. With the majority of
the expenditures completed, management estimates that we have spent a total of
$1.0 million on technology upgrades, with approximately $160,000 being spent
directly on year 2000 compliance. The plan implementation team is responsible
for progress and provides a status report to the board of directors on a monthly
basis. Management is not aware of limitations on any of our legal remedies as a
result of year 2000 damages it may suffer should damages be incurred due to any
reason.
In the event that a year 2000 related interruption should occur over which we
have no control (i.e. communication line interruption, lack of electrical
services) we have developed a two prong contingency plan which would be
implemented based on the expected duration and nature of the interruption. In
the event of a loss of computer communications, loss of utilities or a expected
short duration interruption, a manual back up process has been developed and
will be completely tested in the third quarter of 1999. In the event that our
primary service provider fails and is unsuccessful in implementing its backup
contingency plan, we have identified an alternate vendor. Management believes
that the alternate vendor has the ability to provide the service to meet our
needs because this vendor has software that is year 2000 compliant which is
installed with other parties and would provide a warranty to us as to year 2000
compliance. In the event we were to use the alternate vendor, management
believes that the monthly processing costs could increase marginally, and a
one-time conversion cost in the range of $50,000 to $100,000 would probably be
incurred.
Pursuant to guidelines of the banking industry regulators, our bank subsidiaries
have sent direct mail to their customers regarding the year 2000 issue and the
need for readiness. However, response to these inquiries has not been
significant. Management intends to continue to solicit customer response on this
matter. Since September 1998, commercial loan customers have been required to
sign year 2000 compliance statements as a part of the loan documentation
process. Failure of our customers to prepare for year 2000 compatibility could
have a significant adverse effect on customers' operations and profitability,
thus inhibiting their ability to repay loans and adversely affecting our
operations. We do not have sufficient information accumulated from customers to
enable us to assess the degree to which customers' operations are susceptible to
potential problems relating to the year 2000 issue or, further, to quantify the
potential lost revenue to us in this case.
11
<PAGE> 13
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(i) Exhibits filed with this Form 10-QSB:
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
27 Financial Data Schedule.
99 Risk Factors incorporated by reference from First
Western's Rule 424(b) Prospectus filed on February
10, 1999.
</TABLE>
(ii) Exhibits previously filed and incorporated herein by
reference:
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
3.1 Articles of Incorporation of First Western Corp., as
amended and restated (1).
3.2 Amended Bylaws of First Western Corp (1).
4.1 Form of Subordinated Indenture dated February 15,
1999 between the Registrant and Wilmington Trust
Company, as Indenture Trustee (1).
4.2 Form of Junior Subordinated Debenture (included as an
exhibit to Exhibit 4.1).
4.5 Form of Amended and Restated Trust Agreement of FW
Capital I (1).
4.7 Form of Preferred Securities Guarantee Agreement (1).
21 Subsidiaries of the Registrant (1).
</TABLE>
- ----------
(1) Filed with the Registration Statement on Form SB-2, SEC File No.
333-67107, on November 13, 1998.
(b) Reports on Form 8-K -- None
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
FIRST WESTERN CORP.
Date: August 11, 1999 By: /s/ Timothy D. Wiens
--------------- ----------------------------------------
Vice President and Vice Chairman
Date: August 11, 1999 By: /s/ Ronald B. James
--------------- ----------------------------------------
Ronald B. James, Chief Financial Officer
12
<PAGE> 14
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- ------- --------------------
<S> <C>
27 Financial Data Schedule
99 Risk Factors
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> JUN-30-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> JUN-30-1999 JUN-30-1998
<CASH> 14,496 13,892
<INT-BEARING-DEPOSITS> 0 3
<FED-FUNDS-SOLD> 2,500 13,270
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 46,604 27,082
<INVESTMENTS-CARRYING> 6,259 7,146
<INVESTMENTS-MARKET> 6,336 7,249
<LOANS> 417,416 295,182
<ALLOWANCE> 3,621 2,187
<TOTAL-ASSETS> 499,383 367,207
<DEPOSITS> 428,512 319,480
<SHORT-TERM> 9,563 5,080
<LIABILITIES-OTHER> 3,154 3,818
<LONG-TERM> 12,193 17,440
23,000 0
0 0
<COMMON> 144 140
<OTHER-SE> 22,817 20,566
<TOTAL-LIABILITIES-AND-EQUITY> 499,383 367,207
<INTEREST-LOAN> 17,642 10,196
<INTEREST-INVEST> 1,096 667
<INTEREST-OTHER> 414 326
<INTEREST-TOTAL> 19,152 11,189
<INTEREST-DEPOSIT> 8,495 4,779
<INTEREST-EXPENSE> 9,773 5,126
<INTEREST-INCOME-NET> 9,379 6,063
<LOAN-LOSSES> 1,429 120
<SECURITIES-GAINS> 0 (4)
<EXPENSE-OTHER> 6,939 4,160
<INCOME-PRETAX> 2,910 2,987
<INCOME-PRE-EXTRAORDINARY> 1,953 1,904
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,953 1,904
<EPS-BASIC> 13.66 13.60
<EPS-DILUTED> 13.66 13.60
<YIELD-ACTUAL> 0 0
<LOANS-NON> 352 489
<LOANS-PAST> 334 692
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 2,187 1,321
<CHARGE-OFFS> 31 26
<RECOVERIES> 36 36
<ALLOWANCE-CLOSE> 3,621 1,451
<ALLOWANCE-DOMESTIC> 0 0
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 3,621 1,451
</TABLE>
<PAGE> 1
EXHIBIT 99
RISK FACTORS
The following risk factors relating to First Western Corp.'s business have been
taken from its Rule 424(b) Prospectus filed on February 10, 1999.
IF OUR ALLOWANCE FOR LOAN LOSSES IS NOT ADEQUATE TO COVER ACTUAL
LOSSES, OUR EARNINGS COULD BE ADVERSELY AFFECTED. The inability of borrowers to
repay loans can erode earnings and capital of banks. Like all financial
institutions, First Western maintains an allowance for loan losses to provide
for loan defaults and nonperformance. First Western's allowance for loan losses
may not be adequate to cover actual losses, and future provisions for loan
losses could materially and adversely affect results of operations of First
Western. The loan losses allowance is based on prior experience with loan
losses, as well as an evaluation of the risks in the current portfolio, and is
maintained at a level considered adequate by management to absorb anticipated
losses. The amount of future losses is susceptible to changes in economic,
operating and other conditions, including changes in interest rates, that may be
beyond management's control, and these losses may exceed current estimates.
State and federal regulatory agencies, as an integral part of their
examination process, review First Western's loans and its allowance for loan
losses. Although management believes that First Western's allowance for loan
losses is adequate to cover anticipated losses, the loan loss allowance at
September 30, 1998 and December 31, 1998, are lower as a percentage of total
loans than historical levels. There can be no assurance, however, that
management will not determine a need to further increase the allowance for loan
losses or that regulators, when reviewing First Western's loan portfolios in the
future, will not require First Western to increase this allowance, either of
which could adversely affect First Western's earnings. Further, there can be no
assurance that First Western's actual loan losses will not exceed its allowance
for loan losses.
IF ECONOMIC CONDITIONS IN GENERAL AND IN OUR PRIMARY MARKET AREA
DETERIORATE, OUR REVENUES COULD DECREASE. First Western's financial results may
be adversely affected by changes in prevailing economic conditions, including
declines in real estate values, rapid changes in interest rates, adverse
employment conditions and the monetary and fiscal policies of the federal
government. Because First Western has a significant amount of loans secured by
real estate, declines in real estate values could adversely affect borrowers'
abilities to repay loans. Although economic conditions in First Western's
primary market area are strong and have aided its recent growth, there can be no
assurance that these conditions will continue to prevail. In addition,
substantially all of the loans of First Western are to individuals and
businesses in the Denver metropolitan area, northern Colorado and western
Nebraska, and any decline in the economy of these market areas could have an
adverse impact on First Western. There can be no assurance that positive trends
or developments discussed in this prospectus will continue or that negative
trends or developments will not have a significant adverse effect on First
Western.
A DECREASE IN INTEREST RATE SPREADS MAY DECREASE OUR PROFITS. First
Western's profitability is in part a function of the spread between the interest
rates earned on assets and the interest rates paid on deposits and other
interest-bearing liabilities. A decrease in interest rate spreads would have a
negative effect on the net interest income and profitability of First Western,
and there can be no assurance that a decrease will not occur. Although
management believes that the maturities of First Western's assets are moderately
balanced in relation to maturities of liabilities, this balance involves
estimates as to how changes in the general level of interest rates will impact
the yields earned on assets and the rates paid on liabilities.
DELAYS IN ESTABLISHING NEW BANK BRANCHES AS WELL AS COMPETITION COULD
ADVERSELY AFFECT OUR GROWTH AND EXPANSION PLANS. First Western has pursued and
intends to continue to pursue an internal growth strategy, the success of which
will depend primarily on generating an increasing level of loans and deposits at
acceptable risk levels without corresponding increases in non-interest expenses.
First Western's expansion strategy is primarily the establishment of new
branches. There can be no assurance that First Western will be successful in
continuing its growth strategies due to delays and other impediments resulting
from regulatory oversight, lack of qualified personnel, unavailability of branch
sites or poor site selection of bank branches. In addition, the success of First
Western's growth strategy will depend on maintaining sufficient regulatory
capital levels and on continued favorable economic conditions in First Western's
primary market area.
The banking business in First Western's areas of operations is highly
competitive. First Western competes for loans and deposits with other local,
regional and national commercial banks, savings banks, savings and loan
associations, finance companies, money market funds, brokerage houses, credit
unions and nonfinancial institutions, many of which have substantially greater
financial resources than First Western. In addition, interstate banking is
permitted in Colorado and to a lesser extent in Nebraska. As a result,
management believes that First Western may experience greater competition in its
market areas.
13
<PAGE> 2
IF THE COMPUTER SYSTEMS OF FIRST WESTERN OR ITS SUPPLIERS AND CUSTOMERS
DO NOT TIMELY BECOME YEAR 2000 COMPLIANT, WE MAY BE ADVERSELY AFFECTED. First
Western faces a significant business issue regarding how existing application
software programs and operating systems can accommodate the date value for the
year 2000. Many existing software application products, including software
application products used by First Western and its suppliers and customers, were
designed to accommodate only a two-digit date value, which represents the year.
The interruption to First Western's business could be substantial if its current
computer service provider fails in efforts to assist First Western in becoming
year 2000 compliant. In addition, failure by suppliers and customers of First
Western to modify and convert their own computer systems could have a
significant adverse effect on the suppliers' or customers' operations and
profitability, thus inhibiting their ability to provide services or repay loans
to First Western. As a practical matter, First Western will unlikely be able to
accumulate information on its suppliers' and customers' year 2000 programs to
assess the impact on First Western.
ANY ACQUISITION OF CONTROL OF FIRST WESTERN IS AT THE SOLE DISCRETION
OF FIRST WESTERN'S PRINCIPAL SHAREHOLDERS. Approximately 99.1% of the
outstanding shares of First Western's common stock is owned directly or
indirectly by Joel H. Wiens, First Western's Chairman, and Timothy D. Wiens,
First Western's Vice Chairman. As a result, the Wiens are able to elect all
members of First Western's Board of Directors and direct the policies and
decisions of First Western. This control would make the acquisition of control
of First Western by a third party impossible without the Wiens' approval.
MANAGEMENT WILL HAVE BROAD DISCRETION IN FIRST WESTERN'S USE OF THE
PROCEEDS IT RECEIVES. First Western will receive approximately $18.9 million in
net proceeds from the sale of its junior subordinated indentures, after
deducting underwriting commissions and estimated expenses payable by First
Western. First Western's management will have broad discretion to allocate these
net proceeds to uses it believes are appropriate. See "Use of Proceeds" for the
application of the proceeds. The amount and timing of the allocations will
depend on a number of factors, including First Western's and its subsidiary
banks' capital requirements and may affect First Western's earnings.
GOVERNMENT REGULATION MAY RESULT IN HIGHER OPERATING COSTS FOR FIRST
WESTERN. First Western and its banks are subject to extensive federal and state
legislation, regulation and supervision which is intended primarily to protect
depositors and the Federal Deposit Insurance Corporation's Bank Insurance Fund,
rather than investors. Although some of the legislative and regulatory changes
may benefit First Western and its banks, others may increase their costs of
doing business or otherwise adversely affect them and create competitive
advantages for non-bank competitors
14
