Western Alliance Bancorp (WAL) 2020 Q4 法說會逐字稿

Good day, everyone. Welcome to the earnings call for Western Alliance Bancorporation for the Fourth Quarter 2020. Our speakers today are Ken Vecchione, President and Chief Executive Officer; and Dale Gibbons, Chief Financial Officer.

You may also view the presentation today via webcast through the company's website at www.westernalliancebancorporation.com. The call will be recorded and made available for replay after 3 p.m. Eastern Time, January 22, 2021 through February 22, 2021, at 11 p.m. Eastern Time by dialing 1 (800) 585-8367, using conference ID 9490267.

The discussion during this call may contain forward-looking statements that relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. The forward-looking statements contained herein reflect our current view about future events and financial performance and are subject to risks, uncertainties, assumptions and changes in circumstances that may cause our actual results to differ significantly from historical results and those expressed in any forward-looking statements. Factors that could cause actual results to differ materially from historical or expected results are included in this presentation, the related earnings release and our filings with the Securities and Exchange Commission. Except as required by law, the company does not undertake any obligation to update any forward-looking statements.

Now for the opening remarks, I would like to turn the call over to Ken Vecchione, please go ahead.

Hi. Good afternoon, and welcome to Western Alliance's fourth quarter earnings call. Joining me on the call today is Dale Gibbons and Tim Bruckner, our Chief Financial Officer and Chief Credit Officer. I will first provide an overview of our quarterly results and how we are managing the business in this current economic environment, and then Dale will walk you through the bank's financial performance. Afterwards, we will open the line to take your questions.

In 2020, Western Alliance broke many of our own records for balance sheet growth, net interest income and earnings, all while fortifying our balance sheet position. Our strategy to align the company with strong borrowers nationwide provided us the strength and flexibility to navigate the economic volatility as we grew our balance sheet and income while simultaneously managing asset quality. Despite external challenges, financially, 2020 was a strong year and was our 11th consecutive of rising earnings.

For the year, we produced record net revenues of $1.2 billion, net income of $506.6 million and EPS of $5.04, 4% greater than 2019 despite increasing the provision expense by $124 million. Our focus continues to be on PPNR growth, which rose approximately 20% to $746 million, and net interest income increased $126.5 million or 12%, while total expenses increased a modest $9.6 million. To put this in perspective, 2020 revenue expanded on 13x the rate of expenses in a difficult, uneven and complex operating environment. Given all these actions, tangible book value per share grew 16.4% year-over-year to $30.90.

Turning to the fourth quarter results. We achieved a record $193.6 million in net income and EPS of $1.93 for the quarter, an increase of 54% from prior year. These results benefited from a $34.2 million reversal of credit loss provision, consistent with our strong asset quality results and improved go-forward consensus economic outlook. Our outstanding quarterly loan and deposit growth of $1 billion and $3.1 billion, respectively, lifted total assets to $36.5 billion, which was driven by broad-based growth throughout our business lines and geographies as clients begin to plan their investment for future opportunities.

Additionally, several of our internal business initiatives gained traction. For the full year, loans increased $4.5 billion, excluding PPP program, or 21% and deposits grew a record shattering $9.1 billion, which we believe creates a strong funding foundation for ongoing loan and earnings growth as the economy continues to heal from COVID shutdowns. This balance sheet growth propelled net interest income to climb $315 million for the quarter or 16% on a year-over-year basis. Quarterly NIM was 3.84%, up 13 basis points on the third quarter as PPP income improved and costs, CD costs fell.

Fee income increased to $23.8 million for the quarter, aided by $6.4 million of equity and warrant income. On a full year basis, fee income grew a healthy 8.8% to $70.8 million. Full year operating noninterest expense grew $9.6 million to $491.6 million, producing an efficiency ratio of 38.8%. In the fourth quarter, our efficiency ratio improved to 38.2% as revenue growth was 4x noninterest expense growth and continues to provide incremental flexibility to grow PPNR.

Asset quality continued to improve this quarter as our COVID remediation strategy produced increasingly positive results for our clients. Total classified assets declined $102 million in Q4 to 61 basis points of total assets, which is lower than Q1 '20 levels on both a relative and absolute dollar amount just as the pandemic impact was being felt. At quarter end, total deferrals had fallen to $190 million or 70 basis points of total loans, including $77 million for low LTV residential loans.

As of today, there are less than $10 million of deferrals excluding the residential portfolio, and all of our hotel franchise finance loans are paid as agreed. These noticeably positive credit trends, the improved consensus economic outlook and loan growth of the low risk asset classes drove our $34.2 million release in loan loss reserves this quarter. Dale will go into more detail on specific drivers of our provision, but our total loan ACL to funded loan ratio, excluding PPP loans, now stays at 1.24% or $316 million and total loan ACL to total classified assets is 142%. Charge-offs were $3.9 million in Q4 and full year charge-offs were 6 basis points of loans.

Our robust PPNR generation continues to drive strong capital levels with a CET1 ratio of 9.9%, supporting 28% year-over-year loan growth. Return on average assets and return on average tangible common equity were 161 basis points and 17.8%, respectively. We remain one of the most profitable banks in the industry. As we demonstrated throughout 2020, we will continue to support our clients and are encouraged on their participation in the PPP program as the second round is rolling out. We have begun processing applications and are seeing steady volumes. But given the size and strength and other factors, we don't expect the total amount to rise to the levels we saw in round one.

Finally and most importantly, all of our accomplishments cannot be achieved without the immense efforts made by the people of Western Alliance to successfully respond to the challenging COVID-19 environment, which has strongly positioned and prepared the company whatever may come our way as we enter 2021. We take pride in our peer-leading performance in good times, but above all, during the challenging moments.

Dale will now take you through our financial performance.

Thanks, Ken.

For the quarter, Western Alliance generated net income of $193.6 million or $1.93 EPS, each up more than 40% on a linked-quarter basis. As mentioned, net income benefited from a release of provision expense of $34.2 million, primarily driven by improvement in the economic outlook during the quarter, the loan growth in lower risk asset classes. Net interest income grew $30.1 million during the quarter to $314.8 million, an increase of 10.6% quarter-over-quarter and significantly above Q2's performance, which we guided.

Noninterest income increased $3.2 million to $23.8 million from the prior quarter, supported by $5.1 million of warrant gains related to our technology lending. Noninterest expense increased $8.1 million, mainly driven by an increase in incentive accruals as our fourth quarter performance exceeded the original budget targets, which were established pre-pandemic. Continued balance sheet growth generating superior net interest income drove pre-provision net revenue of $206.4 million, up 30.4% year-over-year and up substantially from the first and third quarters of 2020 as the second quarter benefited from onetime items of PPP loan fee recognition and bank-owned life insurance restructuring.

For the year, Western Alliance generated record net income of $506.6 million or $5.04 per share, an increase over full year 2019 even when considering elevated provision expense of $124 million for the year. Net interest income grew $126.5 million during the year to $1.2 billion, an increase of 12.2% year-over-year, mainly attributable to increased loan balances, PPP loan fees and a 49% reduction in interest expense. Noninterest income increased $5.7 million to $70.8 million from the prior year. We recognized a onetime benefit of a BOLI restructuring during Q2 of $5.6 million. Finally, noninterest expense increased $9.6 million or just 2% year-over-year as increases in short-term incentive accruals and technology costs were offset by lower deposit costs.

Turning now to our net interest drivers. Investment yields decreased 18 basis points from the prior quarter to 2.61% and fell 35 basis points from the prior year due to a lower rate environment. On a linked-quarter basis, loan yields rose 20 basis points following increased yields across most loan types, mainly driven by a change in loan mix and higher PPP yields related to prepayment assumptions on forgivable amounts. PPP yield for the quarter was 3.67% compared to 1.76% for the third quarter. Interest-bearing deposit costs were reduced by 6 basis points in Q4 to 25 with an end-of-the-quarter spot rate of 23 basis points as higher-cost CDs rolled off. Spot rate for total deposits, which includes noninterest-bearing deposits, was 13 basis points. We expect funding costs have essentially stabilized at these levels. However, there could be marginal benefits as higher-cost CDs continue to mature and are in place at lower rates. Current spot rates indicate a relatively stable margin as we enter 2021. Some decline in loan yield is expected as the mix has changed to lower risk segments.

With regards to our asset sensitivity, our rate risk profile has declined notably since the beginning of 2019, with 82% of our loans now behaving as fixed due to floors for variable rate loans and mix shift towards fixed-rate residential loans. We continue to be asymmetrically positioned to benefit from any future rate increases with an estimated increase in net interest income of 5.7% from a 100 basis point rate increase in a parallel shock scenario versus a 0.9% contraction in net interest income if rates fell and flat lined at 0.

As Ken mentioned, this year, we demonstrated our ability to grow net interest income by 15.7% year-over-year despite the transition to a substantially lower rate environment. Net interest income increased $30.1 million or 10.6% during the quarter as net interest margin increased to 3.84%. Margin benefited from both a true-up related to PPP fee recognition, favorable deposit mix shift and improved deposit rates.

As mentioned earlier, during the fourth quarter, our extraordinary deposit growth and build in liquidity continues to weigh on the margin and had a negative impact of 9 basis points this quarter. Adjusting for this, the margin would have been slightly above the 3.9% guidance we gave during the last quarterly call. PPP loans increased our NIM during Q4 by 11 basis points as we trued up from the changes to prepayment assumptions made during Q3, resulting in a PPP loan yield of 3.67%. Notice the gold line on the bar chart showing NIM, excluding volatility related to PPP. NIM was 3.8% for Q4 and essentially flat from the third quarter. Average excess liquidity relative to loans increased $467 million in the quarter, the majority of which is held at the FRB earning minimal returns, which reduce NIM by approximately 9 basis points in aggregate. Given our healthy loan pipeline and ability to deploy these funds to higher yielding earning assets, we expect margin drag to dissipate in coming quarters.

Referring to the chart on the lower left section of the page, of the $43 million in total PPP loan fees net of origination costs, $11 million was recognized in the fourth quarter. We recognized a reversal of PPP loan fees in the third quarter of $6.4 million and expect fee recognition to be approximately $6.6 million in Q1 and taper off as prepayments and forgiveness are realized. As the second round of PPP is just underway, these fee accretion assumptions only apply to the initial round of funding.

Turning now to efficiency. Our efficiency ratio improved to 38.2% in Q4 as the increase in expenses was outweighed by revenue growth and only rose 2% from the fourth quarter of 2019. Excluding PPP net loan fees and interest, the efficiency ratio for the quarter would have been 39.9% and as we indicated last quarter, should be returning to historical levels in the low 40s.

Pre-provision net revenue increased $25.2 million or 13.9% from the prior quarter and 30.4% from the same period last year. This resulted in pre-provision net revenue ROA of 2.37% for the quarter, an increase of 15 basis points from Q3 and equal to the year ago period. This strong performance in capital generation provides us significant flexibility to fund ongoing balance sheet growth, capital management actions or meet credit demands from our clients.

Our strong balance sheet momentum continued during the quarter as loans increased $1 billion, net of $271 million of PPP loan payoffs to $27.1 billion and deposit growth of $3.1 billion brought our deposit balance to $31.9 billion at year-end. Inclusive of PPP, loans grew 28% year-over-year while deposits grew approximately 40% year-over-year with our focus on low loss loan segments and DDA. The loan-to-deposit ratio decreased to 84.7% from 90.2% in Q3 as our strong liquidity position continues to provide us with balance sheet capacity to meet funding needs. As deposit growth continues to outpace loan origination, our cash position remains elevated at $2.7 billion at year-end. However, we believe it provides us inventory for selective credit growth as demand resumes. Finally, tangible book value per share increased to $1.87 over the prior quarter to $30.90. It was an increase of $4.36 or 16.4% over the prior year.

Our strong loan growth is a direct result of our flexible business model, which combines national commercial banking relationships with our regional footprint and enables thoughtful growth throughout economic cycles. The vast majority of the $1 billion in growth was driven by increases in C&I loans of $655 million, supplemented by CRE nonowner-occupied loans of $248 million. Residential and consumer loans now comprise 9.2% of our loan portfolio, while construction loan concentration increased modestly to 9% of total loans.

Within the C&I growth for the quarter and highlighting our focus on low-risk assets, capital call lines grew $408 million, mortgage warehouse lines grew $413 million and corporate finance loans decreased $122 million this quarter. Residential loan originations added $56 million to balances by quarter end net of refinance activity.

We continue to believe our ability to profitably grow deposits is both a key differentiator and a core value driver to our firm's long-term value creation. Notably, year-over-year deposit growth of $9.1 billion is more than double the annual deposit growth of any previous calendar year. Deposits grew $3.1 billion or 10.7% in the fourth quarter driven by increases in savings and money market of $1.8 billion, interest-bearing DDA of $842 million and noninterest-bearing DDA of $450 million, which comprises 42% of our deposit base. Robust activity in tech and innovation and market share gains in mortgage warehouse continue to be significant drivers of deposit growth during the quarter. Additionally, one of our deposit initiatives that is fully online contributed over $1 billion in deposit growth in 2020.

Looking at asset quality. Total classified assets decreased $102 million in Q4 due to credit upgrades, payoffs and refinance activity away from WAL. Our nonperforming loans and ORE ratio decreased to 32 basis points of total assets, and total classified assets fell to 61 basis points of total assets at year-end, which was below the ratio at the end of 2019. Special mention loans decreased $26 million during the quarter to 1.67% of funded loans. As we've discussed before, special mention loans are a result of our credit mitigation strategy to early identify, elevate and apply heightened monitoring to loans or segments impacted by the current COVID environment and fluctuate as credit migrates in and out. We do not see a risk of material losses coming from these credits.

Regarding loan deferrals, as Ken mentioned, as of today, we have less than $10 million of deferrals, excluding approximately $77 million in low LTV residential loans with a weighted average loan-to-value of under 67%. All of our hotel franchise finance loans are paying as agreed, and our sophisticated hotel sponsors continue to confirm support for their projects.

Net credit losses of $3.9 million or 6 basis points of average loans were recognized during the quarter compared to $8.2 million in Q3. Our loan allowance for credit losses decreased $39 million from the prior quarter to $316 million due to improvement in economic forecast and loan growth in portfolio segments with low expected loss rates. In all, total ACL to funded loans declined 20 basis points to 1.17% or 1.24% when excluding PPP loans. On a more granular level, our loan loss classes account for approximately 40% of our portfolio and include mortgage warehouse, residential and HOA lending, capital call lines, public finance and resort lending. When excluding these components, the ACL to funded loans on the remainder of the portfolio is 1.7%.

We continue to generate significant capital and maintain strong regulatory capital ratios with tangible common equity to tangible assets of 8.6% and a common equity Tier 1 ratio of 9.9%, a decrease of 10 basis points during the quarter due to our strong loan growth. Inclusive of our quarterly cash dividend payment of $0.25 per share, our tangible book value per share rose $1.87 in the quarter to $30.90, an increasing 16% in the past year. We continue to grow our tangible book value per share rapidly as it increased at 3x that of the peer group for the past 6 years.

I'll now hand the call back over to Ken.

Thanks, Dale.

We believe that our fourth quarter performance was the baseline for future balance sheet and earnings growth. Building off the robust growth we had in the fourth quarter, our pipelines are strong, and we expect loan and deposit growth of $600 million to $800 million for the next several quarters. Both loans and deposits each have their own cyclical and seasonal behavior that are not aligned on a quarterly basis. As Dale mentioned, given our deposit growth and liquidity build, we expect there to be some downward pressure on NIM related to mix changes and the deployment of liquidity into attractive asset classes. Additionally, we will continue to see NIM influence on a quarterly basis by the wave of PPP loans being forgiven and the second round of PPP loans coming online. Strong PPNR growth will continue and balance sheet momentum will drive higher net interest income, which more than offset the planned increase in noninterest expense.

Looking ahead, we will continue to invest in new product offerings and infrastructure to maintain operational efficiency, which will eventually push our efficiency ratio back to sustainable levels in the low 40s. Our long-term asset quality and loan loss reserves are informed by the economic consensus forecast, which if consistent going forward could imply a steady reserve ratio. Depending on the timing and pace of the recovery, there could be some loan migration into the special mention category, but we do not expect material migrations into substandard. We believe that the provisions in excess of charge-offs since the pandemic began are more than sufficient to cover charge-offs through the cycle as we do not see any indicators that imply material losses are on the horizon.

Finally, WAL is one of the most prolific capital generators in the industry. Our strong capital base and access to ample liquidity will allow us to take advantage of any market dislocations and maintain leading risk-adjusted returns and to address any future credit demands, all while maintaining flexibility to improve shareholder returns.

At this time, Dale, Tim and I are happy to take your questions.

(Operator Instructions) Your first question comes from Brad Milsaps with Piper Sandler.

Dale, just wanted to maybe kind of focus in on the margin and balance sheet. It sounds like you're going to be able to mostly fund the growth that you expect this year with continued deposit growth. Would you anticipate with the liquidity that you have continuing to add to the bond portfolio? And then just as a follow-up to that, it did look like the loan fees ex-PPP were maybe higher than normal this quarter. Could you address that? Have you found a new loan category that might generate more fees or is that something that might be considered abnormal?

Yes. So as you probably saw, we did increase bond purchases in the fourth quarter. I think that, that is going to continue. We're under 85% on a loan-to-deposit ratio. We're certainly comfortable with that climbing. I'm not sure that's going to happen as the deposit pipeline continues to look fairly strong to us, certainly. So if that's the case, I think we do want to deploy some of this capital. We've been sitting on a large chunk of cash. It hasn't been all negative, although the returns we're getting are quite nominal. I mean the yield curve has backed up a little bit, so I'd rather start extending now in terms of investments rather than maybe last fall when it was difficult to even reach 1% on a residential mortgage-backed securities from a GSE.

In terms of the loan fees, yes, you're right, Brad. That number, even excluding PPP, was elevated in the fourth quarter, and I'm going to call that essentially a bit nonrecurring. We just had some things that paid off that helped that number. You can kind of see that if you look at the note rate versus the average rate for the loan book, and then it's a little bit lower at the end of the year than it was for the fourth quarter. That's reflected in there that the yield was a little bit higher. So that will be a little bit lower loan fees kind of going forward, excluding PPP. That said, PPP could be up here as we're just getting started on round two.

Great. That's helpful. And then final question and I'll hop back in the queue. Just around the hotel portfolio, I think you both said that it's paying as agreed, don't have any deferrals in that category. Should we understand that as it's paying as agreed under the terms of your 6 plus 6 or 3 plus 3 program? Or are all of these operators, all of your institutional borrowers, actually making new P&I payments that they didn't put up as escrow initially?

Brad, the deferral programs are completed. So these guys are paying as agreed under the original terms. We're seeing good sponsorship and commitment to these properties. And as Tim Bruckner always tells me, our sponsors at least feel they could see the end of this issue coming with the vaccine being released and being implemented. So it's their impression and ours as well that this won't be going on for too much longer. And that's what makes them feel comfortable to continue to support the properties. Plus, as you know, we've got a very good loan to value here, and there's a lot of equity sitting in front of us.

Would you be able to say kind of what percentage of the properties are supporting themselves with their own cash flow without the sponsor support? Can you define it that way?

I'll tell you how I'll define it. Overall, our October or November occupancy was about 42%. And I would say that, I'm trying to think of the best way to give you that answer. I would say about 2/3 of our hotel book had occupancies over operating expenses. So when you think about it, if you go back a year, the breakeven point was a 39% occupancy level. Today, the 39% still holds, but what's changed is the RevPAR has come down dramatically, but operators have been able to cut out their expenses in order to keep their cash flow generating -- to generate the cash flow to offset their operating expenses. They haven't fully yet gotten to one where they can cover debt service coverage.

Your next question comes from Michael Young with Truist Securities.

Wanted to follow up real quick on Brad's question on kind of the hotel book and maybe even tack on the casino book as well. And just kind of an update in light of the second round of PPP, I assume most of those operators will be eligible, and so that will give them a nice capital and cash infusion as well that won't be as dependent on the sponsors. Is that fair?

Well, the first time around, we probably put out between $32 million and $36 million of PPP loans. A lot of the hotels don't get the cash flow from PPP because they've got separate management companies away from the hotels that manage them. So I would expect that the amount of PPP funding that's going to go to the hotel group will be less than Round 1. And also, there's a cap on the amount of dollars that's being distributed, no greater than $2 million. Tim, do you want to add anything to that?

I would add, yes, and we'll follow with gaming. We underwrite sponsorship as much as we underwrite the hotel when we underwrite our hotel book. So they're not, as Ken mentioned, the $36 million in the first round, not a big taker of PPP for 2 reasons: one, because of the strength of the sponsorship; and two, because the PPP follows the payroll and the structure of the hotel. Loans usually have that at the management company. So we don't expect a big taker. We also are in such frequent and ongoing dialogue that we don't see the inability of sponsorship to carry. We're very confident in that ongoing sponsorship and the relationship that we have there.

With respect to gaming, our gaming again is off strip. So most of our gaming won't qualify for PPP because they've got revenue gains, not revenue reduction. So the gaming portfolio has really moved out of the spotlight in terms of concern because of the strong performance that we've seen.

Yes. I would categorize it as infill. 100% is off strip, 100% of the casinos are open for business. The portfolio has demonstrated the ability to operate at breakeven cash flow or better in these times. The majority are outperforming their pre-COVID, pre-COVID revenue and cash flow plans. And when you think about that statement, why would they be doing that? There's no place else for people to go. I mean these casinos are open, plus they've received funds from the government that they have a little excess cash or they haven't spent a lot of their cash. So it represents a form of entertainment. And just to re-emphasize what Tim said, this portfolio does not represent an outsized risk or concern for us at this time.

Okay. That's really helpful color. And maybe just touching on the growth side, the $600 million to $800 million you called out, can you maybe peel back the onion on that a bit and just give us a little color on what you're seeing today, in particular, with mortgage warehouse potentially being a pressure on a year-over-year basis? Was that guidance kind of on held-for-investment loans or does that include the warehouse, et cetera?

Yes. So first thing I'll say is $600 million to $800 million is a little bit higher than what we said in the previous quarters, which was $500 million to $800 million, so I would note that. I would tell you during the course of the year for 2020, we had a lot of growth come in our capital call business, and that was over $800 million. Warehouse lending, this is traditional warehouse funding year-over-year grew by $1.7 billion, but note financing grew by $400 million. All the bank regions collectively grew by $500-plus million, and our resi grew by $300 million, followed by tech and innovation growing $125 million. And even our resort lending grew year-over-year $182 million.

As we think -- that's some perspective backwards. As we think about forward for 2021 In that number, we have little to no growth coming out of traditional warehouse lending. We're assuming that it just holds its position at year-end predominantly. Now if we're surprised, we want to be surprised on the upside, but we didn't build a lot of that opportunity in. And where I just went through the full year results for 2020, you can see that a lot of that would go forward, come forward into 2021. And as Dale like to always remind folks, our pressure valve is around residential loans. And we can always turn that knob up a little bit and bring in more residential loans if we need to. We've got a lot of runway ahead of us to be anywhere close to what a traditional bank would have in terms of the percentage of residential loans to total loans.

Your next question comes from Chris McGratty with KBW.

Dale, the 40% bogey that you're talking about or the efficiency ratio, I'm interested in kind of the details on that. Looking at this year's results, expense growth was quite remarkably low given the growth at 4%. Are you kind of telegraphing that expenses are going to reaccelerate a bit next year or is there more of a revenue component? Just trying to get a sense of that 40% line in the sand.

Well, I'm certainly optimistic about revenues. I think they're going to be strong. I think we're going to have strong loan growth again, as we discussed a minute ago, perhaps some more deployment into securities. That will pick up yield from what's in cash right now. But the expense side, there is going to be some catch-up elements, so just a couple of things that held back of 2020 expenses. Our travel expenses were down by more than 2/3. We think there is a benefit to actually getting on the road meeting with clients. And as we get past this, I think that's going to pick up maybe in the second, third quarter, probably no later than that. There's other costs related to that. Gosh, we didn't have our management conference this year. That's something that will come in to play in 2021 as well. So there's costs related to pandemic that were suppressed in 2020.

We also have investments that we continue to need to make in risk management and IT infrastructure. We expect to continue to do that. Those were maybe put on a slower path growth for 2020, and we expect those are probably going to reaccelerate to some degree. So yes, I do think our numbers are going to be, it's going to be going to the 4 instead of a 3, it's going to be low 40s, certainly, and the revenue is going to be right there with it. So we're going to be seeing significant increase in earnings per share. Revenue growth in dollars will be more than double certainly of what we're doing in terms of expense growth in dollars.

Chris, I just want to add, we're sitting at $36.5 billion now of total assets. And when we hit $50 billion or as we hit $50 billion, our risk management practices have to continue to evolve, so we need to start spending money today. Our growth rate has been far greater than I think we even thought, and so we need to hire some folks to maintain that growth rate on the operational side as well. And as Dale said, it's artificially depressed at 38%. That's just not a sustainable level to continue to invest in the infrastructure and technology needed to grow. And of course, there's always some new business development in terms of new business lines that we like that are always embedded in that line as well. So again, we've got the revenue coverage to exceed the expense growth. And next year, you can look for us to be back in the low 40s.

Okay. And if I could just, one more on the margin, just want to make sure I got the messaging. So if we look through on the deposit and liquidity build like a lot of your peers are experiencing, that's going to put pressure. And then you talked about the loan fees, is the right way to think about just core margin, excluding PPP, I think modest pressure? Or did you -- I can't remember where you said stability is. I think I heard 2 different things.

So yes, excluding PPP, I think there's modest pressure because I think we've, even in the fourth quarter, we've had loan mix into these lower risk and hence, lower-yielding categories. And so that's put a little pressure on it. The loan fees that we had in the fourth quarter, excluding away from PPP, were a little bit elevated from some payoffs that we had. And once you have the loan pay up early, all the loan fees that had been deferred are brought back in. And so that added a little bit to the fourth quarter number as well, which I don't necessarily anticipate continuing.

So I'm not going to call that a big number, but it's going to have a little pressure in terms of the number itself. Again, what we're focused on is net interest income and PPNR growth. I mean, hey, we could have pushed away some of this deposit growth that we had in the fourth quarter because it would have -- that average obviously damages our NIM. We think that's a good problem to have. I'd like to be able to take those dollars. I know there's liquidity abundance within the industry today. Our view is that this is always going to be the case. And we want to be able to have the resources, have the inventory that we can lend out and sustain a superior growth trajectory over our peers.

Chris, I just want to give you an incremental perspective. Everyone talks about NIM, and they've sort of they've lost sometimes from our credit quality. And I think what's important to know is that we've got a number of business lines, capital call, warehouse lending, note financing, MSR lending, residential loans, resort financing, muni and nonprofit. When you look at what our fourth quarter balances are, you add up the collective sum of those areas, we have $11.5 billion of balances that have never had a loss attached to them. Sorry, let me correct myself, they had one loss of $400,000 several years ago. But basically, I've never had a loss attached to them, and that's 42% of our total loan base.

So when you think about NIM, I think it's also important to think about risk-adjusted NIM. That's the way I think about it. That, yes, NIM shrinks a little bit, but that's okay in the sense that we're going to still be getting good strong growth, which is going to go to Dale's net interest income comment. But also, we're not going to see an increase in provisioning based upon the growth in these subsectors that I just mentioned. It's one of the reasons why we only had $4 million of net losses this quarter.

(Operator Instructions) Your next question comes from Timur Braziler with Wells Fargo.

Looking at the addition of Galton, just wondering what that contribution was in the fourth quarter. And in your comments about just maintaining warehouse balances, as those new relationships come on, how should we be thinking about just kind of building out those existing relationships, not necessarily taking market share in context with your flat guide for next year?

It's kind of funny, as I was talking to the head of that area the other day. I said, hey, let's go, let's review Galton in case I get a question about it. He assured me that there'd be no question about Galton because it's not big enough. And I said, hey, everyone's going to be interested. So let me just tell you what's going on there. The integration is going well, all right? We had to sign up their existing customers onto our platform, and we had to go through that legal and say, formal process. The other thing we had to do is roll out our prequalified approach, which means we had to roll out a pricing engine and roll out a credit engine. And a lot of that is going to be fully completed by the end of the quarter as we go into Q2.

So have we gotten some volume from Galton? Yes. Have we gotten the volume that we expect? No, not yet. We see the pipeline building. And I think it's going to have more of an impact in Q -- it will have more of an impact in Q2 than it will have in Q1. And remember, they come with 100 different clients, and there's only a 30% crossover or overlapping with our existing base.

Okay. Understood. And then I'm not sure how easy this will be to answer, but warrant gains, obviously very strong this quarter. I know they're kind of spotty when you look historically. But as you're looking at the strength you're seeing in the capital call line business and just in the tech ecosystem, generally speaking, is there a gauge for what the pipeline looks on some of the income from the equity investments or is that still going to be up and down in every single quarter?

It's going to be up and down. It's very hard for us to determine that. What I can tell you is, with the increase in liquidity in the tech and innovation space, some of that's come for us in terms of loans have fallen, but the offset of the loans falling are the fact that we're getting these equity gains. So we're happy that we always have it built into our loan docs. We don't get any equity gains around the capital call lines. And as I've said, very hard for us to forecast those gains.

And from a lending standpoint in that business, obviously, there's many new competitors that are also seeing great growth and success in that line. Is there enough for everybody or are you starting to see some of the better credits and relationships get more competitive as more lenders step into the space?

There's a little more competition because there are more competitors, but many of them like to go either into -- we're in Stage 2, if you will. Stage 1, early development; Stage 2, you have some maturity. Yes, you see the revenues growing. The product has been proven or the service has been proven, but they're still spending a lot more money in marketing in order to drive up revenue and drive up their brand recognition, name recognition. And then Stage 3 is they're getting ready to do some type of things, either an IPO or sometimes a strategic sale.

So some of the players that are in Stage 3 don't really compete with us because we're not in Stage 3, and they're looking at it in terms of exit fees, and those would be the larger banks. We don't play there. Some of the banks play in the early stage, and that's not where we have our skill set. So we're in the middle stage. And yes, there's a little more competition, but I would say we're not losing a lot of business, but we're going after it, where we're winning that business and we're winning it on service.

Your next question comes from Jon Arfstrom with RBC Capital Markets.

A couple of quick questions. Can you just touch on the change in segment reporting? I know it's not a big deal, but kind of help us understand what's different and what changes and why you did that? And did reporting lines or anything else change?

Yes. So well, a couple of things. So our segments were a bit unique relative to other institutions. And I think maybe that perhaps it conveyed to some degree that we were an assimilation of commercial business lines put together. And I think that maybe did not appropriately convey that actually, we have a lot of interdependencies among these enterprises, among these businesses that we focus on that we think have kind of superior growth and asset quality metrics. And so some of them are consumers of liquidity, others are certainly providers of liquidity, and I think that the new structure reflects that better, that it's more of a holistic enterprise in terms of what we're being able to accomplish with the business lines that we've selected out to have expertise in.

The other, another thing is, if you look at where the industry is, this much more closely aligns with it. We had almost the most number of segments of any institution out there. Now we're going to 3, that's pretty much in line. And even, I think, JPMorgan has 4 or 5. So I think it looks better like that. The other thing as well is we have a Consumer Related segment. And I think historically, I think people have thought about us as really primarily just a commercial enterprise, but we do have a lot of consumer dependencies in our balance sheet in what we're doing, and I think this highlights that better as well. It's how we're really managing the company and how we think about it.

Yes, more consumer adjacent.

Yes, okay. And there's one other, I have a different question, but one other thing on that. What else is in consumer loan balances? I'm assuming mortgage is there, but what else would be captured in that?

So yes, mortgages are in there. Balances related to our HOA, balances related to our resort finance.

Warehouse lending.

Yes, mortgage warehouse, the mortgage.

Okay. Okay. Good. Tim, maybe one for you on reserves. I think I hear the message on, you're probably set, and we're not going to see more reserve releases from here. But can you talk a little bit about some of your economic forecasts, when you cut it off and whether you expect to see some improvement over the next couple of quarters in some of the qualitative pieces of your reserve building?

Okay. So we look at reserves as kind of really the convergence of portfolio composition, our behaviors and remediating and what's happening in the economy. So with the economy, we've seen the prognosticators really come a lot closer together over the last quarter. So we talk about consensus, a consensus view, aligning generally to a consensus view, that's become easier to do as we progress. We have a consensus outlook where we shape to align with the consensus outlook when we look at our reserves. Then we get into the composition of our portfolio and really separate into near-term and longer-term risk.

And so the things in this economy right now that have been pressed with near-term risk, we just don't have that much of the small business lending, the point of retail and restaurant, small business line, it's not much that we do. And then when we look at our behaviors, we look at the stuff that is potentially undersecured, things that are cash flow dependent and look at what, we started remediating that in February. So we brought that balance down from $126 million of what was substandard to $29 million at year-end. So we look at it, we look at it and say what is going to be impacted, and then we test that against our LTV. The macro drivers are very favorable based on our portfolio composition.

I want to take the chance to think about this and just go a little off your question, but drive it home back to the provisioning and really kind of talk about how we see next year for a moment, and I'll wrap the provision. So Q4, we earned $1.93. As we think about going forward into 2021, if you take out the reversal of $34 million and you look towards the third quarter when we added about $15 million and you normalize for that going forward and take it on an after-tax basis and then normalize for the increase in PPP income for Q4, it gets you to about $1.47 run rate, right? And if you do your $1.47 times 4, that gets you to just a little under $5.90. And we kind of gave you that same math last quarter when we earned $1.36. And if we annualized it, we got to $5.46. So that's how we're moving the business forward based upon that with a viewpoint that we will be increasing our provisions next year.

But as Tim said, if the economic forecast improves or, as we said in our prepared remarks, if the economic forecast improves or if we continue to grow, our growth is stronger in those low to no risk segments or loss segments, you can see that provision coming down, and that would add to the EPS numbers I just mentioned. So I want to connect provision going forward to what we think is our baseline set of numbers as we come out of 2020 into 2021. So I hope that's a little more color for you guys and gives you a sense of where the company is going.

That's helpful. I mean, Ken, I'm stunned because those are the questions we danced around and try to not ask directly because we never get the answer. So that's very helpful.

Well, then I did a terrible job. I won't give you that answer again.

Your next question comes from Michael Young with Truist Securities.

Just big picture kind of question on the hotel franchise book given kind of what we've gone through. And I guess we're not quite on the back end of this yet, but it's looking like it may perform well. You probably broadened your relationship, et cetera. Is this going to be a growth portfolio coming out of the pandemic or do you need to keep it as a certain size of the institution go forward, et cetera, et cetera? Just kind of updated thoughts.

Well, it's not going to be growth gone wild in the hotel book. I'll say since the early part of 2020 when the pandemic took hold, we've only done 5, maybe 6 hotel loans. Those hotel purchases were done by our borrowers away from us. They purchased more distressed properties probably at discounted prices of up to 30%, and then we've structured it in such a way that our LTVs are no greater than 50%. So up to a 30% reduction, we lowered our LTVs, and we strengthened the terms and conditions, and we've always -- we continue to get the same pricing. So if we see deals like that, those are very, very strong deals. And if they're either top primary MSA, primary -- I'm sorry, I should say top MSAs in primary and secondary locations that we like, we'll continue to do that.

But right now, the hotel sponsors and operators, they're waiting. They're a little cautious. And they haven't put their foot down on the pedal yet. They want to see their volumes come back before they extend themselves. And they're also waiting to see if they could pick up any distressed deals. We haven't sold any of our notes or anything like that. Our clients haven't sold any of their properties that we're financing as distressed. So I guess I'm saying it's still a little hard for us to handicap, but we are financing properties when they meet the criteria or being bought at a discount, and we could do it at a lower LTV.

And I should also say, they're coming at a lower LTV, and they're putting up a year's worth of operating reserves and a year's worth of principal and interest. So we're getting those programs way upfront. And because of that, we like still doing the financing, very strong in terms of underwriting.

Your next question comes from Tim Coffey with Janney.

Ken, I want to follow up on the discussion about the Bridge Bank subsidiary because that company is in a unique part of that ecosystem. The industry out there is booming right now. And so from a deposit growth standpoint, how much are you counting on that company or that business for deposit growth this next year?

So the tech and innovation side generates usually 2.5 to 3x loan growth. So yes, first of all, we're counting on all our areas to generate both deposit and loan growth. No one gets to a budget process with us without working on their balance sheet. But last year, the tech and innovation did nearly $1.1 billion of deposit growth, and there was a lot of cash that was flushed into that business. I don't think we're going to see as much come in this year, so I wouldn't expect as much on the tech and innovation. But tech and innovation, life science, I expect for them to contribute in terms of next year's deposit growth and also some of our new business initiatives should continue -- deposit initiatives still continue to contribute. We had a great quarter from one of our new business initiatives this quarter.

And then my other question was on capital management. How are you looking at managing capital levels right now?

Well, our growth is real strong, and so our capital generation is supporting our balance sheet growth. So that's the first and simplest answer. There's been a lot more deal conversation that we're seeing that have come across our desk. We're a little more interested in the deal conversation that is around possibly new products or new initiatives, new products for us or new niches or that we could somehow enhance and grow. So we do see some of those opportunities. None of them have fit our model. So as I've said, the capital generation has been used to support our balance sheet growth.

There are no further questions queued up at this time. I'll turn the call back over to Ken Vecchione for closing remarks.

Yes. Thanks, everyone, for joining. We feel very good about the quarter we had and on to 2021, and we'll talk to you in 90 days again. Thank you all.

This concludes today's conference call. You may now disconnect.