First Western Financial Inc (MYFW) 2020 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the First Western Financial Q4 2020 Earnings Conference Call. (Operator Instructions) Please be advised, today's call is being recorded. (Operator Instructions)

I would now like to hand our conference over to your speaker today, Mr. Tony Rossi of Financial Profiles.

Thank you, Ryan. Good morning, everyone, and thank you for joining us today for First Western Financial's Fourth Quarter 2020 Earnings Call. Joining us from First Western's management team are Scott Wylie, Chairman and Chief Executive Officer; and Julie Courkamp, Chief Financial Officer.

We will use a slide presentation as part of our discussion this morning. If you have not done so already, please visit the Events and Presentations page of First Western's Investor Relations website to download a copy of the presentation.

Before we begin, I'd like to remind you that this conference call contains forward-looking statements with respect to the future performance and financial condition of First Western Financial that involve risks and uncertainties, including the impact of the COVID-19 pandemic. Various factors could cause actual results to be materially different from any future results expressed or implied by such forward-looking statements. These factors are discussed in the company's SEC filings, which are available on the company's website.

I would also direct you to read the disclaimers in our earnings release and investor presentation. The company disclaims any obligation to update any forward-looking statements made during the call. Additionally, management may refer to non-GAAP measures, which are intended to supplement, but not substitute for the most directly comparable GAAP measures. The press release available on the website contains the financial and other quantitative information to be discussed today as well as the reconciliation of the GAAP to non-GAAP measures.

And with that, I'd like to turn the call over to Scott. Scott?

Okay. Thanks, Tony. Good morning, everyone. Our fourth quarter performance capped an extraordinary year for First Western. We were extremely well positioned to manage through the unprecedented environment created by the COVID-19 pandemic. Our well diversified, conservatively underwritten loan portfolio has experienced very little stress from the pandemic. We capitalized on the PPP program to add new commercial customers and the refi boom caused by the reduction in interest rates enabled us to generate significant profits in our mortgage business that contributed to tremendous internal capital generation and growth in our tangible book value this year.

The one drawback is that a huge increase in mortgage activity during the second and third quarter makes for difficult sequential quarterly revenue and earnings comparisons. But aside from the volatility in that one business, which still had very strong fourth quarter from a historical perspective, we continue to see very positive trends in the areas we're focusing on to build a sustainable path to higher earnings and returns in the future. When looking over our year-to-year comparison, the progress we made in 2020 is exceptionally clear.

During the fourth quarter, our revenue increased 44.2% over the prior year. And with the operating leverage we're realizing as we continue to scale, this revenue growth resulted in 88.6% increase in both net income and earnings per share. Our strong financial performance, combined with the completion of our sale of the LA fixed income team, resulted in a tangible book value per share increasing 25% year-over-year. The primary contributor to this improved performance is the success we're having in growing our balance sheet as our commercial banking initiative continues to produce new relationships, high-quality loans and low-cost deposits. Excluding runoff of PPP loans, our held for investment loans increased 6% from the third quarter, while our total deposits increased 3.6%. This balance sheet growth resulted in our net interest income increasing 4.2% from the prior quarter and 64.3% from the fourth quarter of last year, which fully reflects the contribution of both our organic growth and the addition of clients and banking talent we added through the branch acquisition earlier this year.

With our expanded commercial banking team, we're seeing more commercial loan production and also improving in loan pricing. Our average yield on new commercial loan production in the fourth quarter was the highest we've seen prior to the onset of the pandemic. We're also seeing our increased lending capacity and well differentiated value proposition is allowing us to compete effectively against larger banks. In fact, our largest loan originated this quarter, a $50 million line of credit was a deal that we would not have been able to -- likely not have been able to win in past years. This loan was provided to a longtime client who we've supported for many years when he built his business, and in the fourth quarter, he sold the business for a great deal of money. Following the sale, the client now had investment management account of more than $70 million that need to be placed with a wealth manager and the need for a large credit line that will be secured by the investment management account. Many of the large investment banks and brokers made offers to him, we were able to win the business and expand this relationship into a much more profitable one for First Western. And this plan will have additional needs in the future such as trust services and state planning that will provide additional opportunities for us to grow the relationship.

As an added bonus, his partners in the business were impressed with our services, and we now have opportunities to bring them in as clients as well. In winning this deal, we're clearly able to punch well above our weight class and fully leverage the robust private banking and wealth management platform we've built, and we believe it's a type of deal that we'll continue to win in the future.

Looking at our mortgage activity in the quarter, we had another strong month of production in October. At that point, we built a large backlog of loans that needed to be processed for sale. Given the rapid increase in production volume we saw in the second and third quarter, we ran into some processing constraints, so we slowed down new locks in the -- in order to work through this backlog. Combined with the usual seasonality that we see that reduces demand in November and December, this resulted in a lower level of net gain on the sale of mortgage loans relative to the third and second quarters. But on a year-over-year basis, our Q4 gain was still up 67.6%, and I'll talk more about our expectations for this business later in the call.

From an asset quality perspective, we continue to see very positive trends. Our nonperforming loans -- nonperforming assets declined by 59.3% from the end of the prior quarter, while our loan modifications declined to less than 1% of total loans. We continue to implement enhanced monitoring and portfolio reviews to ensure we have a good understanding of how our borrowers are being impacted by the pandemic, particularly given the surge in cases late in the year. To date, we haven't seen this surge have any material impact on our borrowers or results in new requests for loan deferrals.

Moving now to Slide 4. We continue to see a significant jump in our level of profitability relative to last year. The balance sheet growth and increasing operating leverage we're realizing as we scale continues to demonstrate that the model we built will produce a high level of profitability and returns in the future. The sale of the LA Fixed income team resulted in a valuation allowance being placed against our net operating losses in the state of California. This caused our effective tax rate to be higher in the fourth quarter, which negatively impacted our earnings by $0.05 a share.

Turning to Slide 5. We'll look at the trends in our loan portfolio. Our total loans held for investment increased 26.7% or 1.8% growth from the end of the prior quarter. But if PPP loans are excluded, our total loans increased $89.9 million or 6%. We had total loan production of $201.1 million, up from $142 million last quarter. This was partially offset by $128.1 million of payoffs and paydowns, which is the highest level we saw all year. Most of the growth in the portfolio is due to the traction we're getting in our commercial bank initiative, which included 5 more deals we did in the fourth quarter as part of the main street lending program. And the bankers we added in the Simmons transaction brought some construction lending expertise, so we're seeing more opportunities in that area. Our primary focus will still be on the private bank in commercial loans, but construction represents another driver of loan growth, although we plan to keep the construction -- its contribution to the overall mix in the portfolio pretty consistent over the longer term.

The year-over-year trend shows the shift in our loan portfolio away from residential loans towards business related loans as a result of the branch acquisition, the progress we're making with our commercial banking initiative. Compared to a year ago, residential mortgage loans have declined from 40.2% of total loans to 29.7% total loans held for investment.

Moving to Slide 6. We'll take a closer look at deposit trends. Our total deposits increased $56.2 million or 3.6% from the end of the prior quarter. There was some volatility in our period end deposits due to fluctuations in the deposits of a title company that keeps large balances with us. Excluding the balances of that one client, our deposit growth was around $74 million. The primary driver of our deposit growth continues to be commercial DDA relationships, which accounted for 65.7% of all our deposit growth during 2020. With the success we've had in adding commercial transaction accounts, we've seen significant improvement in our deposit mix with noninterest-bearing deposits increasing 29.7% of total deposits from 22.1% a year earlier.

Moving to Slide 7. We want to provide some additional insight into the level of commercial loan and deposit growth we're generating. A couple of years ago, we announced our intent to strengthen our commercial banking capabilities as a natural complement to our entrepreneurial-oriented private banking business. This effort is helping our relationship bankers to better serve existing clients and add new relationships with more products and services. We made good progress from an organic standpoint in the branch acquisition during the second quarter accelerated this initiative.

Throughout 2020, this effort contributed strong growth in assets, revenues and earnings. And it's creating a more diversified loan portfolio and a lower cost deposit base that we believe enhances the value of our franchise.

Turning to trust and investment management on Slide 8. Our total assets under management increased by $124.2 million or $454.8 million, if you exclude the assets that were included as part of the sale of the LA Fixed income team. The increase this quarter was due primarily through a combination of improved market conditions, new client accounts and additional contributions made to existing client accounts.

Now I'll turn the call over to Julie for further discussion of our financial results. Julie?

Thank you, Scott. Turning to Slide 9. We've provided an update on our participation in the PPP program and how it impacts various metrics in the fourth quarter. Through the end of the year, we had $54.8 million of loans receive approval for forgiveness from the SBA. This left $142.9 million in PPP loans remaining on our balance sheet. Despite the acceleration of fees upon loan forgiveness, the PPP loans still had a negative impact on our net interest margin of 12 basis points in the fourth quarter. We are participating in the new PPP program, and as of January 25, we had received applications for $73.7 million in round 2 PPP loans.

Turning to Slide 10. We look at our gross revenue. While we had a very strong quarter of revenue growth with increases coming in both net interest income and noninterest income, the significant growth we have seen in our balance sheet this year pushed net interest income up to 57.5% of our total revenue this quarter, which is above our historical mix. And we are very pleased that we are able to generate this level of revenue growth while keeping our expenses relatively stable.

Turning to Slide 11. We'll look at the trends in net interest income and margins. Our net interest income increased by approximately $500,000 or 4.2% from the prior quarter. The growth was due to an increase in average loan balances, resulting from our organic loan growth. On a reported basis, our net interest margin was unchanged from the prior quarter at 3.07%. However, when the impact of PPP loans and purchase accounting adjustments were excluded, our net interest margin decreased by 13 basis points from the prior quarter. This is primarily due to a decline in average loan yields. Given our continued excess liquidity, combined with full quarter impact of our recent sub debt issuance and declining loan yields, we anticipate seeing some pressure on our net interest margin during the first quarter.

Turning to Slide 12. Our noninterest income was down from the prior quarter due to a lower net gain on mortgage loans, but up 21% from the fourth quarter of last year. Relative to last year, we are seeing increases in almost all of our key generating areas, primarily due to the growth in our client base over the past year, resulting from the organic business development and the branch acquisition, which closed in the second quarter of 2020. Notably, on a sequential quarter basis, our trust and investment management fees increased despite the sale of the LA fixed income team during the quarter.

On Slide 13, we have provided some additional detail on our mortgage operations. Originations were once again very strong in the quarter at more than $400 million. However, revenue is recognized at the time of the locks and our total mortgage locks declined by nearly 50% from the prior quarter. As Scott mentioned earlier, the processing constraints we ran into following the rapid increase in mortgage production earlier in the year, caused the delay in selling the loans that had been originated. In addition, due to the large volume of loans for sale in the MBS market, we saw a decline in gain on sale margins relative to the prior quarter. On a year-over-year basis though, revenue, net income and profit margin in the revenue business are all considerably higher. We generated $1.7 million in net income on revenue of $4.3 million in the fourth quarter of 2020 compared to net income of $900,000 on revenue of $2.6 million in the same quarter of 2019 with relatively the same mix between purchase and refi loans.

Turning now to Slide 14 and expenses. Our noninterest expense decreased 6.1% from the prior quarter. The decrease was primarily due to lower incentive compensation, consistent with the lower mortgage revenues that we had in the quarter. Our occupancy and equipment expense was also down $184,000 from the prior quarter, primarily due to the closure of additional locations acquired in the branch acquisition. Given our balance sheet growth and higher fee income, we continue to see improvement in our efficiency ratio relative to the prior year. In the fourth quarter, our efficiency ratio was 66.6%, down from the 80.5% in the prior year. With the sale of the fixed income team complete during the fourth quarter, we will eliminate some expenses going into 2021. As a result, we expect our quarterly run rate for noninterest expense to be in the range of $16 million to $16.5 million to start 2021.

Turning now to Slide 15, we'll look at our asset quality. We saw positive trends across the portfolio in the fourth quarter. Our nonperforming assets decreased by $6.2 million, primarily due to a large TDR that we had been working to exit the bank and was refinanced by another institution. Combined with minimal net inflow, this outflow resulted in our NPAs to total assets declining to 22 basis points of total assets from 53 basis points in the last -- end of last year quarter. Once again, we continue to see very low level of losses in the portfolio and had immaterial net charge-offs this quarter. For the full year, our net charge-offs were essentially 0.

Turning to Slide 16. We recorded approximately $700,000 of provision expense in the fourth quarter, which primarily reflects the growth we had in the portfolio. This resulted in an allowance to adjusted total loans of 98 basis points, when PPP loans and acquired loans are excluded.

Turning now to Slide 17. We have provided an update on our loan modifications. As Scott mentioned, the surge in COVID cases late in the year has not resulted in any request for redeferral and to date, we have only granted one second modification, which has already come back out of its second deferral period and is performing. As of January 25, 2021, we no longer have any active loan modifications on deferral.

I will now turn the Scott back -- the call back over to Scott.

All right. Thanks, Julie. Turning to Slide 18, I want to provide some comments about our outlook and priorities for 2021. As a starting point, I wanted to address our capital position. Due to our strong performance in 2020, we had a tremendous amount of internal capital generation. Our tangible common equity increased by more than $26 million last year. For a company of our size that essentially equates to significant capital raise, but with no dilutive impact to existing shareholders. As a result, we're very well positioned to continue supporting organic and acquisitive growth without needing to raise external capital. From an organic standpoint, primary driver of our continued growth will be further expansion of our commercial banking platform. Since increasing our push into commercial banking, our reputation is a well-differentiated commercial bank that can compete and win against larger banks, has grown throughout our markets. This is creating more opportunities to attract talent to the bank. And one of our priorities this year is to steadily add bankers that have proven ability to bring in full commercial bank relationships.

We'll also continue to build expertise to help us attract -- target attractive niche markets. We're getting good traction with the banking products and services that we've specifically developed from medical and dental practices. And as we see similar opportunities in other vertical markets, we'll look to replicate this same model. We'll also be active participants in the new PPP program. Last year's program turned out to be a huge accelerator of our commercial bank initiative and resulted in significant expansion of our commercial client roster. We'll again look to use the PPP program to attract new commercial clients that we can cross-sell and expand into more profitable relationships over time

Turning to our mortgage business. We clearly won't be able to duplicate last year's productivity, given the decline in the refi loan volume that's expected throughout the industry. But there's still a lot of opportunity to take market share, particularly given the positive trends in housing, which will continue to create lending opportunities for new home purchases in our markets. We've steadily invested in the mortgage business, and we're going to continue doing that in 2021. We'll be adding MLOs as well as additional operating support to increase our processing capabilities. With a larger MLO team that's focused on purchase originations, we believe we can make up some of the lower volume in refis that we expect to see. And our goal for 2021 is to generate about 80% of the revenue in this business than we did last year. One of the key parts of our model that we've been talking about, since our IPO, is the increasing profitability of our offices as they gain scale. We don't have plans right now to open any new offices this year beyond Vail and Broomfield. So our focus will be on continuing to scale the newer offices that we've opened in the past few years. As they continue to bring in new clients, we'll see these offices move closer to their target level profitability, which will drive additional earnings growth for the company. Although we're looking via commercial bankers and MLOs, we believe we can continue to effectively manage our expense levels and keep expense growth below revenue growth, which will drive additional operating leverage. One area that we'll continue investing is the digital progression of First Western's platform. Our PPP application program is fully automated this year, and as we move through the year, we'll be adding new systems and features that will upgrade our capabilities in the trust and mortgage businesses that will enhance efficiencies, increase our productivity and improve the client experience. And all this will be done on roughly the same technology budget that we had last year, so we'll be investing in areas that can increase efficiencies and enhance revenue generation without increasing our expense levels.

From an M&A perspective, we'll continue to be opportunistic. Over our history, we used acquisitions to great effect to build our franchise. And last year, we had an attractive opportunity with the branch transaction to add talent and scale in a deal that was highly accretive to earnings. So we'll continue to add -- to evaluate additional opportunities that can add value and accelerate our growth. As we start 2021, we feel very optimistic about our ability to deliver another strong performance for shareholders. Since coming public, our story has been one of a unique wealth manager built on our private bank platform that was emerging from a period of capital constraint and would realize strong operating leverage as we grew our balance sheet through both organic growth and acquisitions. And we delivered on that story and significantly improved our level of profitability in the process. Due to the unprecedented environment last year and the opportunities to create a mortgage business, we may not have the linear straight up into the right progression in earnings growth that looks great on the chart, but the areas we focus on for building long-term franchise value, growing our client roster and balance sheet, adding commercial claims that diversify our loan portfolio and adding low-cost transaction deposits, growing our other sources of fee income outside the mortgage business, scaling our newer offices and realizing more operating leverage, all of those areas will continue to show consistent progress. And we're confident that this consistent progress will continue building First Western into a high-performing institution and further enhance the value of our franchise in the future.

With that, we're happy to take your questions. Ryan, please open up the call for questions.

(Operator Instructions) So the first question comes from the line of Brett Rabatin from Hovde Group.

I wanted to first make sure I understood the mortgage in the fourth quarter and then the guidance for '21. How much of the capacity constraint, how much of that kind of impacted what you did in 4Q? And then just thinking about the guidance for '21, doing 80% of what you did in '20. Can you talk about the revenue side on that, is that from an assumption perspective, what you're assuming on gain on sale margins versus 2020?

Well, let me start with a general response. And then, Julie, if you could come back and touch on the margin question, that would be great. When we saw the dramatic increase in volume in Q2 and Q3, we felt like we needed to rebuild our mortgage support for the higher volumes that we were seeing. And so we did a deep dive into that and decided to hire a secondary market specialist and create a capital markets desk in our treasury function that was outside of the mortgage team. And then we decided to strengthen the operations team, we hired a new operations executive for First Western with deep mortgage experience and then move the mortgage operations team under him. And both of those happened in the middle of the year. And then, as we saw these volumes continue into Q3 and even Q4, we're building the infrastructure to support the higher volumes. So I think the progress we've made during the year in addressing that, in a conservative way, in a cautious way, obviously, we want to get ahead of ourselves on the expense side, will give us the stronger support we need to hire more MLOs and push more purchase money volume into the process in 2021. So that's kind of what happened, how we reacted to it in our strategy going forward.

In terms of our expectations for 2021, as we look at the granular detail of what our MLOs are seeing and what the industry is expecting for the year. As I said, we are seeing strong inflows into this market and saw strong housing markets for purchase money. And so we do expect to be able to generate more purchase volume in 2021. Do you want to address the margin questions?

Yes. So on the revenue recognition perspective, we booked the revenues on a pull-through adjusted basis, and that is at the time of the lock. So that's why you're seeing that decline. As the locks are coming down, seasonality is having a big impact on that as well. That's why you're seeing the revenue kind of follow the lock volume and not necessarily the origination volume. Originations is when we're funding it. So you can see that in the fourth quarter, we were able to make really good progress on reducing the backlog, improving processing speed. A lot of that will come through already in the fourth quarter and some in the first quarter, and we've seen really nice improvement in our lock volume and our pipeline for the first quarter already. So I think that, from a overall perspective, we feel like the processing constraints are kind of going to be through by the first quarter.

Okay. That's great color. And then the other thing I wanted to make sure I understood was the anticipation of margin pressure. You still have the PPP fees coming, obviously, and I assume mostly in 1Q versus maybe some -- and some still in 2Q. But would seem like that would have a positive impact on the margin in 1Q. I just want to make sure I understood the commentary about anticipating margin pressure. Is that on a core basis? Or does that exclude PPP? And then maybe you mentioned also the highest origination yields, just kind of curious how much more decline you might expect in loan yields this year?

Well, if you can get the noise out, which is really difficult here over the last 3 quarters, I think our margins have actually held up quite well. And I would tell you we expect that to continue. Now we're not expecting to be able to cut deposit rates significantly going forward unless -- well, assuming flat rates here. And we are seeing improvements in loan yields, which is a deliberate effort that we're making that we've talked about in the last 2 quarters. So I do think that we're going to be able to drive core NIM, at least at the levels it maybe slight improvements from here, we'll see. But we're not expecting continued declines at this point from what we know today.

Now on top of that, though, you got the PPP noise. And I think what we're seeing is, Julie talked in her slides about the progress we've seen with the first round of PPP loans, those seem to be a little bit on hold right now from the SBA and not being processed. So I'm not sure that, that will clear out in the first quarter. And of course, now you're going to have additional noise from a second round of PPP, and we talked about our volumes there. I mean that's going to be another $75 million or so in PPP low spread noise that we'll have to adjust out in 2021. But it has increased noninterest and net interest income, even though it creates margin pressure.

Okay. I must have misheard the comment earlier on the margin. And then maybe if I can just sneak in one last one. I'm just curious a lot of banks are expecting or hoping for increased M&A activity this year. Just maybe any general comments on the M&A game and how optimistic you might be? And if you are seeing any increase in conversations?

Well, in acquisitions, we do have a corporate development department that's actively looking at bank acquisitions and RIA acquisitions. We've done a fair amount of fee business acquisitions over the years, and that's something we're very actively focused on and works nicely for us. We can expand our footprint by going de novo, as we did in Broomfield, for example, or in Vail. We can buy a bank and add the fee business or we can buy the fee business and add the bank to it and any of those have been successful expansion strategies for us historically and things we're certainly looking at actively in 2021.

And our next question comes from the line of Brady Gailey from KBW.

So I want to start just with the reserve, as you know, an adjusted 98 basis points. I know you guys are not yet CECL compliant. But I mean, that does screen as below peer levels. So as we look towards the next year or 2, should we think about that reserve slowly going higher? Or do you think you'll maintain this roughly 1% level?

Unfortunately, I don't think we have a great answer for you on that. What we saw in 2020 was all of our credit metrics improved significantly. And in spite of that, we decided to take our allowance up from roughly 80 basis points to roughly 100. And we just haven't done the work yet on what CECL implementation is going to be in a couple of years and what that would mean to us. And so for our internal look, we're assuming that 100 basis points or 98 basis points, about where we want to be on the allowance, knowing what we know today. But I would tell you, we're not seeing any credit metrics internally, whether that's losses or problem loans or NPAs or NPLs or past dues, I mean, none of that is trending in a direction that would make us think about increasing our allowance. And yet, as I say, we increased it about 25% as a percentage of a rapidly growing loan book this year.

Okay. And then, Scott, looking at loan growth, you guys have had a lot of success growing loans this year, even in the fourth quarter, annualized that's over 20% loan growth, when you back out the PPP and the held for sale. So just great robust on that, how are you thinking about loan growth as we enter into 2021?

It's a little bit hard to hear you, Brady. I heard everything up until how are we thinking about? And then I didn't get like the most important word in that sentence.

Yes. I was just asking about loan growth expectations for 2021.

Yes. So I think we're expecting to see loan growth in line with what we saw in 2020, again, ex-PPP noise.

And our next question comes from the line of Matthew Clark from Piper Sandler.

On the loan yields, I think you mentioned that you had the highest weighted average rate on new loans this quarter. Could you just give us that specific percentage?

The December average rate was 3.95% for new production there.

And is that sustainable, do you think? Or is there something about the mix in December that might have elevated it?

It's driven by the mix that was in December with a little bit of a heavier commercial loan production in that month. But overall, that is what we've been driving for is that kind of mix and the increase in the yield on the loan book is really something that we've focused on in the last several quarters. So I think that our expectation is that, that's maybe a little higher, but in line with where we would like to see it come in.

Okay. And then just on the mortgage gain on sale, I heard you on the down 20% for the year. But in terms of the cadence and how we should see that gain on sale revenue come through the year, I assume you'll see a step-up here. Is there some portion of the capacity constraints that you guys face in the fourth quarter that wasn't locked, that's going to come through here in the first quarter, so we might see a decent pop in the first quarter despite seasonality?

So I think Q1 is traditionally lower for us seasonality wise, so more in line with the Q4 of 2020 than what we have seen in the second and third quarter. Second and third quarter is always our higher home buying season for Colorado market, at least, which is primarily where mortgage loan originations come from. So for Q1, I would expect a little bit of a bump from Q4, but not too material from where we were. I think where we're going to see most of the revenues come in and higher levels would be in the second and third quarters.

Okay. And then on the PPP balances this past quarter, can you -- do you have the average just offhand? I guess I can back into it, but if you have it, I'd take it.

Average -- so we had 390 loans that were Forgiven. Total loans in dollars is $64.5 through the 25th of January, is that what you're asking?

No, just -- I can back into it with the 12 basis point impact to the margin. I was just trying to get the average PPP outstanding balance in the fourth quarter.

So most of our forgiveness come into like November, December, probably late November. So I would say halfway through the quarter be pretty reasonable guess.

(Operator Instructions) We have one more question currently in queue from the line of Ross Haberman from RLH Investments.

I've seen a lot of banks decide to sell their PPP loans and don't want to deal with all the forgiveness and the cost involved with that. Have you looked at that? And what do you think about that option?

We haven't. Especially now with our automated loan processing for the PPP loans, it doesn't really make economic sense. We make money off of those as we hold them. And to the question earlier, obviously, it does hurt your NIM. But at the end of the day, the capital required for that is none because of the accounting treatment, the regulatory accounting treatment. So I mean, we're making money off of those and benefiting the shareholders with them. Obviously, if we keep them, we are able to build relationships better with those borrowers and then book the fees as they get forgiven. So I think that's something we have analyzed, but it doesn't make a lot of sense for us, given our ability to digitize all that.

And just one follow-up question. The new branches you purchased in the last quarter or 2, are they fully assimilated? And are they generating from the type of income and revenue and profitability that you thought? Or is there more to come? You haven't realized all the synergies and/or the revenue enhancements yet? And if so, when will it sort of begin to kick in more so?

So Good question. We closed, as you know, well, as you may recall, in the middle of Q2. We setup the 4 locations that we acquired that we would close 3 of them, but you can't do that for 90 days because of the regulatory notice purchases. So 90 days later, in the middle of Q3, we closed those 3 locations and retain one, our new loan tree location. And we, I think, had a lot more success retaining and growing that business than we had anticipated. The additional folks that we brought over from that acquisition have proven to be really valuable new associates for us, good partners. And so I would tell you, I think we've probably outperformed our projections there, and we thought it was going to be highly accretive and it's proving to be, I think, a real win-win for the shareholders.

And we do have a question in queue from the line of Matthew Clark with Piper Sandler.

Just want to follow-up on the margin outlook. I think early in the call, you were suggesting there might be some modest core NIM pressure ex-PPP, but then it sounded like maybe holding the line. I mean, if you look at your incremental loan yield at 3.95% and funding it at 45 basis points and you consider the liquidity, maybe earning, I don't know, 90 basis points, it suggests your core NIM should migrate back to the low 3.30s. And I just wanted to make sure we were on the same page or whether or not there's something I'm not thinking about?

Well, you're right, it depends how that excess liquidity plays out and how successful we are in growing the loan book. I mean I gave you my view of it. We could ask Julie for a rebuttal?

I would say it totally depends on that, yes. But I think it would be safe to say -- so I think our core NIM at 3%, a little bit ahead of 3& maybe. Give us a little room, but that's where I would guide you.

All right. If there are any other questions, we'll do the financial section again. That was particularly fun today.

At this time, I'm showing no further questions and would like to turn the call back to management for any closing remarks.

All right. Well, thanks, everybody, for dialing in. We do appreciate your support and your interest, and hope you have a great weekend. Thank you.

Ladies and gentlemen, this does conclude your conference call for today. You may now disconnect.