Q4 2020 First Western Financial Inc Earnings Call

January 29, 2021

[music].

Ladies and gentlemen, thank you for standing by and welcome to the first question financial Q for 2020 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question answer session.

First a question during that session you will need to press Star then one on your telephone keypad.

First today's call is being recorded any of your credit any further assistance. Please press star zero.

Now I turn conference every share speakers per day, Sir 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 core Kamp Chief Financial Officer.

We use a slide presentation as part of our discussion. This morning, if you've 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 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.

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.

I'd like to turn the call over to Scott Scott.

Okay. Thanks, Tony.

Morning, everyone.

Our fourth quarter performance capped an extraordinary year for first western.

We're extremely well positioned to manage through the unprecedented environment created by the COVID-19 pandemic.

Our well diversified convert conservatively underwritten loan portfolio has experienced very little stress from the pandemic.

We capitalized on the PPP program.

New commercial customers and the refi boom caused by the reduction in interest rates enabled us to generate significant profit in our mortgage business.

<unk> 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. It makes for a difficult sequential quarter 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 for 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 from 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 sales of yellow fixed income team.

And our 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 run off a P. P. P loans are held for investment loans increased 6% from the third quarter when our total deposits increased three six per cent.

This balance sheet growth resulted in our net interest income increasing four 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 in 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.

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 support it for many years.

This business is the fourth quarter, you sold the business for a great deal of money.

Following the sales of client investment management accountable more than $70 million that needed in place for the milk wealth manager.

The need for a large credit line that will be secured by the investment management accounts.

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 and for first western.

And this plant 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 as partners in the business Warner pressed for those services and we never 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.

Fully leveraged the robust private banking and wealth management platform, we built that.

We believe it is the type of deal that will continue to win in the future.

Looking at our mortgage 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 lots in the court in order to work through this backlog.

Combined with the use of 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.

Second quarters.

But on a year over year basis, our Q4 gain was still up 67, 6%.

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.

<unk> declined by 59, 3% from the end of the prior quarter or loan modifications declined.

For less than one percentage 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.

To date, we haven't seen this surge have any material impact on our borrowers for results and new request for loan deferrals.

Moving now to slide four we continued to see a significant jump in our level of profitability relative to last year.

Yeah.

The balance sheet growth and increasing operating leverage we are realizing as we scale continues to demonstrate that the model. We've 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 five cents a share.

Turning to slide five we'll look at the trends in our loan portfolio.

Our total loans held for investment increased 26, 7% for.

For one 8% growth from the end of the prior quarter.

For the 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 a $128 1 million.

Payoffs and Paydowns, which is the highest level, we saw all year long.

So the growth in the portfolio is due to the traction we're getting in our commercial banking initiative, which included five 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.

But some construction lending expertise so we're seeing more opportunities in net area.

Our primary focus will <unk>.

Beyond the private bank and commercial loans, but construction represents another driver of loan growth, although we plan to keep the construction.

Contribution of 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 and the progress, we're making with our commercial banking initiative.

Two a year ago residential mortgage loans declined from 42% of total loans to 29, 7% total loans held for investment.

Moving to slide six we'll take a closer look at deposit trends are.

Our total deposits increased $56 2 million or three six per cent for the end of the prior quarter.

There was some volatility in our period end deposits due to fluctuations in the deposits of the 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 non interest bearing deposits, increasing 29, 7% of the for total deposits from 22, 1% a year earlier.

Moving to slide seven we wanted to provide some additional insight into the level of commercial loan and deposit growth for generating.

A couple of years ago, we announced our intent to strengthen our commercial banking capabilities as a natural complement to our entrepreneur 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, and the branch acquisition during the second quarter accelerated this initiative.

Throughout 2020, the separate contributed strong growth in assets revenues and earnings.

And it's creating a more diversified loan portfolio and our lower cost deposit base that we believe enhances the value of our franchise.

Turning to trust and investment management on slide eight 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 to 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 nine we provided an update on our participation in the PPP program and how it impacts various metrics and are quite clutter.

Through the end of the year, we had $54 8 million and plan to receive approval for forgiveness from the SBA.

Yes.

$42 9 million in PPP loans remaining on our balance sheet.

Despite the acceleration of fee upon loan forgiveness for 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 PPP program and as of January 25th We had received applications for $73 7 million in round two PDP volume.

Turning to slide 10, we look at our growth revenue.

We had a very strong quarter of revenue growth with increases in both net interest income and non interest income for significant growth we have seen in our balance sheet. This year net.

Interest income.

257, 5% of our total revenue this quarter, which is above our historical net.

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.

Look at the trends in net interest income and margin.

Our net interest income increased by approximately 500 oven or for.

<unk>, 2% from the prior quarter.

Net growth was due to an increase in average loan balances, resulting from our organic Lindbergh.

On a reported basis, our net interest margin was unchanged from the prior quarter at three 7%.

However, when the impact of PPP loans and purchase accounting adjustments are excluded our net interest margin decreased by 13 basis points from the prior quarter.

This is primarily due to a decline in average ammonia.

Given our continued excess liquidity combined with full quarter impact of our recent sub debt issuance and declining loan yields we anticipate seeing from pressure on our net interest margin during the first quarter.

Turning to slide 12, our non interest income was down from the prior quarter due to a lower net gain on mortgage loans, but at 21% from the fourth quarter of last year.

Relative to last year, we are seeing increases in almost all of our fee generating areas, primarily due to the growth in our client base over the past year, resulting from the organic business about net and the branch acquisition, which closed in the second quarter of 2020.

Notably on a sequential quarter basis, our trust and investment management fee increase despite the sale of the early fixed income team during the quarter.

On slide 13, we have provided some additional detail on our mortgage operations.

Origination for once again very strong in the quarter at more than $400 million. However revenue is recognized at the time of the launch 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 for 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 and the revenue business are all considerably higher.

We generated $1 7 million and net income on revenue of $4 3 million in the fourth quarter of 2020 compared to net income of 900000 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 non interest expense decreased six 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 is also down 184000 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 85% 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 non interest expense to be in the range of $6 million 16 million to $16 5 million to start 2021.

Turning now to slide 15, we will 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 <unk> 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 NPA to total assets declining to 22 basis points of total assets from 53 basis points in the last the 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 zero.

Turning to slide 16.

We recorded approximately 700000 in provision expense in the fourth quarter, which.

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 re deferral and to date, we have only granted one second modification, which has already come back out of it the second deferral period and is performing.

As of January 25, 2021, we no longer had any active loan modifications on deferral.

I will now turn the call back over to Scott.

Alright, Thanks Julie.

Turning to slide 18.

I wanted 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 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.

Increasing our push into commercial banking, our reputation as 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.

One of our priorities this year is to steadily add bankers.

Proven ability to bring in full commercial bank relationships.

We will also continue to build expertise to help us attract.

Target attractive niche markets.

We're getting good traction in a bit with the banking products and services that we specifically.

Developed for medical and dental practices and as we see similar opportunities in other vertical markets. We will look to replicate the same model.

We'll also be active participants of the new PPP program last.

Last year's program turned out to be a huge accelerator of our commercial bank initiative that resulted in significant expansion of our commercial client roster.

We will again look to use the PPP program to attract new commercial cloud.

Clients that we can cross sell expanded a more profitable relationships overtime.

Turning to our mortgage business clearly won't be able to duplicate last year's productivity given the decline in the refi loans volume that's expected throughout the industry.

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 have steadily invested in the mortgage business and we're going to continue doing that in 2021, we'll be adding mmos.

As well as additional operating support to increase our processing capabilities.

With a larger MRO team that's focused on purchase originations. We believe we can make up some of the lower volume.

Refis that we expect to see and our goal for 2021 is to generate about 80% of the revenue of this business that 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.

Don't have plans right now to open any new offices this year beyond Vale in Broomfield.

So our focus will be on continuing to scale. The newer offices that we've opened in the past few years.

They continue to bring in new clients will see these offices moved closer to their target level of profitability, which will drive additional earnings growth for the company.

Although we are looking to add commercial bankers in <unk>. 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 as the digital progress in the first western platform or.

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 and increase our productivity and improve the client experience.

And all of this will be done on roughly the same technology budget that we had last year. So we will be investing in areas that can increase efficiencies and enhance revenue generation without increasing our expense levels.

From an M&A perspective.

We will continue to be opportunistic.

Over our history, we used acquisitions to great effect to build our franchise and last day, 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 will 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 the unique wealth manager built on our private banking platform that was emerging from a period of capital constrained and.

And would realize strong operating leverage as we grew our balance sheet through both organic growth and acquisitions.

Delivering on net story.

Difficultly improved our level of profitability in the process.

Due to the unprecedented environment last year and the opportunities that create the 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 to 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 scale.

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.

We'll 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. Brian. Please open up the call for questions.

Yes of course as a reminder to ask a question you will need to press star one on your telephone keypad jewelry draw. Your question, you're compressed pounder husky and we do already have some questions coming in to our Q&A roster. So the first question comes from the line of Brett.

Robert Cheng from.

Hockey card.

Hey, good morning, everyone.

Great.

Wanted to first make sure I understood that.

The mortgage in the fourth quarter and then the guidance for 'twenty one.

How much of how much of the capacity constraints, how much of that kind of impacted what you did in <unk> and then just thinking about the guidance for.

For 'twenty, one joined 80% of what you did in <unk>.

Can you talk about the revenue side on that is that from an assumption perspective, what youre assuming on gain on sale margins versus 2020.

Well, let me start with a general response, and then Julian 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 specialists and create a capital markets desk in our treasury function that was outside of the mortgage team and then we decided the strength in the operations team, we hired a new operations.

Executive for first western with deep mortgage experience and then moved to 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 in Q4.

We were building the infrastructure to support the higher volume. 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 strongest support we need to hire more mmos.

<unk>.

So push more purchase money.

Volume into the into the process in 2021, so that's kind of.

What happened, how we reacted to it and our strategy going forward.

Terms of our expectations for 2021, as we look at that granular deep.

Details of what our <unk> are seeing and what the.

The industry is expecting for the year.

As I said, we are seeing strong inflows into this market and so strong housing markets for for purchase money and so we do expect to be able to generate.

<unk>.

For purchase volume in 2021, do you want to address the.

Let me address the margin question, yeah, so on a revenue recognition perspective.

But the revenues on a poultry adjusted basis and that is at the time of the lock. So that's why you're seeing such a decline at the locks are coming down.

Personality is having a big impact on that as well.

Why you're seeing the revenue kind of follow the lock volume and not necessarily the origination volume origination. This plan were funding. It. So you can see that in the fourth quarter, we were able to add.

And make really good progress on reducing the backlog improving processing speed them 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 in our pipeline for the first quarter already so I think that.

From an overall perspective, we feel like the processing constraints are kind of.

Going to be true 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, it's been mostly in <unk> versus maybe some assumptions still in <unk>, but well it seem like that would have a positive impact on the margin and once you just want to make sure I understood. The commentary box spending margin pressure is that on a core basis or does that exclude does that exclude PPP.

And then maybe you mentioned also the highest origination yields.

<unk>.

Just kind of curious how much more decline you might expect on loans long yields this year.

While if you can get the noise out which is really the difficulty here over the last many 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 two quarters. So.

I do think that we're going to be able to drive.

Core.

NIM.

At least at the levels that it may be may be slight improvements from here, we'll see but we're not expecting continued.

Uh huh.

Declines at this point from from what we know today now on top of that though you've got the PPP noise and I think what we're seeing.

Is.

Can we talk to the 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 process. 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.

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.

PPP low spread noise that we'll have to.

Just out in 2021, but you know it.

It is increased non non interest and net interest income even though it's.

Okay.

Creates margin pressure.

Okay, I must've misheard the card.

Its earlier on the margin.

And then maybe if I can just sneak in one last one and I'm just I'm. Just curious you know a lot of banks for expecting or hoping for increased M&A activity. This year.

Share just maybe any general comments.

On the M&A game, and how optimistic you might be and if you are seeing any <unk>.

Increase in conversations.

Well in an acquisitions, we do have a corporate development department that's actively looking at.

Hello.

Bank acquisitions and 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.

Bye.

Going de Novo as we did in Broomfield for example, or in Vale, we can buy a bank and add the fee business, where we can buy the fee business and as a bank to it in any of those have been successful expansion strategies for us historically and things, we're certainly looking at actively and <unk>.

'twenty 'twenty one.

Okay, Great I appreciate all the color.

Thank you Brad.

And our next question comes from the line of congratulate Gili from K B W.

Okay, great Gaily from Covid I'm sorry.

Yes, no problem.

Hi, guys.

Good morning Brady.

So I wanted to start just with the reserve.

Adjusted 98 basis points I know you guys are not that.

Seasonal compliant but.

I mean is that is that does screen.

Below peer levels.

So as we look towards the next year or two should.

Should we think about that reserve.

Slowly going higher or do you think you will maintain 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 for roughly 100.

And.

We just haven't done the work yet.

What seasonal implementation is going to be in a couple of years that 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 thats.

Losses or.

Problem loans or.

NPA is our npls or past dues I mean, none of that is trending.

<unk>.

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.

Our rapidly growing loans 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 up over 20% volume growth.

When you back out the PPP in the held for sale.

So I just just great robust loan growth how are you.

Thinking about loan growth.

And the 2021.

It's a little bit hard to hear you Brady I heard everything up until how are we thinking about and then.

Let's get like the most important word in that sentence.

I was just asking about load growth expectation for 12 months.

One.

Yeah. So.

Okay.

<unk>.

We're expecting to see loan growth in line with what we saw in 2020 again ex PPP noise.

Okay great.

That's all for me. Thank you guys.

Alright, Thank you Brady.

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

Hey, good morning.

Good morning, Matthew.

Yeah.

On the 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.

Yes.

Driven by the mix that was in December.

I have a heavier commercial volume 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, but that's certainly something that we.

I'm focused on in the last several quarters.

So I think that our.

Expectation is 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 will see a step up here or is it just some portion of.

The capacity constraints that you guys faced in the fourth quarter that wasn't locked in that's going to come through here in the first quarter. So we might see it but a decent pop in the first quarter. Despite you know.

Seasonality.

So I think Q1 is traditionally lower for us seasonality wise, so more in line with Q4 of <unk>.

2020 than what we have seen you know in the second and third quarter second and third quarter is always our.

Higher home buying season for Colorado market salaries, which is primarily where.

Mortgage loan originations come from.

For Q1, I would expect a little bit of a bump from Q4, but not.

Its not too material from where we were I think where we're going to see most of the.

Net revenue came in higher levels would be in the second and third card.

Okay.

And then on the.

The PPP balances this past quarter can you do you have the average just off hand, I guess I can back into it but if you how does that take.

And average so we had 390 loans that were forgiven.

Total loans.

In dollars and 64 five through the 20 <unk> of January is that what you're asking.

No.

I can I can back into it with a 12 basis point.

Impact to the margin I was just trying to get the average PPP outstanding balance in the fourth quarter.

Oh.

From most of our forgiveness comments you like to.

November December.

In late November so I would say halfway through that for B.

Okay reasonable gas.

Okay.

Thank you.

And as for Roger If you do with cash your question Hans Crestar, one on your telephone keypad again for anyone else, who wants to ask a question Thats Star one.

And we do have one more question currently in queue from the line of Ross Herman for from our <unk> investments.

Good morning, Scott Scott how are you.

That's been a lot of banks decide to sell their PPP loans and don't want to deal with all day.

Forgiveness.

Cost involved with that have you looked at that.

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.

Okay.

Money off for those as we hold them in into 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 for providing regulatory accounting treatment. So we're making money out for those are benefiting the shareholders with them.

Obviously, if we keep them, we are able to build relationships better with those borrowers.

And.

Yeah.

Both of these as they get forgiven. So I think thats something that we have analyzed but that doesn't make a lot of sense for us given that her ability to digitize all of that.

And just one follow up question.

The new branches do you purchased in the last quarter or two.

Are they fully assimilated.

And are they generating the type of income and revenue.

And.

The ability that you thought or is there more to come.

You haven't realized for all of the synergies.

And where the revenue enhancements, yet and if so when will flow to.

To begin to kick in more shallow so good question, we closed as you know.

As you may recall in the middle of Q2.

We set up for locations, we acquired that we would close three 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 three locations.

Retained one it'd be low entry location.

And we've.

I think had a lot more success.

Painting and growing that business that we had anticipated.

The additional folks that we brought over from that acquisition has 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.

It's proving to be a I think a real win.

<unk> for the.

Shareholders.

Okay. Thanks, guys best of luck.

Happy weekend.

Great. Thanks, Ross I appreciate the support.

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

Hey, just wanted to follow up on on the margin outlook I think early in the call.

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 yields at 385 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 <unk> and I just wanted to make sure.

We were on the same page or whether or not there is something I'm not thinking about.

While you are right it depends how that excess liquidity plays out.

How successful we are in growing the loan book.

I gave you my view of it we could ask Julie for rebuttal.

I would say.

Totally depends on that yes, but I.

I think maybe Dave just day, driving our core NIM at three and a little bit up a little bit ahead of three maybe.

Give us a little room, but that's where I would guide you.

Okay. Thank you.

Alright, if there aren't any other questions will do the financial section again.

Particularly fund today.

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

Alright, well, thanks to everybody for dialing in and we do appreciate your support and your interest.

No.

If you have a great weekend. Thank you.

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

[music].

Ladies and gentlemen, thank you for standing by and welcome to the first question on financial Q for 2020 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question answer session.

I asked a question during that session you will need to press Star then one on your telephone keypad. Please be advised today's call is being recorded any of your card any further assistance. Please press star zero I would now like to hand, our conference every year speakers per day, Mr. Tony Rossi of financial profiles.

Thank you Ryan good morning, everyone and thank you for joining us today for first western financials fourth quarter 2020 earnings call.

Joining us from first Western's management team are Scott Wylie, Chairman, and Chief Executive Officer, and Julie <unk> Chief Financial Officer.

I'll use a slide presentation as part of our discussion this morning.

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.

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.

I'd like to turn the call over to Scott Scott.

Okay. Thanks, Tony.

Morning, everyone.

Our fourth quarter performance capped an extraordinary year for first western.

We're extremely well positioned to manage through the unprecedented environment created by the COVID-19 pandemic.

Our well diversified convert conservatively underwritten loan portfolio has experienced very little stress from the pandemic.

We capitalized on the PPP program, yes, new commercial customers.

And the refi boom caused by the reduction in interest rates enabled us to generate significant profit in our mortgage business that contributed 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. It makes for a difficult sequential quarter revenue and earnings comparisons.

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 for 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 sales of yellow fixed income team.

For the tangible book value per share, increasing 25% year over year.

Excluding runoff of PPP loans are held for investment loans increased 6% from the third quarter when our total deposits increased three six per cent.

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 clients we supported for many years while EBITDA.

This business into the fourth quarter, you sold the business for a great deal of money.

Following the sales of client now head of investment management accountable for than $70 million that needed in place for the milk wealth manager.

And the need for loans credit line that will be secured by the investment management accounts.

Many of the large investment banks and brokers made offers to hand, we were able to win the business and expand this relationship into a much more profitable and for first western.

And this plant will have additional needs in the future such as trust services in the state planning that will provide additional opportunities for us the relative relationship.

As an added bonus as 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.

Fully leveraged the robust private banking and wealth management platform. We built that we believe thats. The type of deal that will continue to win in the future.

Looking at our more 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.

Combined with the use of 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.

Second quarters.

But on a year over year basis, our Q4 gain was still up 67, 6%.

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 decline.

<unk> declined by 59, 3% from the end of the prior quarter for our loan modifications decline.

So less than one percentage 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.

To date, we haven't seen this surge to have any material impact on our borrowers or results in new request for loan deferrals.

Moving now to slide four we continued to see a significant jump in our level of profitability relative to last year.

The balance sheet growth and increasing operating leverage we are 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 evaluation 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 five a share.

Turning to slide five we'll look at the trends in our loan portfolio.

Our total loans held for investment increased 26, 7%.

Our one 8% growth from the end of the prior quarter.

For the 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 a $128 1 million.

Payoffs and Paydowns, which is the highest level we saw all year.

First of the growth in the portfolio due to the traction we're getting in our commercial Bank initiative, which included five 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 net area.

Our primary focus will still beyond the private bank and commercial loans.

Instruction represents another driver of loan growth, although we plan to keep the construction.

Contribution of the overall mix in the portfolio are pretty consistent over the longer term.

Compared to a year ago residential mortgage loans have declined from 42% of total loans to 29, 7% total loans held for investment.

Moving to slide six we'll take a closer look at deposit trends are.

Our total deposits increased $56 2 million or three 6% from the end of the prior quarter.

There was some volatility in our period end deposits due to fluctuations in the deposits of the 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 for deposit growth continues to be commercial DDA relationships, which accounted for 65, 7% of all of 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 the per total deposits from 22, 1% a year earlier.