Western Alliance Bancorp
NYSE:WAL
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Western Alliance Bancorp
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Good day, everyone. Welcome to the earnings call for Western Alliance Bancorporation for the fourth quarter 2017. Our speakers today are Robert Sarver, Chairman and CEO; Ken Vecchione, President; 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 2:00 p.m. Eastern Time, January 26, 2018, through Friday, February 26, 2018, at 9:00 a.m. Eastern Time by dialing 1-877-344-7529, and using passcode 10115798. 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 at any forward-looking statement. 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 like to turn the call over to Robert Sarver. Please go ahead, sir.
Hey, good morning, everybody. Welcome to Western Alliance fourth quarter earnings call. Joining me are Dale Gibbons and Ken Vecchione. We closed out 2017 in a very strong fashion, wrapping up what I believe to be a very good year for the company. This was our 30th consecutive quarter of record operating earnings as our strong loan growth continued, which helped drive margin expansion and record revenue for the company. After quality remained high and our tangible book value climbed.
Net income for the fourth quarter was $89.3 million or $0.85 per share. This included $0.01 from securities gains. The $0.84 per share on an operating basis is up 6% from $0.79 in the third quarter of 2017 and 20% over the $0.70 of operating EPS in the fourth quarter of 2016. The net interest margin expanded by 8 basis points on a linked-quarter basis to 4.73% and is up 16 basis points from 4.55% in the fourth quarter of 2016. For the quarter, operating revenue rose 5.5% unannualized, while operating expenses increased 7.2%, largely from incentive compensation, as the company achieved most of its 2017 performance goals set out at the beginning of the year. The additional expenses increased our operating efficiency ratio to 40.7% for the fourth quarter from 40%.
Balance sheet growth was solid to close out the year with $572 million in loan growth for the quarter, bringing our total year of loan growth to $1.9 billion. Deposit growth was tempered during the fourth quarter at $68 million, but for the year was very strong at $2.4 billion. Nonperforming assets improved to 36 basis points of total assets, down from 42 basis points in the third quarter and down from 51 basis points a year ago. Net charge-offs were $1.4 million during the quarter or only four basis points of total loans annualized.
Our balance sheet growth was matched with our rising capital, with TCE of 9.6% of total assets, up from 9.4% in both the prior quarter and the prior year. Tangible book value per share climbed to $18.31 at year-end, up 20% for the year 2017. Net income was $325 million for the year at $3.10 per share as compared to $260 million and $2.50 a share in 2016. Our return metrics on assets and tangible equity for 2017 were 1.72% and 18.3%, respectively.
I'll turn it over to Dale.
Net interest income climbed $9.4 million in the fourth quarter to $211 million, driven by over $0.5 billion in average loan growth. Net interest income rose 20% from the year-ago period. Operating noninterest income increased $2.2 million or 20% during the quarter to $12.3 million, entirely from higher SBA and warrant income. Operating expense rose $6.4 million from the third quarter to $95.4 million, primarily due to higher salaries and benefits. Expenses increased 15% from the fourth quarter of 2016 compared to revenue growth of 20% during the same period.
Supporting strong loan growth, the provision for credit losses was $5 million for the quarter and the same as in Q3. We also recorded $1.4 million in securities gains during the quarter. The income tax rate was 28% for the quarter or $35 million as charges related to the Tax Cuts and Jobs Act were almost exactly offset from other tax items. The diluted share count increased modestly, resulting in EPS of $0.85.
To recap, for 2017, net interest income rose 19% to $785 million, while operating noninterest income was up 3% to $43 million. Total revenue rose 18%, while expenses climbed 13% last year. The provision doubled to $17 million as organic loan growth claimed substantially from the level in 2016. The average tax rate was virtually unchanged to 28% and diluted shares grew 1%, resulting in EPS up 24% to $3.10. The security portfolio was held flat at $3.8 billion during the quarter as loan growth exceeded deposit growth, while the yield rose five basis points on this portfolio. Loan yields rose four basis points in Q4 as LIBOR climbed during the period and the prime rate was raised in mid-December.
Interest-bearing deposits rose to $9.5 billion as the weighted average funding cost increased four basis points. Including the benefit of non-interest-bearing deposits, funding costs rose two basis points from the third quarter to 0.4%. As loan growth climbed, yield and new originations during the quarter was 0.25% below the average yield for the period.
Higher securities and loan yields and lower balances and low-yielding cash accounts drove the earning asset yield about 10 basis points during the quarter to 5.10%. This benefit was partially offset by increased deposit cost, resulting in the interest margin rising 8 basis points to $4.73. Accretion on acquired loans slipped to $7.1 million from $7.5 million in the third quarter. For the first quarter of 2018, acquisition accretion would fall to $2.5 million if all discounted acquired loans paid just their contractual principle commitments. However, because of loan prepayment activity, we believe it is likely actual accretion will exceed this estimate, but probably be lower than the fourth quarter amount. We expect purchase loan accretion to decline over time.
As the expense growth rate exceeded that of revenue during the quarter, the efficiency ratio rose to 40.7% on a linked-quarter basis, but is still down from 42.4% a year ago. In addition to elevated incentive compensation cost during the fourth quarter, the provision for unfunded loans, which was part of the other expense category, rose by $800,000. Our pre-provision net revenue return on assets of 2.57% was a new high for the company as was return on assets of 1.79%. These metrics have consistently been in the top decile compared to peer banks.
Strong loan growth, funded by reductions in cash, short-term borrowings and deposit in capital growth, took total asset to just above $20 billion at year-end. As expected, our deposit growth moderated during the quarter after a very strong performance earlier in 2017. However, our liquidity remains strong with loan-to-deposit ratio of 89% at year-end compared to 91% at the end of 2016. Our seasonally strong fourth quarter loan growth of $572 million was led by $276 million in non-owner-occupied commercial real estate and $180 million in owner-occupied. The C&I portfolio and residential loans also rose, while construction loans declined modestly.
Regionally, loan growth leaders were Arizona at $192 million and Nevada at $159 million. Fourth quarter growth in Nevada turned the tide for the year as its loan balances had declined on a year-to-date basis through the third quarter. Growth in total deposits moderated to $68 million compared to $874 million in the prior quarter, driven by an increase of $180 million in interest-bearing DDA, offset by a similar decrease in noninterest-bearing DDA. Money market accounts in CDs grew modestly.
As we indicated on our last conference call, we expected to give back some of our exceptional deposit growth as we approached year-end. Year-over-year growth was $2.4 billion, 3/4, of which was in noninterest-bearing DDA. This least expensive funding stores rose to 44% of our total deposits at the end of '17 compared to 39% at the end of '16 and has contributed to our asset-sensitive rate risk profile. Total adversely graded assets decreased $50 million during the quarter to $355 million, led by a reduction in special mention credits. Nonperforming assets, which is comprised of nonperforming loans and other real estate, declined $12 million to $72 million and now comprises only 36 basis points of total assets.
Gross credit losses of $2.3 million during the quarter were offset in part by $900,000 in recoveries, resulting in net credit losses of $1.4 million, which is only 4 basis points of total loans annualized. For the full year of 2017, net charge-offs were less than $2 million. Supporting our strong loan growth, provision expense was flat to prior quarter at $5 million. The allowance for loan and lease losses rose to $140 million, up $15 million from a year ago. This reserve was 1.03% of non-acquired loans at year-end as acquired loans are booked at a discount to the unpaid principal balance, and hence, have no reserve at acquisition.
For acquired loans shown on the lower right, credit discounts totaled $27 million at quarter end, which was 1.86% of the $1.45 billion purchased loan portfolio. Our capital ratios held steady in 2017 as our strong capital growth modestly outperformed our balance sheet expansion. Tangible book value per share rose $0.78 in the quarter to $18.31, and is up 20% from $15.17 in the past year. At 9.6%, our tangible common equity ratio significantly exceeds the peer median, while earning a leading level of return on tangible equity over 18%.
Okay. Looking at 2018, just to give you a little perspective for management. In terms of our balance sheet, we're again looking to grow both loans and deposits between $1.6 billion and $2 billion for the year. That's an average of $400 million to $500 million a quarter. The first quarter maybe a little bit slower, but our pipelines continue to be strong. And we think, for the year, again, we'll have very strong organic loan and deposit growth. In terms of the net interest margin, as you know, we're asset sensitive. We expect to continue to increase in prime and LIBOR, and with that, a little more of a recent steepening of the yield curve will provide an opportunity for us to grow our margin a little bit in 2018. However, we do think deposit betas will go up a little bit, and we're estimating for our bank that, that could double to about 50%.
I should also tell you, that in the first quarter, you're going to see our margin decline, not in terms of dollars, but in terms of percentages because we have a 12 basis point decrease attributable to the fact that about $2.2 billion of our assets, loans and securities are tax-free. And with the new tax rate change, that's going to lower that. In addition, as usual, in the first quarter, most all of our net interest income comes on a 30 to 360 basis, not on a daily basis. And so the lower day count, going from 92 to 90 days, that will deduct another 10 basis points. As I said, neither one of these are going to affect the actual interest income in dollars, but as a percentage, you're going to see that.
Operating leverage has really been the hallmark of our company. Not only do we have a low efficiency ratio, but we continue to grow our revenue at a faster pace than our expenses. And we think, going into this year, we can continue to run that at about a 3:2 ratio, and that should bode well for our efficiency and our earnings growth. Asset quality, 2017 and the last number of years have been really, pretty stellar. One basis point for the year net charge-offs, kind of hard to project that. But as we look at the horizon and kind see the visibility we have today, we think our asset quality will continue to remain pretty strong and stable.
The tax rate. The tax rate, obviously, the decrease in the tax rate. Last year and the year before, our average tax rate was about 28%. We're projecting it to come in this year at 21%. In addition, we did, as you may have read, we did pile back some of those savings into some investment in our people. During - starting January of this year. We increased our 401(k) match, 50%. We gave some raises to employees who make 75,000 or less, which is about half of our staff, put a couple of other things in place. And so when you look at all the investments we've made in terms of our people and continuing to be able to acquire and retain top talent in the markets was getting more competitive, those initiatives are about $1.3 million per quarter. And our overall tax savings, looks like it's coming in somewhere in the $47 million range. So that will help.
We don't pay dividend. We're not doing share buybacks, so we continue to believe the best thing to do with our earnings is to put it back in the company and use that to continue growing our business, which we've done over the last number of years. So with that, I'll open the floor for questions. And Ken and Dale and I are here to answer any questions. I should note that the transition for me to Executive Chairman is going smoothly, and I'll take that position as of April 1. This is a process that's been discussed for the last year, 1.5 years with our Board of Directors. We spent a lot of time focused on succession planning, not just at the CEO level, but at all of senior management. And we have a very dedicated team that is quite capable of moving into some new positions that we recently announced. So things should continue to roll out here at the bank.
With that, we'll open the floor for any questions.
[Operator Instructions]. And our first question will come from Casey Haire of Jefferies.
I wanted to touch on the loan growth guide, $1.6 billion to $2 billion. That's a little bit stronger than what you guys have been talking about in years past. Just what's giving you that comfort level? Is it just tax reform and your clients feeling better about the world? Or just some color there on the better loan growth guide.
Well, I do think the tax reform is helpful for businesses and confidence of business to grow and expand. But actually, that $400 million to $500 million is the same guidance we gave a year ago, and it's pretty much about what we've been doing the last several years. So I think it's just pretty consistent.
Okay. And in terms of the deposit beta. I think you said 50%, Rob. If memory serves, that's been closer to 40%. Are you seeing competition start to ratchet that up? Or is that conservatism? Just some color on the deposit there.
No, I think it's our best estimate of where we're going to be. We were at 20% and 25% and that's starting to go up. Just as the rates become more meaningful on an absolute level, people start to look around a little more, be more conscious of what they can get. And so that's really just our best estimate.
Okay. And just one more, on the capital management. It sounds like the message is still to reinvest back into the business. But with tax reform, the TCE ratio is really going to fly without a 20% tangible return and no capital return. Just what's holding you back from entertaining a small dividend? Or is it just that you feel a little bit better about M&A prospects?
We have that discussion. And I would say mid-term and longer term, it's possible, that we could end up looking at a dividend. I don't think share buybacks make sense. We kind of like to buy low, sell high, and so we save our powder to be opportunistic. But between organic growth and between other opportunities, we've just seen the ability to put that money to work and do it in a way that's been able to generate a 15% to 20% return on equity. So it's worked well. And our shareholders, obviously, benefited from it. We've been the top-performing stock in our peer group for the last year or three years and five years. And growth is our DNA and we're able to find people and new initiatives to put that money to work, and we think we can do it again in 2018. Beyond that, you may be right, that tide may swing a little bit so that we're just accumulating too much capital. But in terms of our outlook for 2018, we think we could put the money to work.
And the next question comes from Brad Milsaps of Sandler O'Neill.
Robert, could you talk a little bit about a number of new hires you made in 2017? And kind of what the pipeline looks like for this year in terms of kind of how that plays into your growth aspirations?
Yes. Sure. Let me turn it over to Ken, because he's been working on a number of new initiatives for this year with some people. He can give you a little color on that.
So specifically, on the number of people. We've hired seven in the quarter. We actually have held two larger producers that just joined us in January, pretty excited about. So as it relates to the loan pipeline commentary, I think our pipeline remains strong as evidenced by our Q4 and full year growth. Our in-footprint pipeline looks healthy. The economies of California and Arizona are demonstrating good job in employment growth. Nevada's overall economy has shown a significant and continual growth over the past five years. And as one of our three regions, Nevada has lagged behind California and Arizona, but I'll tell you that Vegas, Southern Nevada, is going to see about $14 billion of new projects coming online or have already begun to come online in the next 1 to 2 years.
And Reno is also seeing a revitalization as the Tesla Gigafactory and new distribution centers from Google and Switch, Walmart and FedEx, and also, other large companies announcing data centers have begun to build or will build in Reno as well, pushing actually Reno's vacancy rate, residential vacancy rate, into the very low single digits. So off on the regional side, we are - we're feeling optimistic. The National Business Lines, I won't to go through each one. But I think, in general, we're optimistic about the growth prospects for all the National Business Lines. I would reiterate one thing Robert said, which is Q1 could be a little slower in growth as compared to the Qs 2, 3 and 4. There's always some warehouse mortgage seasonal adjustments that occur. I think some loan growth was brought forward into Q4 in the muni space. But overall, as Robert said, we're - I think we'll do about the same amount of loan growth as we did in 2017.
Maybe more specific to the hiring. What is the pipeline kind of for new hires that you kind of have figured into your expense guidance for '18?
Well, we continue to look for very good people. The business producers will start generating their own - or carrying their own weight, I'll say, within 5 to 6 months. So I'm not afraid to hire anyone that's going to be able to bring in a good-sized book or bring in new business. And that always makes good sense. There is always a little drag in the first two quarters you hire him or her, and then, it begins to pay for itself thereafter. So we're always on the lookout for new people.
But I think we'd probably be bringing on somewhere in the neighborhood of about 10 a quarter, in terms of producers, people in the production space. It's just an estimate.
That's great. And then, maybe, Dale, on the NIM. I apologize if I missed this in your comments, but can you talk about where kind of new loan yields are coming on kind of versus the existing book?
Yes. So in the fourth quarter, new loan yields were about 25 basis points below the existing book. I don't think that's necessarily a trend at all. It's certainly well within kind of the quarter-to-quarter volatility we get. I would say, though, that as people become more confident in the economy that is it just a general inexorable march for lower and lower spreads. And I think you're seeing that competitively. I think some other institutions have commented on their earnings calls as well, stating that they think the price competition could escalate with that temperament. But overall, overall, I think that things look pretty good in terms of moving into a rising rate environment in '18.
Great. I really appreciate it. Robert, is this your last call? If so, it's totally been a pleasure. We'll miss hearing from you.
Yes. No, I appreciate it. I'll be around for Q&A, but I won't be running the ship anymore, so.
Our next question comes from Chris McGratty of KBW.
Dale, maybe an expense question. The 3:2 comment, in terms of revenue growth to expense growth. Given the hires that you're doing and the investments you're making post taxes, should we be assuming a similar rate of expense growth in '18 versus '17? Or do you get to that 3:2 mix perhaps through the high-single-digit expense growth and perhaps a little bit more mid-teen-ish revenue growth?
Yes, the latter. I mean, we did some infrastructure investments in 2017. We do feel good about kind of the 3:2 ratio kind of stepping out from here. But I would expect the expenses to be in the kind the high single digits and translated into 12, 14 or whatever on the revenue side.
Okay. Great. And that would suggest - or I guess, maybe, your appetite to grow the securities book in this environment with the steepening curve, I think you grew at about $1 billion last year. Should we be assuming a similar level of growth? Or are you maintaining a certain proportion of the balance sheet?
In part, it's how effective we are on the kind the loan-to-deposit growth. To some degree, the securities portfolio for us is an accordion based upon what's - that's our next best alternative after good-quality loans in which to put earning assets. Earlier in 2017, we had a significant run off in deposits in excess of loan growth, and that's when that security's build took place. It was flat from the third quarter to the fourth quarter as that mix shifted a little bit in terms of how the growth materialized. So I don't see the securities portfolio going down. It might not climb at the same rate if the loan growth that Robert outlined comes to fruition.
Great. And then, just a clarification on the first quarter margin. It was nine basis points from the [indiscernible] grows up and another basis point from a day count, so down about 10 on a steady basis?
No. No. It's 12 basis points from the day count and another 10 based upon - we do 33, 60 for the margin. Now I know a lot of people use actual, actual, and you can argue both sides of it. Both of them are inherently wrong. But - so that's another 10. So that's 22 basis points margin decline just from these items that are not cash or income-related at all. It's just the measuring stick has been changed.
Okay. So 4.73% less 22?
Right.
The next question will come from Michael Young of SunTrust.
Robert, wanted to, maybe, just start off with kind of the M&A outlook. And does the change in the Tax Act make you biased more towards the whole bank acquisition versus continuing to look at either a specialty finance or portfolio add?
No. I don't think the Tax Act makes the change. I'd tell you a story. I was at a conference at one of the big firms, and there were 150 CEOs in the audience. And they had a panel on M&A, and they asked a question for audience participation. The question was, "What is the main factor you look at when deciding whether to acquire a bank?" And they gave you five options. And then, everyone had the kind of the little controller in the hand, they got to pick what they voted for. And one of the options was earnings accretion. And then, there were four other options, which I didn't really pay a lot of attention to. And they announced the tally, and earnings accretion was voted 27%, and that summarizes the difficulty in M&A. There are a number of banks out there who are interested in buying other banks for reasons other than making money. And so we looked at a deal not too long ago and we came in at a number that was lower, and this company's going to trade it mid- to high-20s on earnings.
And we are all about growing earnings per share, not just earnings growth. So that got my optimism a little muted on whole bank M&A a little bit. However, there are other opportunities-related portfolios and also relating to people. We're getting into the gaming finance business with a group. We're getting into some healthcare equipment leasing with a group. We're looking at ways that maybe the balance sheet won't grow as much as the whole bank, but the EPS growth will be a fair amount stronger. So we will continue to be selective on M&A, but if it doesn't really make money for our shareholders, we're not going to be doing it.
Okay. Great. And maybe just zooming out, again, looking at kind of the balance of the franchise between the National Business Lines and sort of the core regional bank. Do you feel like one's going to sort of lead the way in 2018? And maybe any characterization around that?
I think, somewhat balanced, but part of our job in management is to look at risk adjusted returns and allocate capital in the areas that we think make the most sense for the best risk-adjusted returns. And so we try to be pretty fluid with that and opportunistic with it. And as I sit today, I think, looking at our forecast, those numbers are pretty balanced. Probably, I don't know, 50%, 60% geographical and 40%, 50% of our National Business Lines.
And the next question comes from Brett Rabatin of Piper Jaffray.
I wanted to just go back to deposits. And you had really strong core deposit generation in 2017 and the fourth quarter was a little flatter. I'm curious about the outlook for core deposit growth and sort of the pipeline there. What does that look like for the year? And do you think you can continue to move the core deposit ratios higher? I know they're really high as they are, but what's your thoughts on the funding growth as we look at the next few quarters?
Yes. So I'll take that, and I think you're right. In Q4, we grew $68 million from the third quarter after a very robust growth of $874 million. And we did do $2.4 billion for the full year and I focus your attention on that number. And our loan-to-deposit ratio did end at 88.9%. Having said that, in 2018, I think the banking industry will continue to strive to grow deposits. And on WAL's side, our ICP, our incentive compensation plan offers our people, and specifically, our business development officers, our loan officers, an opportunity to greatly enhance their earnings by growing their deposit relationships. And with our strong pay-for-performance culture, which you saw in some our expense growth in Q4, I believe, we're well-positioned to grow our deposits basically consistent with our loan growth. On top of that, we do have several business lines, which are in themselves pretty well for gathering deposits, specifically tech and innovation, our alliance association, which is our homeowner association channel and warehouse lending. So all in, I would say, we're pretty much directed to growing our deposit growth alongside of our loan growth. And if we are able to pick up a few extra deposits from some opportunities, opportunities, then we'll do just that.
We just killed it in DDA in 2017, and I don't believe we're going to be able to replicate that in 2018. I think our deposit - our mix of growth is going to be more reflective of what our average has been, rather than the great skew that we had last year.
Okay. And then, maybe, an update if you can, on just what each fed hike would mean for your margin, given the balance sheet today?
Yes. So again, we've been sowing in our Qs and Ks or whatever, our interest rate risk sensitivity showing about. And if you reduce that, it's about 5 to 6 basis points of margin expansion for a 25 basis point change in the FOMC target Fed funds rate. That said, there's a couple of things in there that, maybe, are changing. One of them is, that that's based upon a parallel shift in the yield curve. Well, up until the past few weeks, the yield curve change has been anything but parallel. You've got a, certainly, a significant flattening that took place, which is going to impair the ability for us to get full price repricing opportunity on our commercial real estate book, which is priced off of the term structure.
The other thing is what Robert was talking about earlier on deposit betas. We are seeing continued pressure in terms of deposits. I think some people are waking up a little bit in terms of what's their particular shipping point, where they pick up the phone and start to complain. And so I think that, that's likely to continue, and hence, we're going to see some of those betas rise as well. But we're - hey, we're asset sensitive. We've got a fairly short asset book. Our deposit book actually lengthened in 2017, so we think we're well positioned for where we are. But it might be a little tough for sweating than it has been.
And the next question is from Gary Tenner of D.A. Davidson.
Ken, I was curious about, maybe, elaborating more on the Nevada franchise. You talked about, obviously, a lot of strength there this quarter that kind of flipped the year on its head from a loan growth perspective, and you commented about some projects in the Vegas area. Could you talk more broadly about how you think that lays out for Western Alliance growth and performance in that market the next year or two?
Yes. I know everyone likes to talk about baseball analogy. So as it relates to Vegas, I'll say, I think we're in the early innings, with the $14 billion of infrastructure projects coming on, and they're broken down through what I think is what you're going to see happening is the carry-on effect into other smaller and midsized businesses are going to present opportunities for us. We're not going to be funding the Raiders stadium for $1.9 billion. We are not going to be funding one of the old echelon business for $4 billion. But the carry-on effect, I think, will help Vegas, and we're seeing some great growth opportunities and credits there coming our way. As it relates to Vegas, and I'll give you a - I'll call this a fun fact, if you will. Las Vegas employment has now returned to previous session levels. But lost construction jobs at the peak, right before the recession, has now been replaced with other jobs in professional and business services and utility services and healthcare.
So Las Vegas is beginning, and I'll say beginning, because it's always dominated by gaming, is beginning to expand into other fields that should hopefully give the Vegas economy a little bit more balance. Having said that, Vegas is humming along and it always will be a gaming town. And we are seeing some interesting opportunities that we've won, actually, some larger sized opportunities that we've recently won. And we're more constructive on Vegas than we have been over the last number of years.
And next, we have a question from Tim Coffey of FIG Partners.
I had a question about the borrowings in the quarter, the period-end balances. Is the future for those balances to kind of stay the same? Or like the investment securities? Or do you think you'll - about bringing them down?
Well, I mean, our level of borrowings is really quite low, but it's been zero for a long time. And so to have that move up to $400 million, it's still only 2% of our balance sheet, and our peer group has a number higher than that on average when ours kind of spiked at the end. Really, that was driven by the strong loan growth that we had kind of close to year-end. You may have noticed that our ending balance in loans was $0.5 billion more than our average balance during the quarter. So we had a run up there. We borrowed from the FHLB. We're not looking for that to necessarily be a significant funding source. But as loan demand continues to be robust, I could see a little bit number there in terms of an average balance, which we haven't had in quite some time, but still be lower than where the peers are.
Okay. And then, looking at the decline in deposits in the Arizona market, can you provide any color there?
I mean, that's just basically a reversal. I mean, deposits are really hard to forecast on a last-day-of-the-quarter-basis. And you get some significant swings. You've got some title company business. We've got some other types of escrow services we provide. And so those just move up and down. So Arizona, yes, it did have a dropoff in 4Q, but they had a huge run up earlier. And it's just - those are just successive dots across an increasing trend line.
The next question is from Timur Braziler of Wells Fargo.
Just want to look at the commercial real estate growth in the quarter. What was that driven by? Was that customers pulling some demand forward? Was that lower payoff activity? Kind of what drove that growth this quarter? And then, as you look out into 2018, what's the demand and appetite for a commercial real estate look like?
So on the commercial real estate, I would say, for the quarter, it was just more opportunities coming through the door. We've had a good year, in both on the commercial side and on the land lot banking side, and on single-family homes. So I think, predominantly, it was that type of volume that came to the door in Q4. Going forward, I think CRE lending continues to be supported by the strong economy. Overall, long-term interest rates still are - were low. I think low employment is creating sort of individual buying power, which will be good for lot banking, and then, single-family home lending. So I think those are some of the benefits that we have. On - if you carry that just a step forward to, maybe, residential lot development, what we're seeing is a strong demand there, with few banks participating. So we're able to price those loans accordingly. We have quality borrowers, high-quality projects, and very credible sponsorship with deep pockets. So hopefully that gives you enough color.
That's good color. And then, just one more for me, circling back on the expense front. Certainly seems like there's some embedded tailwinds for the revenue guidance, especially the deals with deposit betas if those don't materialize. If we see higher revenue growth, is that going to be cause to accelerate some investment into the company in maintaining that 3:2 ratio? Or could we actually see some outperformance on that front, if we do get some stronger revenue growth?
Our goal is to keep that 3:2 ratio. And as Robert said, that's part of the secret sauce that has made this company successful is watching the expense side and having revenue - have expense chase revenue, not a revenue chasing expenses. So right after this meeting, I go through another budget tangle. Feels like little bit more like mixed martial arts. Success always gives everyone the liberation of wanting to add more and more people. And as I said in about 15 minutes, we'll continue to push forward and push the thought process of keeping that 3:2 ratio throughout all the areas in the bank.
But if we do, do better, we'll probably look to reinvest it more. So I think that's - if you run it in your model, that's probably what you should think about.
And next we have a question from Matthew Keating of Barclays.
I just have one question around the NIM. And not to get too specific here, realizing that the first quarter does have some particular changes this year, but when you made the comment that there's an opportunity to grow the NIM a bit in 2018, is that off of the fourth quarter level? Or the full year 2017 level, which was a bit lower?
That's off of the fourth quarter number adjusted for the 12 basis point decline on the tax adjustments from our municipal securities and loan book. Take the 4.73% and take 12 basis points off it, and kind of go from there.
Yes. Take another 10, and then go from there.
But again, about 10 for just the first quarter. Just the first quarter, yes.
And our next question comes from Tyler Stafford of Stephens.
Just a couple of last questions for me. Going back to the earlier comment around deposit betas accelerating to 50% or so this year. Is that expected pressure primarily out of the regional footprint deposits? Or are you seeing incremental pricing pressure out of the tech and innovation or HOA deposits?
No. Just the regional.
Okay. And at this point yet, are you interested in extending duration more in the securities book? And what are those average yields at this point?
So average yield is 3.15% for the quarter. We - our personal biases for a rising rate environment, we're a bit asset sensitive. We'd like to stay that way. I don't think we want to get necessarily more asset sensitive than we are, but we would not undertake a significant extension of the securities portfolio. We're over four years now, and I don't see us pushing that out a lot further.
And next, the question will come from Jon Arfstrom of RBC Capital Markets.
Hopefully, the last question. Question on credit, I guess. Anything out there - it doesn't seem like there's anything going on, but anything that's bothering you guys from a competitive point of view that you think doesn't make sense? Or you're avoiding?
Yes. Quite a bit, actually. I think, for us, we're in a number of different business lines. And so we're constantly looking at those different business lines and seeing where we think things are maybe a little overheated. And so being candid with ourselves, asset valuations are at all-time highs pretty much across the board. And so looking at the level of debt we're financing in our advance rates, we adjust our underwriting accordingly. So there are things we would have done 3 or 4 years ago that we won't do today in terms of where we are on the credit line. It could be loan to cost. It could be cap rates we're looking at. On the commercial real estate front, we'll look further back on cash flows rather than just trying to lend in to the last 12 months of operating performance. And so we're constantly kind of reevaluating that. The good thing for us, in most of the business we're in, we don't have a lot of competitors.
So if you look at our National Business Lines, we have a rather limited number of competitors in that space. And if you look at our geographic regions, they're all dominated by 2 or 3 really large national banks, and then, we're kind of next. And so to-date, in this recovery, what's been different than previous recoveries, is those national - those larger banks and their geographic regions, and the banks in our specialty lines, have been fairly disciplined in their credit approach. And you haven't seen the easing as much as you typically would in 10 years into a recovery. So from that standpoint, we've been able to maintain good credit discipline. But that goes to underwriting on a case-by-case basis based on it could be geography or product type.
Okay. And just one small one, the hotel franchise finance portfolio looks to be extremely profitable, but curious how that's performed against the original expectations.
Yes, it's performed a little better than we underwrote. We bought it at a 5% discount. We kind of put a circle around about $100 million of credit - $120 million of credit, that was in some markets that we thought, potentially, could have some losses for us. That portfolio's performed better. Our losses to date on that book are $2 million. We originally underwrote it to absorb about $20 million to $30 million in losses. So from a credit standpoint, it's performed pretty well. And we monitor it every quarter and get current numbers and stuff. So it's performed well. I mean, better than we initially underwrote it. We do recognize the fact that hotel values, like other commercial real estate values, have increased, and net operating income levels and rev par levels for this industry are strong. There's a fair amount of new construction going on, and chances are over the next couple of years, absorption rates and rental rates are going to slow down and you won't see the continued rev par growth.
So we're coming in at levels where we're underwriting between 10 and 12 debt yields and give us some pretty good cushion. And that's why you see that portfolio hasn't been growing in large amounts. It's been fairly steady because we're very focused on the quality in dealing with customers that are very well-heeled and skilled at navigating through down markets as well as good markets.
It was the last question, John.
Yes. That was the one. Brad, you still on there? Why don't you queue yourself up? Put yourself in the queue, Brad. We lost Brad. Okay. Thanks, everybody. Have a good rest of the day and a good weekend.
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