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Western Alliance Bancorp
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Good afternoon, and welcome to the Western Alliance Fourth Quarter 2019 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded.
I would now like to turn the conference over to Ken Vecchione, President and CEO. Please go ahead.
Thank you. Good morning, and a happy New Year to everyone, and thank you for joining us today. Today, I am accompanied by Dale Gibbons, our Chief Financial Officer. I will provide an overview of the quarterly results, Dale will walk you through the bank's financial performance in greater detail, and at the conclusion of our prepared remarks we will take your questions.
2019 was a record year on many level for Western Alliance Bank, and demonstrated the powerful advantages of our diversified and distinctive business model to continue advancing our key strategic objectives, which include promoting disciplined and thoughtful loan growth matched with rising deposits, carefully managing our balance sheet with regards to asset sensitivity, de-risking our loan composition, maintaining industry-leading operating efficiency, and thoughtfully returning capital to our shareholders through share buybacks and dividend.
Financially, 2019 was a terrific year and was our tenth consecutive year of rising earnings. For the year, we produced record revenues of $1.1 billion, net income of $499.2 million, and EPS of $4.84. These results were driven by record organic loan and deposit growth of $3.4 billion and $3.6 respectively, which generated the highest total revenue in the company's history against the backdrop of a volatile and falling rate environment.
As our bank has scaled and matured, we also took new capital management actions this year, and announced our inaugural quarterly dividend of $0.25 in Q2, and repurchased 2.8 million shares, reducing our share count by 2.7%. Given all these actions, tangible book value per share grew 20% year-over-year to $26.54, and has now grown by 237% over the past six years as we continue to expand our business.
We believe shareholder value is deeply correlated to loan, deposit, and revenue growth, outstanding asset quality, and predictable and sustainable earnings. As you can see, Q4 was an extraordinary quarter for Western Alliance as EPS of $1.25 grew 11% year-over-year, and was accompanied by strong asset quality metrics. Fourth quarter loan growth of $1 billion and deposit growth of $356 million drove our balance sheet to $26.8 billion in assets.
As a reminder, deposit growth is seasonally lower in this quarter as our warehouse lending clients paid down taxes from custodial account held with us. The yearly deposit growth noted above was supported by the best year ever for our HOA business. They were up $603 million. Tech and Innovation, which knocked the ball out of the park with growth of $1.2 billion, and our deposit initiatives, which saw our balances rise over $100 million.
On the lending side, our regional banking divisions continued their healthy growth trajectories generating over $550 million growth year-over-year after the reduction of construction, land and development loan of $182 billion. Our residential mortgage program, warehouse lending, and hotel franchise finance added $1 billion, $561 million, and $451 million, respectively to the loan portfolio.
During the quarter, we achieved our goal to reduce the relative proportion of our construction, land and development loan below our 10% target to 9.2% of total loan, one year earlier than our December 2020 target. Of note, captured in the $1 billion for loan growth was a $203 million reduction in CLD.
Beginning in 2018, we undertook a program to mitigate our interest rate risk and support our EPS growth objectives through the expansion of high quality residential loans originated by our mortgage warehouse clients. This quarter demonstrated our ability to successfully execute on our strategy to grow revenues to the transition to a lower rate environment as net interest income for the quarter climbed to $272 million or 8.3% on a linked-quarter annual basis.
Quarterly NIM was 4.39%, only down two basis points from Q3 at 4.41%. Full-year operating non-interest expenses grew $62.2 million to $479 million producing an efficiency ratio of 42.7%. Our operating efficiency ratio increased from 41.9% in 2018 as net interest income growth was impacted by the three Fed rate reductions. For the fourth quarter, operating non-interest expenses grew $6.2 million to $128.7 million from the prior quarter, inclusive of approximately $4.1 million in one-time nonrecurring expenses.
Credit quality remained stable this quarter. Special mention loans dropped $53 million to $180.5 million from Q3. Substandard loans on an absolute dollar basis are at their lowest point since 2015 when our balance sheet was only half the size it is today. Charge-offs were $1.2 million in Q4 and full-year charge-offs were two basis points of loans. Our tangible common equity ratio ended at 10.3% for 2019, compared to 10.1% at Q3 and 10.2% for 2018. For the year, we returned a $171 million to shareholders through our stock repurchase program and dividend distribution. Full-year 2019 return on average asset and return on average tangible common equity were 2% and 19.6% respectively, compared to 2.05% and 20.6% in 2018. We remain one of the most profitable banks in the industry.
Finally and most importantly, all of our accomplishments could not be achieved without the dedication and professionalism of our management team and the people of the Western Alliance. They make the unassailable difference, their drive, enthusiasm, and standard of excellence is the secret sauce of our company.
Dale will now take you through our financial performance.
Thanks, Ken. For the year, net interest income rose a $124.5 million or 13.6% to just over $1 billion. Net income of $499.2 million increased 53.4 or 14.5% and EPS of $4.84 increased 16.9% from the prior year demonstrating the impact of our stock repurchase program. For the fourth quarter, strong ongoing balance sheet growth resulted in record earnings despite headwinds from a flattening yield curve that preceded anticipated Fed rate cuts.
Net interest income rose $5.6 million or 8% annualized from the third quarter to $272 million, driven by a $600 million increase in average earning assets, which outweighed reduced loan yields. For the corresponding period last year, net interest income rose 11.7%. The provision for credit losses was $4 million for the quarter, which was consistent with the prior period.
Non-interest income decreased $3.4 million from the third quarter to $16 million as equity investment income from our Tech and Innovation segment and net gains on sales of investment securities were elevated in the third quarter. Non-interest expense was up $3.7 million as data processing, professional fees, and incentives and year-end bonuses increased by $2.9 million, $1.9 million, and $1.8 million respectively, which partially offset a $4.7 million decrease in deposit cost.
Compensation costs were affected by increased accruals for annual incentive and bonus plan. Share repurchases in Q4 of 88,000 reduced the diluted share count to 102 million, resulting in diluted EPS of $1.25 for the quarter. Throughout 2019, we reduced shares outstanding by 2.7% by opportunistically repurchasing 2.8 million shares. For 2020, our board has authorized a new share repurchase plan for up to $250 million.
Turning to net interest drivers, net interest income for the quarter rose $28.5 million year-over-year to a record $272 million. Investment yield decreased 12 basis points from the prior quarter to 2.96% due to a flattening yield curve and lower reinvestment rates. Lower long-term rates increased mortgage prepayment speeds, and the resulting accelerated amortization of premium was responsible for lowering the overall quarterly portfolio yield from the prior year. On a linked-quarter basis, loan yields decreased 21 basis points due to reduction in interest rates and spreads. Further impacting the decline in yields was our intentional mix shift towards residential loans and the decline in LIBOR, which preceded the cuts in the Fed funds rate and prime.
Interest bearing deposit costs decreased by 22 basis points in Q4 to 1.08% as a result of proactive steps taken to reduce our deposit rates immediately after the Fed cut rates in October, outpacing the reduction that we had in loan yields. This decrease funding costs by 12 basis points when all of the company's funding costs are considered, including non-interest bearing deposits as well as borrowings.
As Ken mentioned, this quarter demonstrated our ability to successfully grow net interest income through the transition to a lower rate environment. Strong balance sheet growth and proactive steps taken to reduce the cost of interest bearing deposits resulted in net interest income growth of 8.3% on a linked-quarter annualized basis. Despite the strategic shift in our loan mix away from construction and the overall reduction in market rates, the net interest margin only declined two basis points to 4.39% during the quarter as a 12 basis point reduction in earning asset yield was offset by a 12 basis point decrease in total funding costs.
With regards to our asset sensitivity, our rate risk profile has declined and notably as our mix shifts to primarily fixed rate residential loans has reduced our net interest income variability due to changes in the rate environment. Meanwhile, $3.4 billion of our variable rate loans are now behaving as fixed rate since the rate floors are now in effect active. This has reduced our interest rate risk and a 100 basis point parallel shock lower scenario to only 3.8% of expected net interest income at December 31 from 4.8% at September 30 and 7% in June 2018 when we commenced our residential loan diversification program. Should rates decline from here, we believe a ramp down scenario was a much more profitable rate reduction outcome, which further reduces our rate risk profile by another 50%. We believe we are now positioned to asymmetrically benefit if rates rise, but have limited downside net interest income risk if rate should fall. With an additional 25 basis point rate cut, another $1.7 billion of loans with floors will be triggered, which will further reduce sensitivity and mitigate our margin compression.
Our interest rate mitigation program has lowered our volatility, if rates decline further while maintaining significant upside, if rates rise again. To be clear, in a ramp scenario, if rates decline 100 basis points, 1.7% of net interest income is the risk. However, if rates go up 100 basis points, we would have a positive 3.6% impact to net interest income, double the effect in a down rate scenario.
Turning now to operating efficiency in Q4, year-over-year, we produced another quarter of positive operating leverage, while continuing to invest in new products and business initiatives to continue to drive organic growth. On a linked-quarter basis, our efficiency ratio increased 140 basis points to 43.8%, which includes a $4.1 million of one-time expenses that Ken mentioned earlier.
Despite progress we have made to reduce asset sensitivity and net interest income at risk, our efficiency ratio in 2019 was still affected by declining NIM, caused by the falling rate environment. Adjusting NIM compression driven by the three Fed rate cuts, our efficiency ratio would have remained flat from the year ago period. As a core component of our strategy and irrespective of the rate environment, we will continue disciplined expense management to maintain industry-leading operating leverage and profitability.
Our pre-provision net revenue ROA was 2.3% and return on assets was 1.92% for the quarter. The fourth quarter decline in operating PPNR ROA of 25 basis points was directly related to the margin decline of 29 basis points over the same period. These metrics continue to be in the top decile compared to peers. Our strong balance sheet growth mentioned continue during the quarter as loans increased $970 million to $21.1 billion and deposit growth of $356 million brought our deposit balance to $22.8 billion at quarter-end. Our loan to deposit ratio increased to 92.7% from 89.8% in Q3.
Our strong liquidity position continues to provide us with balance sheet flexibility to pursue attractive risk adjusted lending opportunities. We grew our shareholders equity by $403 million to $3 billion from 2018 and tangible book value per share increased $0.94 over the prior quarter and $4.47 or 20% over the prior-year to $26.64 per share.
Our industry-leading financial performance is a direct result of our distinctive business model which combines the commercial banking relationships within our regional footprint and our National Business lines. Total loan growth was driven by increases in C&I loans of $674 million, residential loans of $285 million and commercial real estate non-owner occupied loans of $214 million.
Strong C&I growth was supported by approximately $175 million in tech and innovation, and $228 million in mortgage warehouse lending. Residential loans now comprised 10.2% of our loan portfolio while construction loans decreased another $203 million and now make up 9.2% of total loans at year-end versus 10.7% of total loans when compared to the prior-quarter.
We believe our ability to profitably grow deposits is both a key differentiator and a core value driver to our platform's long-term value creation. Despite Q4 being seasonally weak for deposits, we were able to grow them $356 million for the quarter, the decrease of $218 million in non-interest bearing DDA primarily from warehouse lending was offset by growth in net interest bearing DDAs and savings in money market accounts of $252 million and $62 million respectively. Over the last year, deposits grew across all categories with the largest increases in savings in money market deposit accounts of $1.8 billion and non-interest bearing DDA of $1.1 billion.
During 2019, deposit growth has been $3.6 billion of which 29.9% has been in non-interest bearing accounts. The deposit growth of $3.6 billion for the year was used to fully fund loan growth of $3.4 billion. Overall asset quality remains stable with credit ratios at historically low levels. Total adversely graded assets decreased $98 million during the quarter to $342 million, as special mentioned credits will reduce $53 million to 86 basis points of total assets.
From the prior-year, total adversely graded assets have increased just $26 million versus a $3.4 billion rise in loans, resulting in reduced ratio to total assets of 1.31% from 1.43%. Non-performing assets comprised of loans on non-accrual and repossessed real estate increased marginally to $70 million or 0.26% of total assets and continues to hold steady as a proportion of the balance sheet.
Regarding a reduction in total adversely graded assets as discussed last quarter, we do special mention loan credits as an early indicator of potential stress that has little correlation to loans becoming non-performing. Overall, we see nothing in our portfolio that raises concerns or indicates a change in our credit outlook.
Gross credit losses of $2.2 million for during the quarter were offset by $900,000 in recoveries, resulting in net loan losses of $1.2 million or two basis points of total loans annualized. The credit loss provision of $4 million remains consistent with the prior quarter. Provisioning related to our loan growth also increased the allowance for loan and lease losses to $167.8 million up $15.1 million from a year-ago resulting in a reserve of 80 basis points of total gross loans held for investment at December 31.
In advance of the adoption of CECL in the first quarter of 2020, we've included historical information on a reserve for unfunded loan commitments and credit discounts on acquired loans, which we believe better represents the total allowance for credit losses going forward. Inclusive of these additional reserves, our allowance for credit loss ratio to total loans would have been 87 basis points in Q4.
Finally, regarding the transition to CECL in the first quarter of this year, we expect day one increase in reserves of approximately $35 million or 20%, which on an after-tax basis will reduce our tangible common equity ratio by approximately 10 basis points. Assuming the economic backdrop relative mix level of loan growth and the duration of credits remain consistent.
Our go forward allowance for loan losses will remain relatively stable at the new CECL adoption reserve level of approximately 100 basis points, which is inclusive of the $35 million day one chart. As a reminder, under prior GAAP, our provisioning was based upon an incurred loss model fall under CECL were estimating lifetime losses and provisioning for them at the time of loan origination.
And finally, we continue to generate significant capital and maintain strong regulatory ratios with tangible common equity total assets of 10.3 and common equity Tier 1 ratio of 10.6%. Despite the payment of our quarterly cash dividend of $0.25 per share, or tangible common equity per share rose $0.94 in the quarter to 26.54 and is up 20% from a year earlier.
Notably, our production of tangible book value has been more than three times that of the peer group over the past six years. Given capital requirements banks operate under, we believe that consistent capital appreciation is fundamental to value creation.
I'll turn the call back to Ken.
Thanks, Dale. On the heels of achieving several corporate milestones in 2019, we are excited by the growth opportunities in both our regional and national business lines in 2020. We continue to hold to the belief that predictable EPS and tangible book value growth will drive industry-leading total shareholder return. In 2020, we expect to, one, continue to thoughtfully and conservatively grow loans, our pipelines appear strong and we expect to grow loans between $600 million to $800 million per quarter funded by deposit growth. Balance sheet growth will drive net interest income growth despite marginal NIM compression. As deposits come back in Q1 and Q2, our liquidity will rise placing some pressure on margin as we continue our residential real estate diversification strategy.
Given the backdrop of a flat rate environment, our efficiency ratio should remain stable your current levels throughout the year even as we continue to invest in technology and new products. These actions should position us to continue industry-leading return on average assets and return on average tangible common equity.
At this time, we'll field your question. Operator, would you open up the line please?
We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Timur Braziler of Wells Fargo Securities. Please go ahead.
Hi, good morning.
Good morning.
Good morning.
Starting with the margins, it looks like NIM benefited from some higher loan fees and pretty impressive reduction and funding costs during the quarter, I'm just wondering how big of a step down do you think is going to take place in 1Q assuming that loan fees normalize, and I would love to hear about your expectations on future possibilities to cut deposit costs.
Yes, so you're correct, it was a little higher than what we guided to. I think our poor margin for the fourth quarter was about a 435, if you kind of back that off, and then from there going forward, we are going to continue to whittle down the margin based upon the execution of our residential mortgage program as that becomes an increasingly large proportion of our loan portfolio. We stated that we think that's going to be maybe two basis points a month or quarter. In any case, we can kind of easily earn through that in terms of net interest income by the balance sheet growth that we expect to have. If we don't see any more rate increases, and I realize the futures market still has one in there, I think it might be unlikely that we're going to see one frankly in 2020 before the election, but if we don't see any, I think the opportunity for increased funding cost reduction is fairly limited. I think we have gotten the rates down a lot. We are a little more of a compressed yield environment as we were on the way up when rates were lower, but we're good with the margin kind of in the 430 range, and we believe we can execute upon that.
And then, switching over to the expenses, as you look at the pipeline for future projects, expenses grew roughly 15% on a core basis in 2019. Is that a good type of run rate to think of for 2020, or is the slower revenue growth going to correlate to a slower expense growth?
Well, I expect that we're going to be able to hold our efficiency ratio essentially kind of where it is, and kind of the lower 40s, and we believe that we can continue to grow with that and increase funds that we have. We've been investing in to improve the products and services and the feature functionality of our systems. During 2019, for example, we had significant outlays to improve the experience for HOA clients, and that we think was instrumental to the very strong growth we had there. We expect to do the same. So, I would look for our efficiency ratio to be fairly flat as we go through 2020.
Okay, and then just one last one for me, looking at the residential mortgage growth and the punitive treatment of resi mortgages under CECL, does that all change your appetite to grow that lending category, and I guess, how should we be thinking about provisioning as that becomes a larger component of the loan book?
Yes, so it's only punitive if it has a kind of a large charge associated with it. Of course, residential loans do have a much longer duration than what some of our average loan length have been, and so that could have an effect, but the types of residential loans we're acquiring, that is LTVs in the 60s, FICOs 750-760, debt-to-income in the mid-30s. Those metrics result in a very low estimated annual charge-off, and so, even when I multiply that by a duration factor, it's still a low number. So, increasing our proportion of our loan book into residential is not going to be increasing our overall reserve in a CECL world above the 100 basis points. So, I don't see an increase there. In fact, it could dribble down slightly.
Okay, great. Thank you.
Our next question comes from Michael Young of SunTrust. Please go ahead.
Hey, thanks for taking the question. I wanted to first ask just maybe about the competitive landscape in particular and some of the national business lines like mortgage warehouse. Do you see an opportunity to take more in market share, or grow at a faster rate any of them in 2020, given some market disruption from acquisitions?
Yes. This is Ken. Overall, I would say the competitive landscape hasn't really changed for the entire book of business. As it relates to warehouse lending, yes, we see some opportunities for disruption there, and we see some opportunity to take advantage both on the loan side and on the deposit side.
Okay. And just, Dale, maybe a follow up on the one-to-four family strategy you mentioned continuing that this year, what's kind of the overall eventual goal there? It sounds like you're pretty well-positioned from an ALCO perspective right now, but should we expect you to go all the way to kind of a neutral balance on the ALCO?
I don't think we'll get that far. What we see about this is it strengthens the relationship with our mortgage warehouse clients, it mitigates our interest rate risk, it positions us in an asset class that we think is going to perform very well throughout the credit cycle. In 2018, we had very strong deposit growth, and it's like, well, this is a great go-to asset to take advantage of to again improve earnings, improve earnings per share growth, and we're getting yields well above what we could do if we were buying residential mortgage-backed securities, for example. I don't expect us to necessarily get to 30% or something like that, where the peer group is, but we have plenty of runway to grow 2020, 2021, 2022, it basically kind of the same pace as we did in 2019, and we think that gives us a sustained kind of a growth model assuming that we have the funding sources to be able to apply them.
Okay, maybe just one last one on the share buyback versus dividend increase, kind of how are you guys feeling about deploying capital through one versus the other at this point, or are there M&A opportunities we should be thinking of?
So, for us, as you look at capital, when we started the year, we said that about two-thirds of our capital that's generated is used to support organic growth. We ended the year with about three quarters of the organic capital that we generate support growth. So, our first and foremost best use of capital is for organic growth. The dividend policy has been set, and then lastly, we will be as we always say opportunistic when either the stock show some weakness or the overall markets show some weakness to come in and buy.
Okay, thanks.
Our next question comes from Chris McGratty of KBW. Please go ahead.
Great, thanks. Ken, maybe the M&A aspect of that question, could you elaborate, you've got your multiple up a little bit, could you remind us market size, what you're seeing in terms of books that might interest you? Thanks.
So, at this time, there is really nothing going on the M&A front, and we are rather quiet there, as we see better opportunities to grow our business organically, and quite frankly, that's where we're spending most of our time. We have a viewpoint into 2020 that says it's going to look a little bit like 2019 in terms of the momentum that we had in '19, and by sticking organically, we'll see or have less execution risk with an organic strategy then if you do an acquisition. In addition, the market has not been kind to acquiring banks as you know. So, at this point, we're in the very fortunate place of saying, we don't need to do an acquisition for revenue growth, loan growth. We don't need to do an acquisition to take out expenses, and we don't need one, so that we can move our EPS or net income up. So, we have as much optionality as one would want, and right now, as I said, all quiet on the M&A front, and we're spending a lot of our time on looking how to continue to organically grow.
That's great color, thanks. Just one more, I think in the past you have guided to that 600 a quarter, Dale, of growth, you've obviously come in well above that in recent quarters, I think the comments were 600 to 800, is that just marking to market kind of how you've been performing, exceeding guidance, or that -- are you trying to send a message that, "Hey, we feel even stronger about growth going into 2020?"
We're building our plans around that $600 million to $800 million bogey there, some quarters are may be closer to six, and some quarters and maybe 800 or more as you seen, this quarter was a billion and the last couple of quarters it was a billion. So, we are looking, and I think what the most important thing here is asset quality that will drive us to the right decision in terms of growth. Right now the asset quality appears good, appears good in our overall book, and we're not seeing a lot of deals that are being won on structure, meaning, they're loosening up covenants, we're not seeing that. So, we feel comfortable in this $600 million to $800 million range, and you'll get the mark-to-market at the end of next quarter and see how we do against that.
Great, thank you.
Our next question comes from Casey Haire of Jefferies. Please go ahead.
Thanks. Good morning, guys.
Good morning.
We're just following up on sort of the capital management. You know, would you guys ever entertain a special dividend that's, an option that you guys have not used. It could be compelling if the stock price seems high and that the buyback is not an option.
Yes, first let's remember, we have a long history of dividends distributions of two consecutive quarters. And so, I think we want to get ahead of that until at least we hit four. So, we're going to continue on with a dividend quarterly growth, we're going to always talk to the board about the best way to return capital to our shareholders. And it's really, I think, really too early at this point to start thinking about special dividends. Specifically, as you see, we moved the amount of capital we're using for organic means, up from two-thirds to three quarters. So, we are trying to find, you know, good thoughtful conservative managed loans to bring onto the balance sheet.
Got you, and to that -- and so on the loan growth front, if I look at Slide 11, and your outlook for 2020. You see that loan growth mix sort of tracking. That loan growth mix in 2020 tracking that same level of C&I ready and CRA?
Well, the nice thing about our distinctive business model is that we get to move capital around all throughout the year to take advantage of the best returns, and where we think the credit is the strongest, and where sometimes competition is a little less active. So as we plan through the 2020 cycle, generally just about every business has the same growth rate to try to achieve. As we execute, that becomes a different story, as we look almost daily or weekly, as we look to move capital around to where we find the best opportunities, and that really has been the success of one of the reasons Western Alliance has been so successful.
I mean, I would expect a construction fees, we're under 10 now to hover in the kind of the nine to 10 range, the residential is going to be continue to climb from 10 now, I think that's going to certainly go into the team. And the others, as Ken mentioned, depend upon kind of the best risk adjusted returns that we have within those categories.
Okay. Thanks. And just last question for me on credit quality. Dale, it sounds like the outlook is very clean, there's nothing systemic that you see. Everyone's very impressed with your ability to keep the NCOs low.
But I mean, when you -- a lot of investors out there would say like, it's only so sustainable given the risk profile, can you just give us some thoughts as to what when you see some of your peers catch a commercial credit, and the leverage loan book comes to mind specifically with you guys. What are you guys doing differently that is enabling you to avoid, catching these credits?
Right. This is Ken -- first half, half a step back, big picture. Our portfolio today looks fine. We don't see any economic stress from the economy. And to answer your more specific question, we think are well diversified portfolio, which again, is consistent with this business model we have helps us to avoid some pitfalls. So for example, we don't do energy loans. We've gotten out of solar. We have very little QSR loans on the bus. We don't have large retail malls. These are all things that we have stopped doing years ago or maybe a year ago. So we're trying to look for where we see there where there's possible to some credit hiccups and avoid that. Next, back to the national business lines, the national business lines for the most part. We've never seen losses. So let's go through timeshare. We've never had a loss and the team that's running it has never had a loss in 35 years. Warehouse lending, we've had that business 10, going on 11 years, never had a loss and this is the full lending. We've had one small loss for $400,000 over the last 10 years. Even our hotel book is very well positioned when I, if you want to talk about our debt service coverage ratio, or LTV and our debt yield for example. So we've been fortunate to be playing in spaces in the national business lines that other banks do not play in and remember the national business lines have four characteristics to them. One generally there's less competition, which allows us to have fairly good pricing power or pricing stability, good operating leverage and last but not least, as I described, good asset quality.
Dale, do you want to add anything to that?
Yes, regarding the corporate finance notes that you mentioned, we monitor those, those are liquid loans and we monitor that pricing daily, if there's a price deterioration that's going on, if we don't understand why that is, it's what sell first and then ask questions later. So we'll cut a particular haircut down or something like that and get out and we really move quickly on those types of deals.
Great, thank you.
Our next question comes from Brad Milsaps of Piper Sandler. Please go ahead.
Hi, Ken, Dale.
Hi Brad.
Okay, I was just curious if you could update us on maybe the number of new producers you hired in 2019. And kind of what your appetite would be for new revenue producers in 2020?
Yes, we've been rather fortunate that through most of our businesses, we've not had large attrition in our revenue producers, I will say, but with a little more competitive up in Northern California in the tech and innovation business, but relatively speaking, we're not pushing heavily to bring in new producers given the runway that we see in front of us, and some of the businesses that we started certainly on the loan initiatives that we started in 2018 and in 2019, both of our two loan initiatives had great results. So we brought in people there earlier in 2018 and we needed to but to get them comfortable with our way of doing business.
In terms of the FTE increase, a good portion of that has really been to increase infrastructure. So those have been in operation tonight in IT areas and also kind of personnel development for that. As Ken mentioned, most of the positions we've had in terms of frontline producers have been fairly static over the past year.
Yes, that's where my next question, it sounds like you've got plenty of capacity on staff without really having to add any additional revenue producers in a big way?
Yes, I think that's fair.
And if maybe as a follow-up, as you look at your $600 million to $800 million quarterly loan in deposit goal, which side of that would be looks easier to attain against backdrop of being maybe more selective with credit versus it's always difficult to grow deposits. Just kind of curious which pipeline might be bigger or which side of that equation, you kind of feel better about as you move through the year based on kind of what you see in the pipeline?
It's funny, our pipeline conversations change almost weekly depending on when deals are going to close or when people are making their customer calls. So quite frankly, they both have the same probability of occurring. I just think you may see some, we're not that good to make sure every quarter is exactly lined up. But if you look at 2019 as an example, it did eventually line up very, very well. If you go back to 2019 Q1, deposits came out of the chute very, very strong, loans were okay. And then it ended just the reverse with loans being very strong and deposits being okay. But net-net loans grew $3.4 billion, deposits grew $3.6 billion. So that's what we're trying to do is to kind of, as I said in my outlook to have deposits match the loan growth.
I like getting the deposits and I like leading with deposits, I think that gives you that, that really gives you inventory that you can find alternatives. If it's a bad economy, we can go to residential, if we think things are growing, we've got a more expansive kind of products array on the loan side that we can offer. If we continue to sustain good core deposit growth, that's going to drive improving earnings per share.
Great. Thank you, guys. Nice quarter.
Thank you.
Our next question comes from Gary Tenner of D.A. Davidson. Please go ahead.
Thanks. Just one question for me in terms of the $4 million of non-recurring items in the quarter, could you give any detail on that? Was it severance, was it tech write-downs, just any kind of background there?
Yes, so I mean, we kind of enumerated a little bit but yes, so we had a very strong 2019, we had an accrual catch-up in terms of incentive compensation that we recognized. We continue to build out as I mentioned on one particular product with regarding HOA but both infrastructure regarding future functionality of products, regulatory compliance and sustaining what we need to do there as well. So it's a little bit elevated in the fourth quarter in terms of kind of what those charges came in, but in some respects, they're going to continue, as I mentioned, we're going to expect to have basically a stable efficiency ratio going forward which means that our revenue growth in dollars is going to be more than double what we're going to be increasing expense.
Okay. Thank you.
Our next question comes from Brock Vandervliet of UBS. Please go ahead.
Thanks, good morning.
Good morning, Brock.
Good morning. Dale, just going back to your deposit pricing comment, it sounded like there wasn't, you weren't expecting much scope there to further down deposit costs and just wanted to talk about that?
Sure, yes, I know -- so we got in front of I think the market rates were coming down. I mean we moved within hours after each of the equities to the Fed changes. And today, where we see our pricing relative to kind of the competitive environment is we don't see that, we've got a whole lot of latitude relative to what others are paying, and of course we have these kind of odds, everyone does, these online banks that are charging or providing returns much, much higher than that when local institutions do. So that doesn't mean there isn't some kind of changes we can kind of make on the margin. But I think people have kind of settled into kind of the term structure of the yield curve that we have today. And I think it's been fairly quiet out there for rate changes, not just for us, but for the market of late as well.
Okay. And others have asked about this as well, but within that resi portfolio and these rates 475 loan yields, let's say 140 bps above agency conforming, could you talk about what's in there and a little bit more detail number one, and number two as this portfolio grows relative to other components, do you think there could be a leak down in the reserve given that this may have a lower some benefit under CECL which you may have alluded to?
Yes, it does. It does have some benefit under CECL and it could kind of whittle down maybe over time. Of course, CECL, you're always in this process of kind of reconfirming and testing and testing your models and back testing them. So there could be other changes that might take place, but so a couple of things, one is we're not intending to buy agency qualifying paper. So that is part of the reason that picks us up in yield. So we're not expecting to kind of bundle this up and ship it off to Fannie, Freddie or anything like that. So from our warehouse clients, we're buying some of the stuff that doesn't qualify to their primary liquidity channel, which is one of these DSCs. So what do we buy, so there's some jumbo in there, it's not a lot. The average balance on this stuff is under $500,000. But there is some jumbo that doesn't qualify as there's a significant piece of something that isn't owner occupied. So these could be vacation home or something else that could make it ineligible for these agencies to pick-up. But again, we're looking for things that make improve the yield to us but don't increase the risk. So again, these are really low. These are low LTV loans, they're good to high FICO scores, but it's not necessarily their primary residence. We also look for things that are, maybe there's some defect in the process that makes them ineligible for it. There's been like timing on right of rescission. There's been kind of what.
Just a documentation, they have a slight imperfection.
Yes, and so we'll take those and we get a cheaper price for it.
Got it. Okay, great. Thank you.
Our next question comes from David Chiaverini of Wedbush Securities. Please go ahead.
Hi, thanks. Couple of questions for you, so follow-up first on the deposit discussion, what's giving you confidence on the deposit side to fund that increased growth of $600 million to $800 million, is it new initiatives or getting more entrenched in existing businesses, just curious there?
Yes, I think there are a couple of things. One, the way our business is structured, we have an HOA business; again, you've heard us say that grew over deposits over $600 million. We put money against it for technology. We think that technology improvement has allowed us to bring in more deposits this year. So that channel helps us. The tech and innovation channel generally brings in deposits on a two to one basis. Our warehouse lending channel with all the ways we touched the warehouse lending clients allows us to bring in deposits that are one-to-one. So we have a number of channels just that created its own national momentum for us to grow. And then, things we always say, we're a pay for performance culture, so everyone's out looking to get deposits, we don't do a loan without getting the operating accounts, we've got minimum liquidity requirements in our loan docs. In case, you don't hold your deposits at a certain level, we have an opportunity to re-price your loan, your yield. So, it's all those things.
As it relates to the loan initiatives, we've gotten a little traction on the loan, sorry, the deposit initiatives, we've gotten a little traction there. We grew both of those over $100 million. We are still keeping our eye on that. We'd rather be a little slower and right, and give the clients the best customer service experience, tends to be fast bring in stuff and not service the client, and since we have the opportunity through these other channels to bring in deposits, we can take it a little slower on the new initiatives and wait to when we feel ready to go out and bring them in at a faster pace, but our new initiatives had a great year. I mean tech and innovation up a $1 billion, HOA up $600 million. So it's been both.
That's helpful. And should we expect a similar mix in that deposit growth between interest bearing and non-interest bearing?
Yes, I think if we can hold our own on interest bearing dollars, I think that's doing pretty well on non-interest bearing dollar. So I mean, I could see over time and particularly price rise, that's going to be a little more difficult. So I would like to hold our own dollars on the non-interest bearing side, maybe most of the growth comes from interest bearing.
Got it. Thanks very much.
Our next question is from Jon Arfstrom of RBC Capital Markets. Please go ahead.
Thanks. Good morning, guys.
Good morning.
A couple of follow-ups, Ken, you talked about going where competition is less active, is that the case in the CLD book? I'm just curious yields look good. And you're a little bit under 10%, and just curious what your thought is on that book going forward?
Yes, so, on that book we're going to flow between 9% and 10%. This quarter, as it relates to the percentage used to our multi-numerator and the denominator impact, denominator went up a $1 billion, and we focused on the numerator and that came down $203 million. We primarily did that through pricing. So, we priced up a little bit. We did get some deals at our pricing, and the ones we didn't get, well, we waited for loans to roll off the books, we didn't replace them, and that's how we brought the ratio down. But some of the aspects of what we do in that book, the competition is not any more competitive than it's been for the last two or three years.
Okay, good. And then, your ability to get there a year early, it's just simply what you just said pricing and letting some things roll off.
And the denominator.
Okay. And then two other follow-ups, the other national business line growth was really strong for the quarter, you talked a bit about the mortgage warehouse, anything else to call out in that segment?
I don't think anything pops right off the top of my head, I think it's really the growth was in those segments.
Okay. And then, last one, tech spending is the other area that you called out in your expense guidance. You mentioned HOA, but talk a little bit about the initiatives and where you're spending the tech money, where it's focused? Thanks.
Yes. So, our spending is really targeted against the client satisfaction and offering products and improved service, and my hypothesis is that, I think a lot of banks are going to pull back in 2020, because they don't have the growth aspects that we have, and I don't think they're going to service their clients to the level that the clients want to be serviced at. So, I think by continuing to improve our service offering, I think one will have happy clientele, and number two, as you saw in HOA, we'll be able to either hold deposits or bring in more deposits.
Okay. Yes, a lot of your peers are talking about expense programs, no doubt about it. Thank you.
Okay, you got it.
Our next question comes from Tyler Stafford of Stephens. Please go ahead.
Hey good morning, guys, and thanks for taking the question. When I compared the management outlook slide in -- for 2020 in the deck release yesterday to the outlook slide, last year, you guys kept the loan and deposit growth the same, the interest margin the same, the operating leverage the same, and the asset quality the same, but this year, you added earnings to it. Obviously, the outlook is very favorable that you guys have talked about so far this call. I'm just curious given that you added that to the slide, if you wanted to comment just around the pace for earnings growth, or how comfortable you felt with earnings growth in 2020, especially given a lot of your peers are not growing earnings? Thanks.
Yes, one, it's good to hear that we're rather consistent year-over-year with loan and deposit growth interest margin operating levers and asset quality. The point of earnings was the cumulative effect of all of that. We'll produce year-over-year earnings, and we -- again, as we said in our prepared remarks, higher earnings, higher tangible book value will lead to better valuation over the long-term, and to distinguish ourselves from our peer group that may have a little trouble growing earnings, I think only helps us.
Okay, thanks, Ken. And then just going back to the buyback, would you expect to fully utilize the authorization this year?
I'm not going to make a forecast on that other than to say, think about how we've done it so far, and I think we've done it in a very managed and prudent way. When there's plenty of growth, that growth is supported by capital. We realized we're running with a little more capital, we initiated a dividend, and if -- again, if the stock looks weak, if the market takes down everyone, we'll have enough ammunition to come in and support the stock and buy what we hope will be at attractive pricing.
Okay, understood. Congrats on a very strong quarter.
Thank you very much.
This concludes our question-and-answer session. I'd like to turn the conference back over to Ken Vecchione for any closing remarks.
Well, thank you all for joining us, and we look forward to talking to you a couple months from now. Thank you.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.