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Western Alliance Bancorp
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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 views 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.
Good afternoon, and welcome to Western Alliance's fourth quarter earnings call. Joining me on the call today are 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 lines and take your questions.
And in 2020, Western Alliance broke many of our own records for balance sheet growth, net interest income and earnings, all the 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 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 of 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 following results and improved go forward consensus economic outlook.
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 [indiscernible] under 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 created 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 decline of $315 million for the quarter or 16% on a year-over-year basis. Quarterly NIM was 3.84%, up 13 basis points of the third quarter as PPP income improved and costs, CET 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 non-interest 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 non-interest expense growth and continues to provide incremental flexibility to grow PPNR.
Asset quality continued to improve this quarter as our COVID remediation strategy produce increasingly positive results for our clients. Total classified assets declined $102 million in Q4 to 61 basis points of total assets, which was lower than Q1 2020 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 and residential loans. As of today, there are less than $10 million of deferrals excluding the residential portfolio and all of our hotel franchise findings loans are paid as agreed. These noticeably positive credit trends, the improved consensus economic outlook and amount of loan growth of low risk asset financials drove our $34.2 million release in loan loss reserves this quarter.
Dale will go into more details on specific drivers of our provision, but our total loan to ACL to funded loans ratio excluding PPP loans now stands 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 for the 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 by their participation in PPP program as the second round is rolling out. We have begun processing application and are seeing steady volumes. But given the size constraints and other factors, we don't expect the total amount to rise to 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 for whatever may come our way as we enter into 2021. We take pride in our peer-leading performance in good times, but above all during the challenging events.
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 in provision expense of $34.2 million, primarily driven by improvement in the economic outlook during the quarter and 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 performance to which we guided. Non-interest 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.
Non-interest expense increased $8.1 million, mainly driven by an increase in incentive accruals as our fourth quarter performance exceeding the original budget targets, which were established pre-pandemic.
Continued balance sheet growth generating superior net interest income grow 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 one-time 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 49% reduction in interest expense. Non-interest income increased $5.7 million to $70.8 million from the prior year. We recognized a one-time benefit of fully restructuring during Q2 of $5.6 million.
Finally, non-interest 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 changing 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 basis points, with an end of the quarter spot rate of 23 basis points as higher cost CD roll off. Spot rate for total deposits, which includes non-interest-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 yields 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 100 basis point rate increase in a parallel shock scenario versus 0.9% contraction in net interest income, if rates fell and flat line at zero.
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 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 and 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 changes to prepayment assumptions made during Q3, resulting in 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 or a minimal returns, which reduced 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, from 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 and it is up $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 the 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 to 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, broader deposit balances of $31.9 billion at year-end. Inclusive of PPP, loans grew 28% year-over-year while deposits grew approximately 40% year-over-year with a focus on loan loss loan segments in DDA.
Loan to deposit ratio decreased 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 inventory for selective credit growth as demand resumes.
Finally, tangible book value per share increased $1.87 over the prior quarter to $30.90, with 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 growth was driven by increases in C&I loans of $655 million supplemented by CRE non-owner 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 workout lines grew $413 million and corporate finance loans decreased to $122 million this quarter. Residential loan originations added $56 million in balances by quarter end, net of repayment 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 million 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 non-interest 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 pulling online contributed over $1 billion in deposit growth in 2020.
Looking at asset quality, total classified assets decreased to $102 million in Q4 due to credit upgrades, payoffs, and refinance activity away from WAL. Our non-performing loans and OREO ratio decreased to 32 basis points to 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 mentioned loans decreased $26 million during the quarter to 1.67% of funded loans. As we've discussed before, special mentioned loans are 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 weighted average loan to value of under 67%. All of our hotels franchise finance loans are paying as agreed and our sophisticated hotel sponsors continue to confirm support for their project.
Net credit losses of $3.9 million or 6 basis points in 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 forecasts and loan growth in portfolio segments with low expected loss rate.
In all, the 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 assets 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 for 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%, the 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 increase of 16% in the past year. We continue to grow our tangible book value per share rapidly has it increased at 3x that of the peer group for the past six years.
I'll now hand the call back over to Ken.
Thanks, Dale. We believe that our fourth quarter performance was a baseline for future balance sheet and earnings growth, building off a 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 loan 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 non-interest expense. Looking ahead, we will continue to invest in new product offering and infrastructure to maintain operational efficiency, which we will eventually push our efficiency ratio back to sustainable levels in the low 40s.
Our long-term asset quality and loan loss reserves are formed by the economic consensuses forecast, which is consistent going forward could imply a steady reserve ratio. Depending on the timing and pace of the recovery, it could be some loan migration into the special mentioned category, but we do not expect material migration fee to sub-standard.
We believe that the provision 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 allows to take advantage of any market dislocation we take, 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. Your line is open.
Hey guys. How are you doing?
Good, Brad.
Dale, just wanted to maybe kind of focus in on the margin, the balance sheet, it sounds like you are 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 if you probably saw, we did increased bond purchases in the fourth quarter. I think that is going to continue. We're under 85% on loan to deposit ratio. We're certainly comfortable with that climbing. I'm not sure if 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 deals are passed back 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 to reach 1% on a residential mortgage-backed securities from a GSE.
In terms of the loan fees, 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 non-recurring, 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 that 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 in loan fees kind of going forward, excluding PPP. That said, PPP could be up here as you know, as we're just getting started on round two.
Great. That's helpful. And then final question here, 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 six plus six or three plus three 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 done 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 sales with their own cash flow without the sponsor support? Can you define it that way?
I'll say how I'll define it. Overall, our October – 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 two-thirds 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 39% occupancy level. Today, the 39% still holds, but what's changed is that RevPAR has come down dramatically, but operators have been able to cut out there 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 group one where they could cover debt service coverage.
Great. Very helpful. Thank you guys very much.
Your next question comes from Michael Young with Truist Securities. Your line is open.
Hey. Thanks for the question. Wanted to follow-up real quick on Brad's question on kind of 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 that fair?
Well, the first time around, we probably put out between $32 million and $36 million of PPP loans. A lot of these – lot of the hotel don't get the cash flow from PPP because they have got separate management companies away from the hotel management. So I would expect that the amount of PPP funding that's going to go to the hotel group will be less than around one. And also there is 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?
Yes. I will follow with gaming. We underwrite sponsorship as much as we underwrite the hotel, when we underwrite our hotel book. So there is not as Ken mentioned, the $36 million on first round, not a big, big taker of PPP for two reasons. One, because of the strength of sponsorship and two, because the PPP [indiscernible] and the structure of the hotel loans usually have that as management company. So we don't expect a big taker. We also are in such frequent and ongoing dialog that we don't see the inability of sponsorship to carry. We are very confident in that ongoing sponsorship and the relationship that we have there.
With respect to gaming, our gaining again is off-strip. So most of our gaming won't qualify for PPP because they 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 as Tim said, 100% off-strip, 100% of the casinos are open for business. The portfolio has demonstrated the ability to operate at breakeven cash flow are better in these times. The majority are outperforming their 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, and these casinos are open plus they receive funds from the government that they have a little excess cash or they haven't spent a lot of the cash. So it represents a form of entertainment. And just to reemphasize 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 with that guidance kind of on held for investment loans or does that include the warehouse, et cetera?
Yes. So first thing I'll say, $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 lending year-over-year grew by $1.7 billion, but no financing grew by $400 million.
All the bank regions collectively grew by $500 million-plus, and our resi grew by $300 million followed by tech and innovation growing to $125 million, and even our resort lending grew year-over-year $182 million. As we think that's the 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. I just went through the full-year results for 2020, you can see that a lot of that will come forward into 2021 and as Dale [indiscernible] remind folks, our pressure belt is around residential loans. And we can always turn that knob off 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 a percentage of residential loans to total loans.
Okay. That's helpful. I'll step back.
Your next question comes from Chris McGratty with KBW. Your line is open.
Hey. Good morning and thanks for the question. Dale, the 40% BOLI that you're talking about or efficiency ratio, I'm interested in kind of the details on that. Looking at this years result, expense growth was quite remarkably low given the growth at 4%, is this – are you just 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%...
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 deploying it into securities that will pick a deal from what's in cash right now. For the expense side, there is going to be some catch up elements. So just a couple of things that held back 2020 expenses that we – our travel expenses were down by more than two thirds. 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 into play in 2021 as well. So there's costs related to the pandemic that were suppressed in 2020.
We also have investments that we continually need to make in risk management and IT infrastructure. We expect to continue to do that. They've been put on a slower path of 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 begin with four instead of a three. It's going to be a low 40s, certainly. And 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 all artificially depressed at 38%, we've not just not on 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 ask one more on the margin. Just want to make sure I got the messaging. So if we look through the deposit and liquidity build, but lot of your peers are experiencing and 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, any modest pressure or did you [indiscernible], I think I heard two different things.
Yes, absolutely, 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. So that's put a little pressure on the loan fees that we had in the fourth quarter, excluding away from PPP. We're a little bit elevated from some payoffs that we had and as once you have a low pay early, all the loan fees that have been 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 of. Again, 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. But, because I would have get 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 isn't 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 years.
Chris, I just wanted to give you an incremental perspective, everyone talks about NIM and then sort of divorce sometimes from our credit quality. And I think what's important to note, is that we've got a number of business lines, capital call, warehouse funding, note financing, MSR lending, residential loan, resort financing, muni and nonprofit. When you look at what our fourth quarter balances are due to add, also the collected some of those, of those areas. We have a $11.5 billion of balances that have never had a loss attached from, sorry, let me correct myself, they've had one loss of $400,000 several years ago, but basically have never had a loss as business 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 a increase in provisioning based upon the growth in these sub sectors that I just mentioned.
Great. I appreciate the color.
But it's one of the reasons why we only had $4 million of net losses this quarter.
Awesome. Thanks a lot.
[Operator Instructions] Your next question comes from Timur Braziler with Wells Fargo. Your line is open.
Hi, good morning everyone.
Good morning, Timur.
Looking at the addition of Galton and 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. Today let's go, let’s review Galton in case I got a question about it. He assured me that there would be no question about Galton because it's not big enough and I said, hey, everyone is going to be – 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 pre-qualified approach, which means we had a rollout a pricing engine and rollout a credit engine.
And a lot of that's 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 cover hundred different clients, and there is only a 30% crossover are overlapping with our existing base.
Okay, understood. Thank you. And then, not sure how easy this would 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 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 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 on the fact that we're getting these equity gains. So we're happy that we always have that 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 is many new competitors that are also seeing great growth and success in that line. Is that 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 is a little more competition because there are more competitors, but many of them like to go either into we're in stage two, if you will, our stage one early development stage two you have some maturity. Yes, you see the revenues growing, the product has been proven, the service has been proven, but they are 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 three is they are getting ready to do some type of things that either an IPO or some type of a strategic sale.
So some of the players that are in stage three don't really compete with us because we're not in stage three and they are looking at it in terms of exit fees and those would be the larger banks. We don't play there. Some of the banks playing in the early stage and that's not where we have our skill set. So we're in the middle stage. And yes, there is a little more competition. But it's – I would say we're not losing a lot of business we are going after it where we're winning that business and we’re winning it on service.
Thank you for the color, guys.
Your next question comes from Jon Arfstrom with RBC Capital Markets. Your line is open.
Hey, thanks, good morning guys.
Good morning.
Hey, 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 than what changes and why you did that and the reporting lines have anything else changed?
Yes. So a couple of things. So our segments were a bit unique relative to other institutions. And I think may be it 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 our consumers of liquidity. Others are certainly providers of liquidity and I think the new structure reflects that better that it's more of a holistic enterprise in terms of what we're being able to work accomplished 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 three. That's pretty much in line and even I think JP Morgan has four or five. So I think it looks better like that. The other thing is well is that is we have consumer related segment and I think historically, I think people have thought about us is really primarily just a commercial enterprise, but we do have a lot of consumer dependencies in our balance sheet and what we're doing. 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.
Okay. And this 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 there?
So yes. Mortgages are in their balances related to our HOA, our balances related to our resort finance, mortgage warehouse and else.
Okay, good. Tim, maybe one for you on reserves. I think I heard 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?
Sure. Okay. So we look at reserves is kind of the convergence of portfolio composition. Our behaviors and remediating and then what's happening in the economy. So with the economy, we've seen the prognosticators really become 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 and easier to do as we progress. We have a consensus outlook where we shape to align with the consensus outlook when we look at it, our reserves and 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 impressed with near-term risk, we just don't have that much.
The small business lending, the point of retail and restaurant, small, small business line is not much that we do. And then when we look at our behaviors we look at this stuff that is potentially under secured things that are cash flow dependent and look at what will remain we start remediating that in February. So we brought that balance down from a $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 LGD the macro drivers are very favorable based on our portfolio composition.
Yes, I want to take the chance [indiscernible] just go a little off your question but drive the call back to the provisioning and really kind of talk about how do we see next year for a moment and I'll wrap the provisioning. And so Q4 we are the $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 taken on an after-tax basis and then normalize for the increase in PPP income for Q4, it gets you to about a $1.47 run rate. Right.
And if you do your $1.47 times four that gets you to just a little under $5.90 and we kind of gave you that same math last quarter when we are in the $1.36 and we annualized it, we got to $5.46. So that's how we're moving the business forward based on that with a viewpoint that we will be increasing our provisions next year, but as Tim said, if the economic forecast improves as we said in our prepared remarks if the economic forecast improved 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 wanted 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 to all of 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 dance 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.
Appreciate it. Thanks for everything guys, I appreciate it.
Okay.
Your next question comes from Michael Young with Truist Securities. Your line is open.
Hey, thanks for taking the quick follow-up. 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've probably broaden your relationships, et cetera., is this going to be a growth portfolio coming out of the pandemic, or do you need to keep it out of the 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 five, maybe six hotel loans. Those hotel purchases were done by our borrowers away from us, they purchased more distressed properties, probably at discount – discounted prices of up to 30% and then restructured in such a way that our LTVs are no greater than 50%. So our 30%, up to a 30% reduction, we've lowered our LTVs and we strengthened the terms and conditions and we've always got, we continue to get the same price.
So if we see deals like that, those are very, very strong deals and it's either top primary MSA primary as 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 are little cautious, and they haven't put their foot down on the pedal yet and they want to see their volume come back before they extend themselves and they're also waiting to see if they can pick up any distressed deals.
We don't, we haven’t sold any notes or anything like that. Our clients haven’t sold any of their properties that refinancing is distressed. But so I guess I'd say it's still a little hard for us to handicap. But we are financing properties when they meet the criteria being bought at a discount and we can do it at a lower LTV. I should also say that they're coming on 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 – we like still doing the financing very strong in terms of underwriting.
Okay, that's helpful. I appreciate the updated thoughts.
Your next question comes from Tim Coffey with Janney. Your line is open.
Thank you. Good morning, gentlemen. Ken, I wanted to follow-up on discussion of the Bridge Bank subsidiary because you – the 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 2.5x to 3x loan growth. So yes we're account – first of all, we're counting all our areas to generate both deposit and loan growth. No one gets to a budget process with us for that getting there working on their balance sheet, but last year in 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 would 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 for one of our new business initiatives this quarter.
All right. And then my other question is 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. We are – there has been a lot more deal conversation that we're seeing that come across our debt. We're a little more interested in the deal conversation that is around possibly new products or new initiatives, new products for us for 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.
Okay, all right, great, those are my questions. Thank you for your time.
Thanks.
And 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.