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Western Alliance Bancorp (NYSE:WAL) Q4 2018 Earnings Conference CallJan. 25, 2019 12:00 p.m. ET
Contents: Prepared Remarks Questions and Answers Call Participants Prepared Remarks:Operator
Good day, everyone, and welcome to the earnings call for Western Alliance Bancorporation for the fourth-quarter 2018. Our speakers today are Ken Vecchione, chief executive officer; Dale Gibbons, chief financial officer; and Robert Sarver, executive chairman. 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 2:00 p.m.
Eastern Time on January 25, 2019 through February 25, 2019 at 9:00 a.m. Eastern Time by dialing 1 (877) 344-7529 and entering pass code 10127283. 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.
Some factors that could cause actual results to differ materially from historical or expected results include those listed in the 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 now like to turn the call over to Ken Vecchione. Please go ahead.
Ken Vecchione -- Chief Executive Officer
Good afternoon, everyone, and welcome to Western Alliance's fourth-quarter earnings call. Joining me on the call today are Dale Gibbons and Robert Sarver. I will provide some overview into the quarterly and annual results and then Dale will walk you through the bank's financial performance in greater detail. Robert, Dale and I will address your questions at the end of our remarks.
Bank stocks and valuations were volatile in Q4 as concerns of a slowing economy and potentially rising credit costs unsettled the market. Western Alliance posted consistent and sustainable results this quarter as net income rose to $119.1 million or $1.13 per share compared to $111.1 million and $1.05 per share for Q3. Year over year, net income and EPS rose 33%. Several positive factors contributed to this performance.
Loans grew $978 million from the prior quarter, supported by our residential loan program and broad growth throughout our regional banks and National Business Lines. Linked quarter annualized growth was 23%. Deposits increased $269 million from the prior quarter. Balance sheet growth and stable quarter-to-quarter NIM of 4.72% generated linked quarter annualized net operating revenue growth of 18%, which positioned the company to achieve its 2.5:1 revenue to expense target and maintain our 41.5% efficiency ratio.
These results were buoyed by stable asset quality and so our special mention loans declined $35 million, graded loans dropping $5 million with charge-offs of $3.3 million or 8 basis points. Net charge-offs were stable from Q3. Before I move to the full-year results, I wanted to acknowledge the decline in non-interest-bearing deposits and the associated impact on NIM. During the quarter, we declined to continue a lending relationship, which carried with it over $200 million of DDA balances.
I have repeatedly told the Board and management that asset quality comes before loan growth. A loss of these deposits shaved two basis points from NIM, but it was prudent to protect our balance sheet and profitability, while we maintained credit discipline. Additionally, DDA seasonally troughs in the fourth quarter as balances decline in mortgage servicing and title and escrow businesses. Turning our attention to the full year.
Net income topped out at $435.8 million or $4.14 per share compared to $325 million or $3.10 per share for 2017. Loans grew $2.6 billion or 17% to $17.7 billion, while deposits rose $2.2 billion or 13% to $19.2 billion. Non-interest-bearing deposits remained flat year over year and represented nearly 39% of total deposits at year-end. The balance sheet stands at $23 billion.
Annual net charge-offs were $10.3 million, return on assets was 2.05% and return on tangible common equity was 20.64%, while our tangible capital ratio was 10.2%. Let me finish my comments where I began. The dislocation in the bank stock valuations offered us an attractive use of capital to repurchase shares. This quarter, we spent $36 million to repurchase 901,000 shares at an average price of $39.58, which will add $0.04 to 2019 earnings.
Dale will now take you through our financial performance.
Dale Gibbons -- Chief Financial Officer
Net interest income rose $9.5 million from the third quarter to $243.5 million, driven by $684 million increase in average loan growth. Net interest income rose 15.4% from the year-ago period. The provision for federal losses was $6 million for the quarter as asset quality remained steady with $978 million in loan growth and $3.3 million in net losses. Operating noninterest income was up $1.8 million from the third quarter to $14.7 million, largely due to an increase in warrant income.
Net operating income, which excludes losses on securities sales and fair value adjustments, was up $11.3 million to $258.2 million, which is 18% annualized growth from the third quarter. Operating expense, which excludes a charitable foundation contribution in the third quarter and other items, rose $4.6 million to $109.6 million, largely due to an increase in deposit cost. Income before tax was $140 million and taxes were $20.9 million. While tax expense was unusually low this quarter as certain credits were recognized earlier than originally anticipated, they are expected to be recurring unlike the onetime carryback election that reduced the third quarter taxes or the benefit that -- from restricted share vesting in Q1.
Adjusting for these items, the tax rate was 18.5% for 2018, which is also a good rate looking forward. Diluted shares fell slightly from the 100,000 share average effect from the 900,000 shares repurchased, resulting in EPS of $1.13. Net interest income increased to $131.2 million or 16.7% from the prior year to $916.9 million, driven by $2 billion of average loan growth. Operating noninterest income climbed 26.5% over 2017 to $54.4 million as warrant-related gains nearly doubled, bringing operating revenue growth to over 17%.
Provision expense rose 33% to $23 million and was more than double the $10.3 million in net loan losses last year. Operating noninterest expense was up $55.8 million or 15.4%, again, driven by compensation and deposit cost. Income tax expense decreased $51.8 million due to the reduction in the corporate tax rate resulting from the Tax Cuts and Jobs Act as well as the benefit received in Q3 from the company's carryback election. Earnings were a third higher than 2017 at $4.14 per share.
In the next three pages, recall that we've added an orange line to the Q4 '17 period to show what these ratios would've been without the reduction in tax-exempt benefits due to the tax change. While the numbers in green are actual reported performance, the numbers in orange provide continuity to the quarters in 2018 as tax change went in effect last year. Investment yield increased 25 basis points during the quarter to 3.49% and are up 52 basis points over the past year. The investment yield in the second and fourth quarters benefited from some semiannual dividend payments that occur in Q2 and Q4.
Loan yields have climbed over the past year rising 35 basis points from 5.62% in Q4 of '17 to 5.97% last quarter. On a linked-quarter basis, yields rose seven basis points, resulting in a loan beta of 28% of the 25 basis point increase in target fed funds during the quarter. However, this includes the effective increase in the residential portion of our loan book, which has a lower yield than the portfolio overall and is much less sensitive to changes in interest rate. Using total earning asset beta better captures the rate sensitivity of the balance sheet, in which yields rose 10 basis points during the quarter to 5.44%, a 40% beta.
Interest-earning deposit cost rose 16 basis points in Q4, a 64% beta and an increase from the 60% during the third quarter, but lower than the 88% peak reported in the second quarter of 2018. When all of the company's funding sources are considered, including non-interest-bearing deposits and borrowings, total funding cost increased 12 basis points, resulting in a linked-quarter funding cost beta of 48%. The interest margin during the quarter remained flat at 4.72% and was held back two basis points due to the reduction in non-interest-bearing deposits from the client that Ken mentioned and 3 basis points due to the increase in average balances in residential loans from executing our loan mix diversification strategy. We decided to trade-off the margin for high-quality, low-capital absorption, less rate-sensitive loans at this time, given fed moderation to further interest rate increases.
From a year earlier, and after adjusting the prior margin by the effect of the lower taxable-equivalent benefit, the fourth-quarter margin climbed 11 basis points from 4.61%. The increase in acquired loan accretion added back two basis points to the margin from the last quarter. Forecasted loan accretion is expected to decline over time, but will likely be higher than the $1.7 million shown here because of loan prepayment activity. The efficiency ratio remained flat at 41.5% on a linked-quarter basis and virtually flat from the 41.7% ratio a year ago, after adjusting for the tax change.
For the full year, annual net operating revenue growth of $142.6 million was two and a half times the $55.8 million increase in operating expenses, maintaining our strong operating leverage profile. Our pre-provision net revenue return on assets was 2.65% and ROA was 2.13% for the fourth quarter. These metrics are a record for our company and have consistently been in the top decile compared to peers. Continued loan and deposit growth to total assets to $23.1 billion at year-end.
Our consistent balance sheet momentum continued during the quarter as loans increase of $978 million generated linked-quarter annualized growth of 23% and 17% on an annual basis. Fourth-quarter deposit growth of $269 million brought us to 13% annual growth for the year. These growth rates compare to our three-year growth rates in loans and deposits of about 16% for each of the past three years. Our loan growth of $978 million was driven by residential loans, up $377 million; C&I up $275 million; and CRE non-owner occupied up $260 million.
Year-over-year loan growth is spread across all loan types, with the largest growth also in C&I, residential and construction. Loan growth also was spread throughout our regions and our National Business Lines. Deposit growth of $269 million was driven by increases in interest-bearing DDA and savings and money market deposits, offset by decreased non-interest-bearing demand. During the year, deposits grew across all deposit types, with the largest increase also in savings and money market of $1 billion and interest-bearing checking of $969 million.
Seasonally, deposits have grown the slowest in the fourth quarter for each of the past three years. Total adversely graded assets declined by $42 million during the quarter to $316 million as special mention credits decreased $35 million. Nonperforming assets comprised of loans on nonaccrual and repossessed real estate decreased to $46 million or only 0.2% of total assets. Gross credit losses of $4.1 million during the quarter were partially offset by $800,000 in recoveries, resulting in net losses of $3.3 million or 8 basis points of total loans annualized.
The credit loss provision of $6 million was consistent with the prior quarter as adversely graded assets improved and net loan losses were essentially stable. The allowance from owned and lease losses rose to $153 million, up $13 million from a year ago. This reserve was 0.92% of non-acquired loans at December 31 as acquired loans were booked at a discount to the NPA principal balance and have no reserve at acquisition. For acquired loans, credit discounts totaled $14.6 million at year-end, which is 1.4% to the $1 billion purchase loan portfolio, primarily from Bridge Bank and the Hotel Franchise Finance transaction.
Capital ratios with the exception of tangible common equity were down slightly from the prior quarter as the share repurchase program reduced the ratios by just under 20 basis points. The company repurchased 901,000 shares during the quarter at an average price of $39.58 for a total of $36 million. No shares have been repurchased thus far in 2019. Even with the share purchases, tangible book value per share rose $1.37 in the quarter to $22.07, in part benefiting from a reduction in unrealized losses on available-for-sale securities that recorded as part of other comprehensive income, which fell by half during the quarter as interest rates declined.
Tangible book value is up 20.5% in the past year. And at 10.2%, our tangible common equity ratio is in the top quartile of the peer group. I'll turn the call back to Ken.
Ken Vecchione -- Chief Executive Officer
Thanks, Dale. While we expect economic growth to slow this year from 2018, our loan pipeline remains strong and we anticipate approximately $600 million in net growth per quarter. As always, this growth is predicated on sound underwriting decisions and not reaching for credit. We will continue to augment our residential loan mix as stable market conditions arise, while holding construction loans to a low proportion of total loans.
This mix change will mute the bank's asset sensitivity over time as we believe the large preponderance of rate increase for this cycle is behind us. This mix shift may also result in relatively lower credit loss provision charges as presumed losses from residential mortgage loans are lower than other loan categories. On the funding side, we look to fund our loan growth with core deposit growth by continuing to expand existing relationships, building new relationships and enhancing our product and service offerings. In today's rate environment, most of this growth is likely to be in interest-bearing accounts.
Stability in non-interest-bearing deposits should also reduce our deposit betas from the fourth quarter. As the company reduces its asset sensitivity, we expect the margin to be fairly flat in 2019. Please recall the first quarter margin is always somewhat challenged as we report the margin on 30/360 basis and reflects about a 10 basis point decline from a reduction of two calendar days in the first quarter from the fourth. On a year-over-year basis, considering our 2018 results and expectations for this year, the efficiency ratio should moderately improve with revenue increasing 2.5 times the increase in operating expense.
Year-over-year analysis for this comparison is appropriate since on a linked-quarter metric, revenue will be constrained from the fourth quarter due to a loss of two calendar days, while expense will rise from the resumption of FICO charges and other seasonal items that pick up at the beginning of the year. While we are targeting 2.5 times revenue to expense growth, from time to time, we will continue long-term investing in new products and technology that may introduce modest volatility into this performance ratio, while achieving our earnings goals. Asset quality remains strong and stable and we see nothing on the horizon that signifies any change in this trend. Moving into the residential real estate should reduce credit risk volatility to the business cycle.
Low double-digit balance sheet growth, coupled with a stable margin and operating efficiency should result in double-digit EPS growth in 2019. At this time, Robert, Dale and I are happy to take your questions.
Questions and Answers:Operator
[Operator instructions] Our first question comes from Casey Haire of Jefferies. Please go ahead.
Casey Haire -- Jefferies -- Analyst
Yes, thanks. Good morning, guys. Starting on the deposit outlook, I get that the deposit growth is going to be driven by interest-bearing, but what's your confidence level that you can hold DDA at this level going forward? I know you've lost the relationship on a credit-related decision, but just confidence in holding the NIB level and avoiding further attrition from here.
Ken Vecchione -- Chief Executive Officer
Yes. We're going into the year with that approach, which is we think we can hold the non-interest-bearing deposits stable to last year. On a percentage basis, it may drop a little bit, but otherwise, we're looking for stability.
Dale Gibbons -- Chief Financial Officer
As you know, we have our two initiatives that should be coming online, that should add to that. We also should get some recovery on a seasonal basis that I alluded to.
Casey Haire -- Jefferies -- Analyst
OK. So the new initiatives, those are -- there is a DDA focus there?
Dale Gibbons -- Chief Financial Officer
Certainly, a significant DDA element, yes.
Ken Vecchione -- Chief Executive Officer
Right. Just to recall, Casey, there were two loan initiatives and then two deposit initiatives. The first deposit initiative has basically gone live and then the second one will go live toward somewhere in the third quarter.
Casey Haire -- Jefferies -- Analyst
OK, great. And then, on the borrowings, the loan generation was huge this quarter. so you used some of the borrowings. I mean, are we going to see that go down from here? Or are you confident that you can core fund the loan growth going forward?
Dale Gibbons -- Chief Financial Officer
Yes. So if we -- I mean -- yes, we're looking for deposit growth to kind of roughly match what we do on the loan growth. So that would be a playoff on those two. We also have a $4 billion securities portfolio that we could bleed off a little bit as well.
But the last thing I'd say is that our borrowings that $500 million is actually pretty low. We typically don't have a position like that, but the average bank our size runs about 4% of their total assets in borrowed funds. So we've got capacity there too. We've got a $3 billion line with the FHLB also.
Casey Haire -- Jefferies -- Analyst
OK. I mean, the loan-to-deposit ratio, I mean, is there a level where you would not violate that or you would not want to go above?
Dale Gibbons -- Chief Financial Officer
Well, I think we're fine where we are, 92%. I think as we get -- if we got to the higher 90s, I think we would reconsider that.
Robert Sarver -- Executive Chairman
But I think also -- it's Robert. When you look at the growth in the residential mortgage book, that book carries a different capital requirement and some different risk profiles too and marketability of those assets. So it's -- you can kind of think of that mortgage book as kind of a mix between a loan and an investment security.
Casey Haire -- Jefferies -- Analyst
OK. Yes. I get that. And that's -- actually, my last question is just on the loan growth mix.
I get the benefits from diversifying in the resi. But looking at Slide 10, is that proportionately that sort of mix going forward? Is that what you guys are looking for in 2019 with the $600 million per quarter? I guess, how far are you willing to take the resi as a percentage to total loans?
Dale Gibbons -- Chief Financial Officer
Well, so the average bank our size runs about 25% to 30% of total loans and we're at 7% here. So we could -- I think we're going to continue to have that increase. If you said a third of the $600 million was residential, that would be about what proportionately may be kind of where the others are. So I think we could sustain that for really quite some time kind of going forward.
Ken Vecchione -- Chief Executive Officer
Let me just add to that, Casey. We're targeting about $600 million per quarter and inclusive in there are residential purchases, but those can be accelerated if the economy or interest rates and pricing allow for more opportunistic opportunities to buy or increase our forward floor arrangements with our warehouse lending customers. So when we started to buy a lot of these loans and entered the forward floor arrangement, the 10-year was like 3.25% or a little higher. So the 10-year has dropped 50 bps and so we've got a good buy, we think, looking in hindsight on doing these deals.
So we're going to be opportunistic as we look at this and we've got plenty of runway ahead of us as well.
Casey Haire -- Jefferies -- Analyst
OK. Great. Sorry, just one more follow-up. The new money yield on loan production versus the 5.97% in the fourth quarter?
Ken Vecchione -- Chief Executive Officer
Yes, it's higher than it was in Q3.
Dale Gibbons -- Chief Financial Officer
It's a little bit higher than the current portfolio.
Casey Haire -- Jefferies -- Analyst
How could that -- I mean, if resi mortgage is driving a significant proportion of loans -- of the loan growth, why would it -- I mean, I would assume that would come at a lower yield, no?
Dale Gibbons -- Chief Financial Officer
OK. So it's higher on a portfolio basis, if you look at the mix because that is a larger proportion of kind of what we acquired versus what's out there. So the residential loans were essentially flat, but each of the -- but the other categories, C&I loans, commercial real estate, they're higher than what they were during Q4.
Casey Haire -- Jefferies -- Analyst
Gotcha. OK. Thank you.
Operator
Our next question comes from Brad Milsaps of Sandler O'Neill. Please go ahead.
Brad Milsaps -- Sandler O'Neill -- Analyst
Hey, good morning, guys.
Ken Vecchione -- Chief Executive Officer
Good morning, Brad.
Brad Milsaps -- Sandler O'Neill -- Analyst
Ken, I appreciate the commentary around asset quality. Things looks to be -- continue to get better. Obviously, a lot of focus in the market about credit quality, particularly leveraged lending. Just kind of curious if you could provide any more color there.
And then just any more color on the loan that you pushed out sort of -- obviously, you can't get into the specifics on the customer, but any other details on why that one didn't fit anymore and how that might apply to the rest of the book?
Ken Vecchione -- Chief Executive Officer
So I'll have to stay at a very high-level with that, but it just didn't fit our risk/reward profile and we probably thought there was a higher probability that, that loan could trade into special mention and be downgraded. And quite frankly, we think given the size of the loan because you can see the size of the deposit relationship, that would have -- first of all, it would be negative and it would also have a negative impact, I think, upon our market capitalization, and we don't want to be viewed as being too risky here. So we just thought it was the right thing to do. It's just the risk/reward profile of it, the return on it, it just wasn't making any sense for us.
I got to tell you, by having a set of ethos or presets, it's easier to make a decision to say let's move away from this loan customer even if it has a couple of hundred million dollars of deposits, but it was the right thing to do. And that's what we have to do. I'm sorry your other question on the leveraged loans, we have in our corporate finance book about $1.7 billion overall. Half of that in round numbers sits with Bridge Bank, half of that sits in corporate finance.
The half that sits in corporate finance is either at or near BBB rating and it has generally a lot of liquidity to it. So from time to time, if we don't like a particular credit or we don't like particular industry, you've seen us trade out of that and maybe take a small haircut to the price, but it has a lot of liquidity and allows us to get out of those loans.
Brad Milsaps -- Sandler O'Neill -- Analyst
Great. That's helpful. And then just one follow-up kind of bigger picture question. I know, Ken, it's usually at this time of the year, when you start kind of thinking about new businesses or projects.
I know you've got the two loan and two deposit businesses that are sort of in various stages of getting off the ground. As you kind of think about the next year, what's kind of top of mind in terms of sort of more -- most important on your kind of top five or top 10 list?
Ken Vecchione -- Chief Executive Officer
Well, we've got some things we're looking at, but nothing that we want to either announce or tell you that we're rolling out. We try to be very prudent in this. First let me say, the two deposit initiatives, one just rolled out and the other isn't ready yet to be rolled out. So it's important that we complete what it is that we have in front of us and execute well on those and then see what the performance is.
On the loan side, the two loan initiatives really are now embedded inside of our loan growth. One -- just we booked maybe $36 million on one of those initiatives full-year last year but is now ready to ramp up and the other kind of grew nicely all during 2018 and should continue on to contribute to that $600 million net growth per quarter. But right now, we look at things, we talk a lot about different opportunities, but we want to focus on the four that we mentioned, make sure we execute well on those four. And then over time, inside of our EPS growth, inside of our efficiency ratio and our two and a half to one, we'll decide what programs we want to take forward that make sense.
Brad Milsaps -- Sandler O'Neill -- Analyst
Great. Thank you, guys.
Operator
Our next question comes from Michael Young of SunTrust. Please go ahead.
Michael Young -- SunTrust Robinson Humphrey -- Analyst
Hey, good morning.
Ken Vecchione -- Chief Executive Officer
Good morning, Mike.
Michael Young -- SunTrust Robinson Humphrey -- Analyst
Just following up on the last comment about the new initiatives on both sides. Since they're there kind of up and running now, it seems like the staffing is probably fully in place, so the incremental kind of expenses next year aren't really associated with those two or, I guess, four initiatives at this point?
Ken Vecchione -- Chief Executive Officer
I'll say, generally correct, but we've still got some hiring to do in each one of those -- three out of those four initiatives and then we have that scattered throughout the year and that's embedded inside of our two and a half to one. We've anticipated for those initiatives.
Michael Young -- SunTrust Robinson Humphrey -- Analyst
OK. And then, on the growth this quarter and maybe this year in the other NBLs, could you provide a little more color there? I was interested just because the profit contribution seemed to be greater from not the other NBLs. I don't know if that's funds transfer pricing that's kind of attributing the profit to other segments or just any color kind of holistically on all of that.
Ken Vecchione -- Chief Executive Officer
On the growth, on the profitability? I'm sorry, maybe I don't understand that question.
Michael Young -- SunTrust Robinson Humphrey -- Analyst
Yes. On both sides, it seemed like there was really strong growth in the other NBLs in terms of dollar volume, but it seems like more of the profit contribution wasn't coming from that area. So I didn't know if that was higher funds transfer pricing, attributing some of the profit back to other areas. So I just wanted some color on kind of the dynamics that were playing out there.
Dale Gibbons -- Chief Financial Officer
Well, part of this is just timing within the quarter, OK? So as you may have noticed, our ending balances in loans were $850 million higher than our average balances. And so you're going to see -- this is an ending balance statement, but the earnings are based upon an average. So I would look for that just kind of shift as now you have higher balances. The most significant NBL change is within the NBLs is where we consolidate our residential real estate initiative, and so that's pulled that up.
And some of those settles in December.
Ken Vecchione -- Chief Executive Officer
And a little bit of general rule too. The National Business Lines have better operating leverage than the regions, so just keep that in mind.
Michael Young -- SunTrust Robinson Humphrey -- Analyst
OK. But there weren't any significant purchases of shared national credits or anything else in the other NBL space this quarter?
Ken Vecchione -- Chief Executive Officer
No.
Michael Young -- SunTrust Robinson Humphrey -- Analyst
OK. All right. Thank you.
Ken Vecchione -- Chief Executive Officer
Thanks.
Operator
Our next question comes from Timur Braziler of Wells Fargo. Please go ahead.
Timur Braziler -- Wells Fargo Securities -- Analyst
Hi, good morning.
Dale Gibbons -- Chief Financial Officer
Good morning.
Timur Braziler -- Wells Fargo Securities -- Analyst
Just wanted to follow-up again on the other National Business Lines. I guess, how much of that growth came from the warehouse business this quarter?
Dale Gibbons -- Chief Financial Officer
So the warehouse business includes the residential real estate piece. So the $400 million that we had in that category came in there. Away from that, the warehouse business was really not a participant.
Timur Braziler -- Wells Fargo Securities -- Analyst
OK. So as we're thinking about residential growth, I just want to make sure I got this right. It seems like much of that is going to be coming through purchases with your warehouse partners, rather than going out there and turning a strategy to originate kind of through footprint. Is that correct?
Ken Vecchione -- Chief Executive Officer
Yes. I want to spend a second on this. We chatted about this last quarter. We have an opportunity to have a deeper relationship with our warehouse lenders, which has many benefits not only loan growth, but also maintain deposit relationships as well.
And what we're doing is we're using their network, their brand, their branches, their upfront compliance costs and to bring in volume on a forward floor arrangement to us. We then underwrite all the loans ourselves anyway and we get to pick what is it we want to keep. So that's the relationship that we have. Along with when we talk about warehouse lending, there is a notice finance part of warehouse lending, there is an MSR part of finance lending and there are other component pieces that go under the heading of warehouse lending inclusive of the residential piece.
Timur Braziler -- Wells Fargo Securities -- Analyst
OK. Understood. And then just one last one from me. As you look at warrant income, that's been ramping higher in the back end of the year.
What's the visibility that you have within that segment? And as we think for modeling purposes, kind of how should we be looking at that on a go-forward basis?
Ken Vecchione -- Chief Executive Officer
We know about it when we know about it almost. There are plans that we think we're going to get income in a particular quarter and for whatever reason, the deals flow or deal doesn't become public. That's all icing on the cake as far as we're concerned in terms of the relationship. It has a little volatility to it and it's hard to predict quarter-by-quarter, to be honest with you.
Timur Braziler -- Wells Fargo Securities -- Analyst
OK. And do you have the dollar amount foreign income this quarter? I know you said it doubled, but what is the actual dollar on that?
Ken Vecchione -- Chief Executive Officer
Yes. The $909,000, up from $413,000 in Q3. So just to help you out, we use warrant income, but sometimes there's success fees. So success fees were another $900,000.
So it was $900,000 in warrant, $900,000 in success. It can flip-flop between the two. We're a little bit indifferent as long as it does come in, OK?
Timur Braziler -- Wells Fargo Securities -- Analyst
Got it. Thank you.
Ken Vecchione -- Chief Executive Officer
All right. You're welcome.
Operator
Our next question comes from Tyler Stafford of Stephens Inc. Please go ahead.
Tyler Stafford -- Stephens Inc. -- Analyst
Hey, good morning, guys.
Ken Vecchione -- Chief Executive Officer
Good morning.
Tyler Stafford -- Stephens Inc. -- Analyst
Hey, I just wanted to clarify the NIM outlook of relatively flattish. Is that from the 4Q levels or the full-year '18 levels?
Dale Gibbons -- Chief Financial Officer
The 4Q level.
Tyler Stafford -- Stephens Inc. -- Analyst
OK. And then just thinking about the trajectory, you mentioned the day counts having a negative impact. So we should start off from a lower NIM starting point in the first quarter and then move back up throughout the year so that the full-year '19 equals or is roughly flat with 4Q '18 NIM. Is that the right way to think about the trajectory?
Dale Gibbons -- Chief Financial Officer
Exactly. Yes.
Tyler Stafford -- Stephens Inc. -- Analyst
OK. And then just following back on the residential growth, what is that or how does that impact the provisioning from here? Can you just talk about how you're viewing the loan loss reserve and given so much more of the growth this year will be incrementally from the resi, lower risk, how does that impact the provisioning going forward in the reserve?
Dale Gibbons -- Chief Financial Officer
So I mean, it's basically a substitution of sorts, right? So if you look at our other categories, commercial real estate tends to today have very kind of low allocation, C&I is a bit higher, construction is a bit higher. And so to the degree that doing more in residential kind of elbows out some of these other categories. That means that overall, the reserve allocation for that is going to be lower. Now how that translates into exact provisioning is a process in terms of looking at kind of our historical loss rates and expectations of what that's going to look like on a category-by-category basis.
But in general, moving toward a less risky, less volatile asset class should diminish our reserve requirements and hence, our provisioning over time.
Tyler Stafford -- Stephens Inc. -- Analyst
OK. Got it. And just last one from me. I just wanted to get some color from you on kind of how you guys view the quality from a credit perspective of the Hotel Franchise portfolio today.
It's one of the questions I get talking about your story. So I'm just curious if you've got any metrics of what kind of LTVs look like there, debt service coverage kind of dominant flags there. Just a credit overview of the Hotel Franchise book? Thanks.
Ken Vecchione -- Chief Executive Officer
Yes. So the book is about $1.6 billion. About 88% of all our deals are under the two major flags of Hilton and Marriott. They're producing very strong debt service coverage ratios.
The REVPAR numbers for our book of business still continue to accrete upwards, although not as fast as they were, but still strong. We work with seasoned partners or seasoned sponsors and operators. So we generally work with -- our borrowers have 10 to 12 hotels. They've been doing it for a number of years.
We usually require 35% equity in front of us and these are folks that have the capital and the liquidity to put up any money in case if there is a margin call. But right now, the book is performing very, very well and we only have two credits of the entire book that sit in special mention and that came along with the deal.
Robert Sarver -- Executive Chairman
I'll just add two things to that. The average debt yield is north of 10%, so we're not as sensitive to increases in interest rates or as sensitive to changes in REVPAR. And a lot of the relationships we have, lot of loans we have are portfolio loans. So that if one hotel and one market has an issue, there is extra cash flow from another market.
So it's been underwritten very strong.
Operator
Our next question comes from Chris McGratty of KBW. Please go ahead.
Chris McGratty -- KBW -- Analyst
Hey, good morning. Thanks for the question. Dale or Ken, can you speak -- given the $200 million relationship you talked about, can you speak about just the granularity of your deposits of it? How many of these larger $100-plus million you have, and kind of are there any other relationships you might be watching at this point?
Dale Gibbons -- Chief Financial Officer
So we have -- our largest relationship is about 2% of our funding, very similar to the one that we've alluded today. And we have about 15 that are over $100 million. We have a policy limit of no more than 4% funding, and as I've mentioned, our largest is half of that.
Chris McGratty -- KBW -- Analyst
OK. And are any others kind of contemplating the L2 to kind of move like you described?
Dale Gibbons -- Chief Financial Officer
No. I mean, in that situation, I mean, we had another enterprise offered them in advance higher than we go and we wouldn't go there.
Chris McGratty -- KBW -- Analyst
OK. And just maybe another one on the balance sheet. The $600 million of quarterly growth had a little bit of lower NIM and credit profile. The question is, do you view that as kind of a net accretive exercise to net interest income? And also kind of factoring in the security strategy, maybe some comment there would be great.
Dale Gibbons -- Chief Financial Officer
So, I mean, with our stable margin outlook, that would be that our net interest income would grow basically in line with what we're seeing in terms of earning assets. And so at $600 million, we're going to be growing earning assets in kind of the low double-digit range. Net interest income should track that. Then you've got your two and a half to one revenue to expense dollar change in terms of efficiency improvement.
And then, our tax situation should be certainly no higher than what we're running in 2018 on an average basis and stable credit quality, so the provision should follow that as well.
Chris McGratty -- KBW -- Analyst
OK. Great. And just a clarification on the tax rate. This quarter's rate is about what we should be using? I know...
Dale Gibbons -- Chief Financial Officer
So this quarter had some benefit with some items that we thought were probably going to come in, in Q1. So the rate is a little lower this quarter than what kind of the run rate is. But if you look at 2018 in aggregate, take out the benefit that we had from the loss carryback that we did in the third quarter and a little bit of the benefit from the vesting of our restricted share awards in the first quarter, which may not happen this quarter, I'm not sure. At that point in time, that rate was about 18.4%.
That number should be a good run rate on average for 2019 going forward.
Chris McGratty -- KBW -- Analyst
OK, and that is a FTE number? Just to make sure I'm clear.
Dale Gibbons -- Chief Financial Officer
OK. So well, I wouldn't want you to gross up the yields for tax-exempt securities and then only take 18%. So if you look at the revenue coming in and take 18% of that considering the mix that we have in some interest securities and tax-exempt loans, 18%, yes, 18.5%.
Chris McGratty -- KBW -- Analyst
OK. Got it. Thanks. Thanks for the clarification.
Operator
Our next question comes from Gary Tenner of D.A. Davidson. Please go ahead.
Gary Tenner -- D.A. Davidson -- Analyst
Hi, good morning. It's Gary Tenner. Regarding the loan growth in the fourth quarter, obviously, you came in well above the run rate that you're suggesting for 2019. It sounds like, to some degree, you're opportunistic on the resi side a bit in the fourth quarter, but beyond that, in terms of just regular way of business, any other specific trends or deals that were pulled forward into the fourth quarter that you may be expected to close during the first quarter?
Ken Vecchione -- Chief Executive Officer
No, there was nothing that was pulled forward.
Gary Tenner -- D.A. Davidson -- Analyst
So I mean, a clean number, and as you said, it doesn't fit. Your pipelines into 2019 remain very, very strong. So, OK.
Ken Vecchione -- Chief Executive Officer
Right. Yes, that's correct.
Gary Tenner -- D.A. Davidson -- Analyst
OK. I mean even in the absence of the runoff of that sizable deposit, your deposits wouldn't have kept up this quarter regardless, so I was just trying to wonder if there is any change you're expecting in the first quarter or will deposits in '19 just kind of track '19 and not really catch up on '18?
Dale Gibbons -- Chief Financial Officer
Well, I'm not sure they're going to catch up, but, I guess, a couple of things. One of them is, I wouldn't look for $400 million in residential increase every quarter. Like you've mentioned, we were kind of opportunistic in that. If we took our $600 million, if we map that to what a typical bank is, which is 30% residential, that would be roughly a third of it.
So $200 million maybe for quarter in residential versus $400 million. And then the second piece is, excluding the account that's gone, seasonally, fourth quarter is a little bit lighter. We would expect that to recover as well, which would put that kind of more in balance. So deposit growth would be a little bit better.
You wouldn't have a lost account of significance and then loan growth would be a little bit lower.
Gary Tenner -- D.A. Davidson -- Analyst
All right. Thank you for the color.
Operator
Our next question comes from Brett Rabatin of Piper Jaffray. Please go ahead.
Brett Rabatin -- Piper Jaffray -- Analyst
Hey, guys, good morning. Wanted to go just back to credit for a second. Your adversely graded credits continues to trend down nicely and just it seems like people are worried about credit. Can you talk about franchise finance where few banks have had some issues with that in the past quarter or two.
Maybe just some thoughts on that portfolio.
Ken Vecchione -- Chief Executive Officer
Are you referring to the quick-service restaurant loans, is that what you are...
Brett Rabatin -- Piper Jaffray -- Analyst
Correct, correct.
Ken Vecchione -- Chief Executive Officer
Yes, yes. Our total book of business there is $200 million and we have less than $1 million that's in either classified or criticized loans there. So it hasn't been a very strong focal point for us, mainly because we don't like the pricing and then we, of course, then don't like the risk/return aspects of it. So we're not very strong in there.
If the deal flow to us that we like, we, of course, will pursue it, but it's got to hit both credit metrics and return metrics for us.
Brett Rabatin -- Piper Jaffray -- Analyst
OK. And then the other thing it's kind of just curious to me is given your results for the past two quarters, it's a little bit odd that your stock hasn't, to me, reacted more favorably, and I think some investors think about deal activity and where you guys might do a deal, I'm not sure how that might look. I thought I'll give you an opportunity to just talk about your perimeters around deals and just how you see the market and what you would and wouldn't do this year?
Robert Sarver -- Executive Chairman
Yes. It's Robert. I think when you look at the results this year that were organically driven and you look at the kind of the forecast information that Ken and Dale shared with you, we're comfortable with where we are organically. Having said that, we've looked at a couple of non-bank deals during the year.
We weren't competitive enough price wise, but at this stage in the economy and given the organic growth that we have and continue to have, we're very disciplined in any potential acquisition we would do. And if we were to do something, it would have to have metrics that were very accretive for us, and in addition, we've to have extreme comfort on the credit side given where we are that we're comfortable there. We know what we have now. We know what's in our book.
We know where we think we are. And quite frankly, if we don't find something that fits perfectly for us, we're comfortable to accumulate a little capital and opportunistically buy our own stock back and that's kind of where we're at. I mean, we're really in a very good position in that we don't have to do anything.
Brett Rabatin -- Piper Jaffray -- Analyst
That's good color. And then just thinking about the capital and accumulating, you accrete about 1% TCE a year. Just ensuring we expect buybacks to help keep the capital ratios somewhat muted from growing this year?
Robert Sarver -- Executive Chairman
I think we look at the buybacks opportunistically and make that decision as the year goes along. We're not opposed to getting a little extra capital and being able to put ourselves in a position of strength should the economy soften or there's some opportunities there.
Brett Rabatin -- Piper Jaffray -- Analyst
OK. Appreciate all the color.
Ken Vecchione -- Chief Executive Officer
Thank you.
Operator
Our next question comes from Brock Vandervliet of UBS. Please go ahead.
Brock Vandervliet -- UBS -- Analyst
Thanks for taking my questions. So I just -- I guess, I'm just having trouble with the math here. I worry about your loan yield, which at least in my coverage is the highest. I know you have to balance growth against yield and it's both, it's not just one, but by bringing on so many residential loans, 20%, 30% of your total originations that I'm guessing 4.50% yield, that's 150 bps lower than your average loan yield and how do you keep the NIM flat next year if you're doing that in 2019?
Robert Sarver -- Executive Chairman
Let me give you one high-level comment and these guys can step in. We have our tentacles in a whole bunch of spaces. There are actually some spaces out there in business banking where the loan yields for non-resi are lower than the loan yields for the resi we're buying. So you can't look at we're buying the residential loans to replace an average loan in the bank.
We may be buying the residential loans to replace some pockets of loans that were not going to make -- that actually have loan yields equal to or less.
Ken Vecchione -- Chief Executive Officer
Yes, let me pick up on Robert's comments. First, our yields on these loans were north of 4.50%. And when you think about that relative to our investment book and think about how you can swap out of the investments into this, that would be accretive from a -- from an invested yield to a loan yield basis.
Dale Gibbons -- Chief Financial Officer
So in 2018, we had on a core basis, our margin rose 11 basis points over the course of the year. We just got a rate increase last month, as you know, that's really going to affect first quarter, not fourth quarter and then we're expecting one rate increase that we have dialed in, in midyear. So that should give us some lift of where we are as our balance sheet is still kind of asset-sensitive today. Overlaying this, we're going to mute that and that otherwise benefit that we would have in the margin increase is going to instead be flatlined as our mix changes and we move to a little bit of a less risky profile.
Brock Vandervliet -- UBS -- Analyst
Got it. OK. And if you didn't get that midyear rate hike, we can expect a down NIM?
Dale Gibbons -- Chief Financial Officer
That loan that we lost that you guys talked about, that we mention that we pushed out of the bank, the bank that took that credit took that actually at a lower yield than the mortgages we bought this quarter. So that's my point that we don't make an average loan. We make a loan and the market misprices risk and return on different types of loans and we're substituting these mortgage for those types of loans.
Brock Vandervliet -- UBS -- Analyst
OK. Thank you.
Dale Gibbons -- Chief Financial Officer
Thanks.
Robert Sarver -- Executive Chairman
Thanks, Brock.
Operator
Our next question comes from Jon Arfstrom of RBC. Please go ahead.
Jon Arfstrom -- RBC Capital Markets -- Analyst
Thanks. Good morning, guys. Hey, just a couple of quick follow-ups. Just on what Brock was just asking, if the Fed pauses or stops, we all think of you as asset-sensitive, but are there benefits that you see to the Fed pausing or stopping? For example, do you see less deposit pricing pressure and maybe an easier path in deposit gathering?
Dale Gibbons -- Chief Financial Officer
Yes. Personally, I'm pretty indifferent on whether they keep going or not. I'm fine if they stop. And yes, I think it'd probably take a quarter or two, but I think overall, it would probably kind of snap the energy and the pressure in terms of what's going on, on the funding side, not at these levels, but if they're pretty relentless in going forward, I think it perhaps introduces some credit stress as well in terms of serviceability.
We're not there yet, but -- so I'm OK if they give it up.
Jon Arfstrom -- RBC Capital Markets -- Analyst
OK. Basically, the message is you don't necessarily need the Fed to keep going to hold the margin steady.
Dale Gibbons -- Chief Financial Officer
No. In fact, I mean, to some degree, I don't want to call that we're saying we're at the top of the rate cycle, but we certainly think we're closer to the top and more than halfway there for sure, and that's really an impetus to kind of moving the duration of our assets, we think. And this isn't a bad time to -- we're not doing swaps or anything to throw it out there, but take a little longer duration asset and put returns such that -- I'm not saying rates are going down, but if they were to, that we're going to be a little slower repricing assets than we otherwise would have been.
Robert Sarver -- Executive Chairman
It also puts more volume in fees to some of our business lines that break slow down so that potentially offsets the margin issue too, especially housing-related business, home construction, mortgage warehouse lending volumes can go down.
Jon Arfstrom -- RBC Capital Markets -- Analyst
OK, that makes sense. Ken, I may have missed this, but you talked about the first deposit initiative being live and you touched a little bit on it last quarter on how it was going, but give us an update, if you can, in terms of how that's gone so far?
Ken Vecchione -- Chief Executive Officer
Yes, I want to avoid talking about each one of the business lines specifically. I'll just say, it really went live in Q4. We brought in some deposits with that. We expect to continue to roll it out and to grow it.
Both deposit initiatives actually now report to Dale. So we're going to move through these initiatives in a very constructive way and make sure what we're doing works and how we are dealing with our customers that we can service them. Again, if you have a misstep, then you wind up destroying all the brand equity you're trying to create with this customer base, and we are optimistic that we have found something here that we can grow. It will grow over time.
If you don't look for like a big grand slam coming in on the next quarter, we'll just continue to grow. But remember, the second one doesn't kick off live until sometime in Q3, maybe to the back end of Q3, which is what we've always said.
Jon Arfstrom -- RBC Capital Markets -- Analyst
OK. And then one follow-up maybe Robert or Ken. Robert, last quarter you talked about some of the non-bank funds potentially filling up and maybe shaking loose. You touched on it, but I'm guessing that December maybe shook some more things loose and I'm just curious, if you've seen increasing numbers of opportunities and a little bit better pricing in terms of the things that you're looking at.
Robert Sarver -- Executive Chairman
There is definitely an increased amount of deal flow that's floating around. In terms of the pricing, I'm not really sure I could comment on that because we only really dig into a couple of things we have interest in. So we don't -- I could tell you on a macro basis on pricing.
Jon Arfstrom -- RBC Capital Markets -- Analyst
OK. All right. Thanks, guys.
Robert Sarver -- Executive Chairman
Thank you.
Operator
Our next question comes from David Chiaverini of Wedbush. Please go ahead.
David Chiaverini -- Wedbush Securities -- Analyst
Thanks. First question is a follow up on the mortgage. And I was curious, can you remind me what the average FICO, average size, average maturity, fixed/floating rates? Just some additional stats on mortgage. You already mentioned the yield is north of 4.50%, but I was curious about the other items.
Dale Gibbons -- Chief Financial Officer
Yes, so the LTV here is in the 70s. The debt-to-income is kind of mid-30s, 36% and FICOs are 760 on this group. We do buy some in the jumbo category. So some of these are in the high six figures in terms of balances.
And geographically, it's kind of fairly dispersed, but a concentration more so in the west than the east.
David Chiaverini -- Wedbush Securities -- Analyst
Got it. And then I also wanted to follow up on the lending relationship that you ended in. Certainly happy to see you sticking to prudent underwriting. I was curious, can you share what industry you ended the relationship in?
Ken Vecchione -- Chief Executive Officer
I would prefer not to, OK?
David Chiaverini -- Wedbush Securities -- Analyst
Fair enough, fair enough. That's all I had. Thank you.
Ken Vecchione -- Chief Executive Officer
You're welcome.
Operator
Our next question is a follow-up from Michael Young of SunTrust. Please go ahead.
Michael Young -- SunTrust Robinson Humphrey -- Analyst
Hey, thanks for the follow up. Just wanted to really quickly touch on the residential piece one more time, but in the context of CECL and extending the duration, you kind of mentioned that it's a good use of capital. Do you still feel that way, obviously, pro forma under the new CECL regime? Is that fair?
Dale Gibbons -- Chief Financial Officer
Yes, that's fair.
Michael Young -- SunTrust Robinson Humphrey -- Analyst
And any color you could provide on the analysis there?
Ken Vecchione -- Chief Executive Officer
Yes. So, well, maybe just generally, let me start. So I mean, we don't have a number for you for CECL. I think we're going to probably provide some guidance on that maybe on our second quarter earnings call, that would be my guess.
But our analysis is consistent with others that have talked in general terms that those areas that have consumer, particularly high loss areas like credit cards and something like that, consumer always has a higher loss with some duration over one year, which is somewhat the implicit model in the current construct. That's where these larger requirements for reserves are coming from. So given our profile and where we stand in terms of commercial real estate, which has had a very low loss rate in the past several years, residential real estate, which has had a lower loss rate as well, and that does have a duration element to it that can add to that. But considering that we're still single-digit percentages of our balance sheet versus tripled or quadrupled that for the average bank, my estimation is that from where we are today, the effect on us on CECL is going to be less significant than a typical bank.
Dale Gibbons -- Chief Financial Officer
On the mortgage piece, in particular, we have some AI that we use that helps us achieve better duration, lower duration on the mortgages we're buying and higher yields.
Michael Young -- SunTrust Robinson Humphrey -- Analyst
OK. Makes sense. Thanks, guys.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Ken Vecchione for any closing remarks.
Ken Vecchione -- Chief Executive Officer
Yes. Just finish by saying we're very pleased with our performance in Q4, very pleased with the performance for the full year. We think we entered the year with good loan growth, stable asset quality trends, as we said, a steady NIM, growing net interest income that will be balanced against expense growth to 2.5 to one, generating the positive operating leverage, you heard Dale talk about a lower tax rate going forward and we're going to be opportunistic in buying back the stock. So all that gives us a little bit of momentum moving into next year, and we look forward to talking to you on our next call.
So thank you all for joining us today.
Operator
[Operator signoff]
Duration: 60 minutes
Call Participants:Ken Vecchione -- Chief Executive Officer
Dale Gibbons -- Chief Financial Officer
Casey Haire -- Jefferies -- Analyst
Robert Sarver -- Executive Chairman
Brad Milsaps -- Sandler O'Neill -- Analyst
Michael Young -- SunTrust Robinson Humphrey -- Analyst
Timur Braziler -- Wells Fargo Securities -- Analyst
Tyler Stafford -- Stephens Inc. -- Analyst
Chris McGratty -- KBW -- Analyst
Gary Tenner -- D.A. Davidson -- Analyst
Brett Rabatin -- Piper Jaffray -- Analyst
Brock Vandervliet -- UBS -- Analyst
Jon Arfstrom -- RBC Capital Markets -- Analyst
David Chiaverini -- Wedbush Securities -- Analyst
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