Executive Summary / Key Takeaways

• First Western Financial is executing a strategic shift towards offense, leveraging its integrated wealth management model and boutique presence in affluent Western markets to drive profitability and shareholder value.
• The company demonstrated significant financial improvement in Q1 2025, with Net Income available to common shareholders increasing 68% year-over-year to $4.2 million, or $0.43 per diluted share, driven by expanding net interest margin and improved non-interest income.
• Key operational successes include a notable increase in non-interest bearing deposits, a reduction in funding costs, and the successful resolution and sale of two major OREO properties, freeing up capital for redeployment.
• Strategic investments in talent across banking, mortgage, and wealth management, coupled with a foundational technology platform rebuild, are expected to enhance productivity, drive pipeline growth, and improve long-term efficiency and competitiveness.
• Management is targeting continued financial performance improvement, including Net Interest Margin expansion into the second half of 2025 (aiming for a 2.70s exit NIM) and a return to a 1% Return on Assets, supported by disciplined expense control and asset quality stabilization.

Setting the Scene: A Boutique Approach to Western Wealth

First Western Financial, Inc., established in 2002, operates as a financial holding company uniquely positioned to serve the distinct needs of the Western wealth management client. Its mission is clear: to be the premier private bank for entrepreneurs, professionals, and high-net worth individuals, typically those with $1 million-plus in liquid net worth, and their associated entities. Unlike larger, more generalized financial institutions, First Western employs a boutique model, delivering a fully integrated suite of wealth management services – encompassing private banking, personal trust, investment management, mortgage loans, and institutional asset management – through a team-based approach across a strategically located network of offices.

This deliberate geographic footprint spans affluent and high-growth markets in Colorado, Arizona, Wyoming, Montana, and California. From its first profit center in 2004, the company has expanded to fourteen full-service profit centers, four loan production offices, and one trust office by March 31, 2025, a testament to its history of organic growth and strategic acquisitions, which have collectively contributed to tripling the balance sheet since 2018.

In the competitive landscape, First Western operates alongside larger regional banks like UMB Financial Corporation (UMBF), Glacier Bancorp, Inc. (GBCI), Prosperity Bancshares, Inc. (PB), and Zions Bancorporation (ZION), as well as indirect competitors like fintech firms and national banks. While larger rivals may possess greater scale and broader digital capabilities, First Western differentiates itself through its high-touch, relationship-based service model and localized expertise. Its boutique structure allows for deeper market penetration in niche Western areas, fostering higher customer loyalty and potentially stronger recurring revenue streams compared to competitors focused on broader community banking or purely digital platforms. However, this regional focus can also present challenges in achieving the same level of operational efficiency and scalability as larger players, and the pace of technological innovation may lag behind more digitally advanced competitors.

The Engine of Efficiency: Investing in Technology and Talent

Central to First Western's strategy for enhancing competitiveness and driving future profitability is a significant investment in upgrading its operational backbone, particularly its technology platform. Recognizing the need to modernize and improve efficiency, the company has embarked on a comprehensive rebuild of its tech infrastructure. This initiative involves migrating its core systems to the cloud, integrating fintech solutions, and fundamentally changing how its platform is hosted and utilized.

While specific quantitative metrics on the performance enhancements of this new platform are not yet fully disclosed, the strategic intent is clear: to drive tangible efficiency gains and improve the effectiveness of service delivery to both associates and clients. The foundational build of this new platform was approximately 80% complete as of Q2 2024, with the implementation of middleware and subsequent "bells and whistles" features expected to roll out starting in Q4 2024 and continuing into early 2025. This technological investment is designed to provide a competitive edge by streamlining processes and potentially lowering operational costs over the long term, addressing a key vulnerability when compared to the cost structures of some larger, more efficient competitors.

Complementing its technology investments, First Western has aggressively pursued a talent acquisition strategy, particularly over the past year. This includes adding 14 additional front office producers in the first half of 2024, strategically placed in key markets like Jackson, Boulder, and Fort Collins. The company has also significantly expanded its mortgage team, hiring 7 new Mortgage Loan Officers (MLOs) in 2024, representing nearly a 50% increase, with plans to add more. Furthermore, key leadership roles have been filled, including a new Head of Wealth Planning from Goldman Sachs (GS) and a Head of Retirement Services. This influx of talent is expected to directly impact business development efforts, bolster pipelines across loans, deposits, and fee-generating services, and enhance the company's ability to capitalize on market disruption and attract clients from competing institutions facing their own challenges.

Performance on the Rise: Q1 2025 Highlights

First Western's strategic focus and operational execution began to yield tangible results in the first quarter of 2025, demonstrating a significant improvement in financial performance. Net Income available to common shareholders surged to $4.2 million, or $0.43 per diluted share, a substantial increase from $2.5 million, or $0.26 per diluted share, in the same period of 2024. Income before income taxes rose 50% year-over-year to $5.4 million.

This profitability growth was primarily driven by a notable expansion in Net Interest Income and an increase in Non-Interest Income, coupled with a decrease in Non-Interest Expense. Net Interest Income, before the provision for credit losses, increased by $1.4 million, or 8.7%, to $17.5 million. This expansion was largely attributable to a 54 basis point decrease in the average rates paid on interest-bearing deposits, which fell to 3.59% in Q1 2025 from 4.13% in Q1 2024, despite an increase in average interest-bearing deposit balances. The average loan yield also saw a modest increase to 5.71% from 5.66%, reflecting new loan production coming onto the books at rates higher than those of maturing loans. The Net Interest Margin (NIM) expanded by 27 basis points to 2.61% in Q1 2025 from 2.34% in Q1 2024.

Non-interest income saw a modest increase of $0.1 million, or 0.9%, reaching $7.3 million in Q1 2025. This was significantly boosted by a $0.5 million net gain on the sale of two large OREO properties and a $0.3 million increase in the net gain on loans accounted for under the fair value option, reflecting improved performance in that portfolio. These gains offset decreases in Bank fees (down $0.5 million, primarily due to a large loan prepayment penalty fee in Q1 2024) and Trust and investment management fees (down $0.3 million due to mix shifts within AUM product balances). Risk management and insurance fees saw a substantial increase of $0.2 million.

Non-interest expense decreased by $0.3 million, or 1.7%, to $19.4 million. This reduction was primarily due to a $0.7 million decrease in professional services (including legal, audit, and FDIC insurance fees) and a $0.3 million decrease in other operational costs related to non-performing asset workouts. These decreases were partially offset by increases in occupancy and equipment expenses (due to a lease extension) and salaries and employee benefits (due to higher wages).

Balance Sheet Resilience and Asset Quality Resolution

First Western's balance sheet remained relatively stable in Q1 2025, with total assets decreasing slightly by 0.4% to $2.91 billion as of March 31, 2025, compared to December 31, 2024. Cash and cash equivalents saw a significant increase of $35.5 million, or 15.1%, to $271.6 million, largely driven by the proceeds from the OREO property sales. Held-to-maturity debt securities decreased by $1.9 million due to principal payments. Loans, net of allowance, remained relatively flat at $2.41 billion, as new production was offset by payoffs. Mortgage loans held for sale decreased by $14.9 million due to lower origination volumes.

A key development in the quarter was the substantial decrease in Other Real Estate Owned (OREO), which fell by $31.5 million to $4.4 million as of March 31, 2025, following the successful sale of the two largest OREO properties. This resolution is a significant step in addressing the large non-performing relationship that has been a focus for the company. While non-performing loans remained flat in Q1 2025, the decrease in OREO led to a decline in total non-performing assets. Management noted that underlying credit metrics, such as past due and classified loans, have shown positive trends in recent quarters, indicating improving asset quality apart from the complexities of this specific workout. The company maintains a conservative credit appetite, with a diversified loan portfolio and limited exposure to areas like non-owner occupied office CRE.

On the funding side, total deposits increased slightly by $1.2 million to $2.52 billion. This included a $53.1 million increase in money market accounts and a $5.6 million increase in interest checking accounts, partially offset by a $91.9 million decrease in time deposits as the company reduced rates on maturing CDs, leading to some runoff but improving the deposit mix. Borrowings decreased by $13.4 million, or 12.2%, to $96.2 million, primarily due to the redemption of $8.0 million in subordinated notes (which had a cost of 5.125%) and lower reliance on FHLB borrowings. The company successfully achieved its goal of reducing the loan-to-deposit ratio to the mid-90% range by the end of Q3 2024, enhancing liquidity.

Total shareholders equity increased by $4.2 million, or 1.7%, to $256.6 million, driven by net income. The company remains well-capitalized, exceeding regulatory requirements, and authorized a stock repurchase program in June 2024, initiating repurchases in Q1 2025, signaling confidence in its valuation.

Strategic Momentum and Future Outlook

Looking ahead, First Western's management is focused on leveraging the positive momentum from Q1 2025 and the strategic initiatives underway to drive continued improvement in financial performance. The strategic shift from a defensive posture to an offensive one is expected to unlock significant operating leverage.

Management anticipates continued growth in Net Interest Income, driven by further expected reductions in the cost of funds (benefiting from lower deposit rates and the redemption of high-cost subordinated debt) and the redeployment of cash generated from OREO sales into higher-yielding interest-earning assets, primarily new loan production. While NIM is expected to be relatively flat in Q2 2025 due to typical seasonal deposit runoff related to tax payments, opportunities for further expansion are anticipated in the second half of the year, with a target of exiting 2025 in the 2.70s NIM range.

Disciplined expense control remains a priority, with quarterly non-interest expense targeted in the $19.5 million to $20 million range for 2025. While higher incentive compensation accruals could push expenses slightly above this range if performance exceeds expectations, management views this as a positive outcome for shareholders.

The talent additions across the organization are expected to translate into increased productivity and pipeline growth over the coming quarters, supporting loan and deposit growth targets. The focus on enhancing the Wealth Management segment, including recent leadership hires, is aimed at increasing its contribution to overall revenue and profitability. The ongoing technology platform rebuild is anticipated to deliver efficiency gains starting in the latter half of 2025 and into 2026, further supporting operating leverage.

Management's near-term financial target is to return to a 1% Return on Assets (ROA), viewing this as an achievable step towards realizing the business's full operating potential in a more normalized economic environment. While acknowledging potential risks from macroeconomic uncertainty and external factors like tariffs impacting loan demand, the company believes its strong balance sheet, conservative underwriting, and strategic initiatives position it well for steady improvement and value creation for shareholders throughout 2025 and beyond.

Conclusion

First Western Financial is demonstrating clear progress in executing its strategy to enhance profitability and unlock value within its specialized Western wealth management niche. The strong financial results in Q1 2025, marked by expanding margins and improved non-interest income, signal that the underlying positive trends are translating into tangible performance. The successful resolution of significant non-performing assets, coupled with a conservative credit culture, strengthens the balance sheet and frees up capital for productive deployment.

Strategic investments in talent and technology are building capacity and efficiency for future growth, positioning the company to capitalize on market opportunities and competitive disruption. While challenges remain, including potential macroeconomic headwinds and ongoing competition, First Western's focused business model, disciplined expense management, and clear targets, such as achieving a 1% ROA and expanding NIM, provide a compelling narrative for investors looking for a regional bank poised for continued improvement and operating leverage.