Good day, everyone. Welcome to the earnings call for Western Alliance Bancorporation for the 4th Quarter 2020. Our speakers today are Ken Fiscione, 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 pm Eastern Time, January 22, 2021 through February 22, 2021 at 11 pm Eastern Time by dialing 1-eight hundred 5,858,367 using conference ID 9,090,267.
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 effective 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, would like to turn the call over to Ken Begoni.
Please go ahead.
Good afternoon and welcome to Western Alliance's 4th 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 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. And in 2020, Western Alliance broke many 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 $1,200,000,000 net income of $506,600,000 and EPS of 5 point to $0.04 4 percent greater than 2019 despite increasing the provision expense by $124,000,000 Our focus continues to be on PPNR growth, which rose approximately 20 percent to 7.40 while total expenses increased to modest $9,600,000 To put this in perspective, 2020 Revenue expanded more than 13 times the rate of expenses in a difficult, uneven and complex operating environment. Given all these actions, tangible book value per share grew 16.4 percent year over year to $30.90 Turning to the 4th quarter results, we achieved a record $193,600,000 of net income and EPS of $1.93 for the quarter, an increase of 54% from prior year. These results benefited from a $34,200,000 reversal of credit loss provision consistent with our strong asset quality results and improved go forward consensus economic outlook.
Outstanding quarterly enrollment deposit growth of $1,000,000,000 $3,100,000,000 respectively, listed total assets to $36,500,000,000 which was driven by growth based growth throughout our business lines and geographies as clients begin to plan their investments for future opportunities. Additionally, several of our internal business initiatives gained traction. For the full year, loans decreased 4 point $5,000,000,000 excluding PPP program or 21% and deposits grew a record shattering $9,100,000,000 which we believe creates a strong funding foundation for ongoing loan and earnings growth as the economy yield from COVID shutdowns. This balance sheet growth propelled Ventures' income decline $315,000,000 for the quarter were 16% on a year over year basis. Quarter O and M was 3.84%, up 13 basis points of the Q3 as triple fee income improved and cost fee cost fell.
The income increased to $23,800,000 for the quarter, aided by $6,400,000 of equity and warrant income. On a full year basis, fee income grew a healthy 8.8 percent $70,800,000 Full year operating non interest expense grew $9,600,000 or 491.6 to 38.2% as revenue growth was 4x non interest expense growth and continues to provide incremental flexibility to grow PP and R. Asset quality continued to improve this quarter as our COVID remediation strategy produced increasingly positive results for our clients. Total classified assets declined $102,000,000 in Q4, the 61 basis points of total assets, which was lower than Q1 'twenty's levels on both a relative and absolute dollar amount just as the pandemic impact was being felt. At quarter end, total deferrals has fallen to $190,000,000 from 70 basis points of total loans, including $77,000,000 for low LTV residential loans.
As of today, there are less than $10,000,000 of referrals 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 in Low risk asset classes drove our $34,200,000 release in loan loss reserves to support. Pierre will go into more detail on specific drivers of our provision, but our total loan ACL to funded loan ratio, excluding PPP loans, now stands at 1.24 percent or $316,000,000 and total loan ACL to total classified assets is 142%. Charge offs were $3,900,000 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 percent 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 percent 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 cover their participation in the BBB program as the 2nd round is rolling out. We have begun processing application and are seeing steady volumes. Because of the size constraints and other factors, we don't expect the total amount to rise to the levels we saw in ground Finally and most important, all of our accomplishments cannot be achieved without the event Texas made by the people alliance to successfully respond to the challenging COVID-nineteen virus, which has strongly positioned and prepared the company whenever they come our way as we enter 2021.
We take pride in our peer leading followed good times, but above all, during the challenging moments. Dan will now take you through our financial performance.
Thanks, Ken. For the quarter, Western Alliance generated net income of $193,600,000 or $1.93 EPS, each at more than 40% on a linked quarter basis. As mentioned, net income benefited from a release in provision expense of $34,200,000 primarily driven by improvements in the economic outlook during the quarter and low growth and lower risk asset classes. Net interest income grew $30,100,000 during the quarter to $314,800,000 an increase of 10.6 percent quarter over quarter and significantly above Q2's performance as to which we guided. Non interest income increased $3,200,000 to $23,800,000 for the prior quarter, supported by $5,100,000 of warrant gains related to our technology lending.
Non interest expense increased $8,100,000 mainly driven by an increase in incentive accruals as our 4th 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 $206,400,000 up of 30.4% year over year and up substantially from the 1st and third quarters of 2020 as the 2nd quarter benefited from one time items of BBB loan fee recognition and Bank of Light Insurance Restructuring. For the year, Western Alliance generated record net income of $506,600,000 or $5.04 per share, an increase over full year 2019 even when considering elevated provision expense of $124,000,000 for the year. Net interest income grew $126,500,000 during the year to $1,200,000,000 an increase of 12.2 percent year over year, mainly attributable to increased loan balances, PPP loan fees and a 49% reduction in interest Non interest income increased $5,700,000 to $70,800,000 in the prior year. We recognized a one benefit of a fully restructuring during Q2 of $5,600,000 Finally, non interest expense increased 9 $600,000 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 3P yield for the quarter was 3.67% compared to 1.76% for the 3rd 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 with higher cost CDE 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 replaced
at lower
rates. Current spot rates indicate a relatively stable margin as we enter 2021. Some decline in loan yield is 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 percent from a 100 basis point range increase in As Ken mentioned, this year, we demonstrated our ability to grow net interest income by 15.7% year over year despite the transition to substantially lower rate environment. Net interest income increased $30,100,000 or 10.6 percent during the quarter as net interest margin increased 3.84%.
Margin benefited from both the true up related to 3PPP fee recognition, favorable deposit mix shift and improved deposit rates. As mentioned earlier, during the Q4, our extraordinary deposit growth in building 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 3.9% guidance we gave during the last quarter recall. 3P 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 3P loan yield of 3.67%. Notice the gold line on the bar chart showing NIM excluding volatility related to 3P.
NIM was 3.8% for Q4 and essentially flat from the 3rd quarter. Average excess liquidity relative to loans increased $467,000,000 in the quarter, the majority of which is 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 $43,000,000 in total Triple fee loan fees, net of origination costs, dollars 11,000,000 was recognized in the Q4. We recognized a reversal of 3P loan fees in the 3rd quarter of 6,400,000 and expects fee recognition to be approximately $6,600,000 in Q1 and taper off as prepayments and forgiveness are realized. As the 2nd round of 3P 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 4 as the increase in expenses was outweighed by revenue growth and only rose 2% from the Q4 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 $25,200,000 or 13.9 percent 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 Our strong balance sheet momentum continued during the quarter as loans increased $1,000,000,000 net of $271,000,000 of PPP loan payoffs to $27,100,000,000 and deposit growth of $3,100,000,000 brought our deposit balance $31,900,000,000 at year end. Conclusive of 3B, loans grew 28% year over year, while deposits grew approximately 40% year over year with a focus on our focus on loan loss loan segments and 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 $2,700,000,000 at InterAct. However, we believe it provides this inventory for selective credit growth as demand resumes.
Finally, intangible book value per share increased $1.87 over the prior quarter to $30.90 with an increase of $4.36 were 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 $1,000,000,000 in growth was driven by increases in C and I loans of $655,000,000 supplemented by CRE loans of $248,000,000 Residential and consumer loans now comprise 9.2% of our loan portfolio, helping structural loan concentration increased modestly to 9% of total loans. Within the C and I growth for the quarter and highlighting our focus on low risk assets, capital call lines grew $408,000,000 mortgage warehouse lines grew $413,000,000 and corporate finance loans decreased $122,000,000 this quarter. Residential loan originations added $56,000,000 to balances by quarter end net of refinance activity.
We continue to believe our ability to we grow deposits is both the key differentiator and a core value driver to our firm's long term value creation. Notably, year over year deposit growth $9,100,000,000 is more than double the annual deposit growth of any previous calendar year. Deposits grew $3,100,000,000 or 10.7 in the 4th quarter driven by increases in savings of money market of $1,800,000 interest bearing DDA of 842,000,000 and non interest bearing DDA of $450,000,000 which comprises 42% of our deposit base. Robust activity in innovation and market share gains in Morton's Warehouse continue to be significant drivers of deposit growth during the quarter. Additionally, one of our deposit initiatives that is fully online contributed over $1,000,000,000 in deposit growth in 2020.
Looking at asset quality, total classified assets decreased $102,000,000 in Q4 due to credit upgrades, payoffs and refinance activity away from wall. 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 mentioned loans decreased $26,000,000 during the quarter to 1 point 7% of funded loans. As we've discussed before, special interest 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 and $10,000,000 of deferrals, excluding approximately $77,000,000 in low LTV residential loans with a weighted average loan to value of under 60 7%. 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 $3,900,000 or 6 basis points of average loans were recognized during the quarter compared to $8,200,000 in Q3. Our loan allowance for credit losses decreased $39,000,000 from the prior quarter to $316,000,000 due to improvement in economic forecast and loan growth in portfolio segments with low expected loss rates. In all, total ACL funded loans declined 20 basis points to 1.7 percent or 1.24% when excluding fee 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 for funded loans under the remainder of the portfolio was 1.7%. We continue to generate significant Capital had maintained strong regulatory capital ratios with tangible common equity tangible assets of 8.6% and a common equity Tier 1 ratio of 9 point 9, a decrease of 10 basis points during the quarter due to our strong loan growth. Inclusive of our quarterly cash dividend payment of 0.2 $0.05 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 as it increased at 3 times that of the peer group over the past 6 years. I'll now hand the call back over
to Jim. Thanks, Dale. We believe that our 4th quarter performance is baseline for future balance sheet and earnings growth. Building off the robust growth we had in the 4th quarter, our High volumes are strong and we expect loan and deposit growth of $600,000,000 to $800,000,000 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 2nd round of PPP loans coming online. Strong PTNR growth will continue with balance sheet momentum will drive higher net interest income, which more than offsets 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 will eventually push our efficiency ratio back to sustainable levels in the low 40s. Our long term 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 category, but we do not expect material migration to be too substandard. We believe that the provisions in excess of charge off since that imply material losses are on the horizon. Finally, Wall is one of the most prolific capital generators Our strong capital base and access to ample liquidity will allow us to take advantage of any market dislocations to and leading risk adjusted returns and to address any future credit events, all while maintaining flexibility to improve shareholder returns. At this time, Dale, Tim and I are happy to take your questions.
Your
Dale, just wanted to maybe kind of focus in on the margin, the 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. Can 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 4th quarter. I think that, 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 that's going to happen As the deposit pipeline continues to look fairly strong to us certainly. So if that's the case, you want to deploy some of this capital? I mean, 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 It was difficult even to reach 1% on a residential mortgage backed securities from a GSE. In terms of The loan fees, yes, no, you're right, Brad. That number, even excluding Triple P, was elevated in the 4th quarter. And I'm going to call that essentially 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 Q4. That's reflected in there that the yield was a little bit higher. 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 2.
Great. That's helpful. And then Final question, Neil, 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. Is it should we understand that as it's paying as agreed under the terms of your 6 plus So 3 plus 3 program or are all of these operators, all of your institutional borrowers actually making new P and 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 can see the end 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 supported in sales 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 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 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 the one where they could cover debt service coverage.
Great. Very helpful. Thank you guys very much.
Your next question comes from Michael Jung 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 2nd 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 $32,000,000 $36,000,000 of PPP loans. A lot of the hotels don't get the cash flow of the Triple P because they've got separate management companies away from the hotel event management. So I would expect That the amount of Triple T 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 $2,000,000 Tim, do you want to add anything? I would add.
Yes, and we'll follow with gaming. We underwrite sponsorship as much as we underwrite the hotel When we underrate our hotel book. So they're not, as Ken mentioned, 36 on the first round, Not a big taker of PBB for two reasons. 1, because of the strength of sponsorship and 2, because The PPP follows the payroll and the structure of the hotel loans usually have that as management 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, nonrevenue 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 since 100% is off strip, 1 100% of the casinos are open for business.
The portfolio demonstrate the ability to operate at breakeven cash flow or better on 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 received funds from the government that they have a little excess cash or they have to spend a lot of their 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 $600,000,000 to $800,000,000 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, etcetera?
Yes. So first thing I'll say, dollars 6,000,000 to $800,000,000 is a little bit higher than what we in the previous quarters, which was $500,000,000 to $800,000,000 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 business and that was over $800,000,000 Warehouse lending, this is traditional warehouse lending year over year grew by $1,700,000,000 but note financing grew by $400,000,000 all the bank regions collectively grew by $500,000,000 plus and our resi grew by $300,000,000 followed by tech and innovation growing $125,000,000 and even our reason why lending grew year over year As we think that's sort of 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, We didn't build a lot of that opportunity here. And where I just went through the full year results for 2020, you could see that a lot of that would go forward come Forward into 2021. And as Dale likes to always remind folks, our pressure valve 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.
Dale, The 40% bogey that you're talking about or 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%. Is this are you kind of telegraphing that expenses are going to We accelerate 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 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 cash development. So Just a couple of things that held back 2020 expenses.
Our travel expenses were down by more than twothree. 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, 3rd quarter is probably no later than that. There's other costs related to that. 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 continue to need to make in risk management and IT infrastructure. We expect to continue to do that. Those were They may be put on a slower path of growth for 2020.
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 a 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 $36,500,000,000 now of total
assets. And when we hit 50 or as we hit 50, 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 the pressed 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 in 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
So yes, it's really PPP. I think there's modest pressure because think we've even in the Q4, we've had loan mix into these lower risk and hence lower yielding categories. So that's put a little The loan fees that we had in the 4th quarter, excluding away from PPP, were a little bit elevated from some Payoffs that we had and so once you have a loan payoff early, you all the loan fees that have been deferred are brought back in. And so that added a little bit to the 4th 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 4th quarter, but because it would have because 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 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 sort of divorced 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 loan, resort financing, muni and non profit. When you look at what our 4th quarter Balances are due to add on the collective sum of those areas. We have $11,500,000,000 of balances That have never had a loss attached to them.
Sorry, let me correct myself. They've had one loss of $400,000 several years But basically, I've never had a loss of that system. And that's 42% of our total loan base. So when you think about BIM, I think it's also important to think about Risk adjusted, that's the way I think about it, that yes, VIM shrinks a little bit. That's okay in the sense that we're going to still be getting good strong growth, which is going to go to sales 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.
Great. I appreciate all the color.
That's one
of the reasons why we only had $4,000,000 of debt losses this quarter.
Awesome. Thanks a lot.
Your next question comes from Timur Braziler with Wells Fargo. Your line is open.
Hi, good morning, everyone. Good morning, Matt.
Looking at the addition of Galton, just wondering what that contribution was in the 4th 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 and 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 would be no question about GOLM 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 we had to go through that legal and say formal process. The other thing we had to do was roll out our pre qualified approach, which We had to roll out a pricing engine and roll out 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 gold? Yes.
Have we gotten the volume that we expect? No, not yet. We see the And I think it's going to 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 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 the capital call line business and just in the tech, eco System 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, maybe some more color?
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 We're in stage 2, if you will, or stage 1 early development. Stage 2, you have some maturity. Yes, you see the revenues growing. The product has All 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 exit, either an IPO or some type of 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 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's a little more competition, but it's I would say we're not losing a lot of business. We're going after it. Where we're winning that business and we're winning it on service. Thank you for the color, Ken.
Your next question comes from Jon Arfstrom with RBC Capital Markets. Your line is open.
Hey, thanks. Good morning, guys.
Good morning.
Hey, 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? The 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 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 I guess the quality metrics.
And so some of them are consumers of liquidity, others We're providers of liquidity. And I think the new structure reflects that benefit. It's more of a holistic holistic enterprise in terms of what we're being able to work or 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 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 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.
Yes. Okay. And just 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, Our balance is related to our resort finance. Warehouse finance. Yes, mortgage warehouse and mortgage.
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 That's become easier to do as we progress. We have a consensus outlook or we 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 lending. It's not much that we do.
And then when we look at our behaviors, we look at the stuff that is potentially under secured, things that are cash flow dependent and look at what we started remediating that in February. So we brought that balance down from $126,000,000 of what was substandard to $29,000,000 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. I want to take the chance to think about it 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 in.
So Q4, we earned 1.93 As we think about going forward into 2021, if you take out the reversal of 34,000,000 And you look towards the Q3 when we added about $15,000,000 and you normalize for that going forward and take it on an for tax basis and then normalized for the increase in Triple T income for Q4. It gets you to about 1 point 47 run rate, right? And if you do your $1.7 times 4, that gets you to just a little under 5.9 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 that 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 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 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 broadened your relationship, etcetera. 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, etcetera, etcetera?
Just kind of Updated thoughts.
Well, it's not going to be growth going 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've lowered our LTVs and we've strengthened the terms and conditions and we've always and we've continued to get the same pricing. So if we see deals like that, those are very, very strong deals. And if there is a top primary MSA, primary I should say top MSAs in primary and secondary locations that we like, we'll continue to do that. For right now, the hotel sponsors and operators, they're waiting, they're a little cautious and they have They put their foot down on the pedal yet. They want to see their volume come back before they extend themselves.
And they're also waiting to see if they could pick up Any distressed deals. We don't 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 is distressed. But 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 of the board at a discount and we could do it at a lower LTV. And I should also say that 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. 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 about the Bridge Bank subsidiary, because that company isn't 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 the business for deposit growth this next year?
So
The tech and innovation side generates usually 2.5x 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 through a budget process with us without Getting there working on their balance sheet. But last year, The tech and innovation did nearly $1,100,000,000 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, like science, I expect for them to contribute in terms of next year's Positive growth. And also some of our new business initiatives should continue deposit initiatives still will continue to contribute. We had a great quarter in one of our
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 a large capital generation is supporting our balance sheet growth. So that's the first and simplest answer. We are there's been a lot more deal conversation that we're seeing 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 For new ditches 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 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.
Thank you.
There are no further questions queued up at this time. I'll turn the call back over to Ken Vekken 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.