Good day, everyone. Welcome to the earnings call for Western Alliance Bancorporation for the first quarter of 2020. Our speakers today are Ken Vecchione, President and Chief Executive Officer; and Dale Gibbons, Chief Financial Officer. You may also view the presentation today via the 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, April 17, 2020, through May 17, 2020, at 9 a.m. Eastern by dialing 1-877-344-7529 using the passcode 10142009.The discussion during this call may contain forward-looking statements that relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. The forward-looking statements contained herein reflect our current views about future events and financial performance and are subject to risks, uncertainties, assumptions and changes in circumstances that may cause our actual results to differ significantly from historical results and those expressed in any forward-looking statements. Factors that could cause actual results to differ materially from historical or expected results are included in this presentation, the related earnings release and our filings with the Securities and Exchange Commission. Except as required by law, the company does not undertake any obligation to update any forward-looking statements.Now for the opening remarks, I would like to now turn the call over to Ken Vecchione. Please go ahead.

Good afternoon, and welcome to Western Alliance's first quarter earnings call. Joining me on the call today are Dale Gibbons, our -- and our Chief Credit Officer, Tim Bruckner. I will first provide an overview of Western Alliance's response to the coronavirus pandemic. And then Dale will walk you through the bank's financial performance. Afterwards, we will open the line to take your questions.I'll begin by laying out Western Alliance's approach to the COVID and economic crisis. First and most importantly, I hope that everyone on the line is doing well and that your families and loved ones are safe and healthy. These wishes are especially extended to all the care and safety workers actively putting themselves in harm's way to protect our communities.At Western Alliance Bank, our people remain healthy and engaged and despite the vast majority working from home for the last month, continue to go above and beyond the call of duty to serve our customers and the communities we operate to navigate this challenging time. Our business continuity plans have been working as anticipated, and I am proud of the entrepreneurial spirit our people continue to demonstrate to get the job done and develop unique solutions for our clients.First, I'd like to lay out the business actions Western Alliance has taken in light of the evolving environment. Although we did not anticipate the widespread severity and likely duration of the virus, we did start assessing potential risks and mitigants as early as mid-January. And as the breadth of the pandemic became apparent, we accelerated implementing plans in mid-February to prioritize asset quality, capital and liquidity management. We have since divided the business into appropriate risk segments, led by senior managers with deep credit and workout experience to monitor and force the early engagement with our borrowers…

For the first quarter, Western Alliance generated net income of $84 million or $0.83 earnings per share. Net income was reduced by a $51.2 million provision for credit losses driven by the adoption of CECL, balance sheet growth as well as the change in the economic outlook due to the pandemic.Strong ongoing balance sheet momentum coupled with diligent expense management drove operating pre-provision net revenue to $163.4 million, up 10% from a year ago, which we believe is the most relevant metric to evaluate the ongoing earnings power of the company. Net interest income and fee income remained relatively stable, producing net operating revenue of $285.3 million, primarily a result of lower yields on loans which was partially offset by lower rates on deposits and borrowings. Noninterest income declined $10.9 million to $5.1 million from the prior quarter due to mark-to-market of preferred stock holdings of primarily large money center banks of $11.3 million, partially offset by $3.8 million equity investment gain. To date, of the $11.3 million mark, $3.5 million has been recovered.As credit spreads widened during the last quarter, the yield on preferred stocks followed, impacting valuations. We do not believe this represents a permanently reduced valuation and that preferred stock values will continue to recover over time. Finally, noninterest expense declined $9.3 million as compensation and other operating expenses declined by $7 million.Regarding implementing CECL in our allowance for credit losses. In our 10-K, we disclosed the adoption impact of $37 million. $19 million of which was attributable to funded loans, $15 million for unfunded commitments and $2.6 million for held-to-maturity securities. This resulted in a combined January 1 allowance of $214 million.During Q1, loan growth drove an additional $24 million of required reserves and about $30 million was driven by changes in the economic outlook as…

Thanks, Dale. Regarding our hotel franchise finance business, we believe our focus on the select service subsegment, conservative loan-to-cost underwriting discipline and strong operating partners sets us up for a maximum financial flexibility to weather the duration of the crisis. Like most hotels in the country, our clients have seen a dramatic reduction in occupancy rates over the last month, and senior management is involved in active dialogue with each borrower to evaluate remediation efforts and contingency plans.Going into the pandemic, 75% of the portfolio had an LTV under 65%, and more than 73% had a debt service coverage ratio of 1.3x. Additionally, we only partner with experienced hotel operators with significant invested equity and resources to support ongoing operations. Fully 66% of the portfolio is with large sponsors who operate more than 25 hotels, and 90% operate 10 or more properties with top franchise or flags. Based on our ongoing constructive dialogue, we believe that sponsors view this as a temporary event and want to continue to maintain and support these properties over the long term given their significant equity investments. We are actively working with them to appropriately utilize the PPP program and the Main Street Lending Programs along with their own liquidity as a helpful financial bridge to arrive at a longer-term solution. Based on the mutually developed financial action plans, we will selectively implement loan modifications along the lines we previously discussed. This is a prime example where both parties contribute to a comprehensive solution.Now regarding our Tech & Innovation business, we primarily finance established growth technology firms with a strong risk profile mainly companies classified as Stage 2 with an established business model, validated product, multiple rounds of investment and a path to profitability. This provides greater operating and financial flexibility in times of stress.…

[Operator Instructions]. Your first question today comes from Casey Haire of Jefferies.

Just a question on the reserve build. Obviously, a tricky proposition here. But trying to get a -- you guys mentioned you used a bunch of Moody's scenarios. Can you just give us some color as to how much weighting was given to the Moody's adverse scenario? What kind of recovery you guys are assuming? How much government help -- the stimulus stuff that the government is doing is -- offset it and then obviously, the duration? I know that's a lot, but just trying to get some color as to the magnitude of reserve build here.

Yes. So we primarily use the baseline case as of March 31. And then we looked at S1, and we looked at S3. S3 is the kind of the adverse scenario, which is obviously more critical and a longer recovery period. We do struggle with what is the time line of this type of thing and how much these things come back. We do think that the institutions and the plans done by the federal government and both on the congressional side as well as the FOMC have an effect in terms of being able to mitigate this and draw -- make a bridge to when we're at a time when we can start to turn the economy back on.I don't have a time line for you in terms of kind of when that is going to be. But we will look at this. We fully reserved as of March 31, and we'll look at this again at the end of the second quarter.

Yes. I would just add and say, we did factor in some impact of the PPP program. But as we were processing, we didn't know what that size level is going to be. So having 2,600 participants over $1.5 billion looking to go out is going to be very helpful. I don't think it's been fully factored into our reserve calculations. But that $1.5 billion will help cover $6.7 billion of commitments in our company or $4.6 billion of current outstanding loans, which means that's about 20% of our current portfolio.

Okay. Great. And just following up on the loan modifications. If I heard you right, I think you said $400 million to date. So just specifically, what exactly are you guys doing there? And then like any color as to how much you've improved upon that $400 million as of April 17 here.

Yes. By the way, that $400 million is April 17 number, just to be all clear. Okay? Number two, I would say in terms of color, I think we caught a lot of our clients by surprise, our borrowers by surprise when we said early on, this is going to be a longer-term problem. And let's have a longer-term solution rather than the standardized cookie cutter, 90-day P&I deferral.And by the way, that took a lot of getting used to from our client base, and we had to go back to them several times. As we've had that conversation, you can see that our viewpoint is more likely than not going to be correct. We don't know how long it's going to go. But we said, "Let's start with figuring it out through the end of the year." And because of that, we need you, the borrower, to contribute something with more equity, more collateral, more liquidity to the project, and then we will help you along with the deferral as well. And we took each loan on a case-by-case basis. So we did make broad proclamations that said, "We'll just do 90 days here." So every loan is being different. And I assume as we get into questions about different books of business, I'll give you some stories behind each one of those books of business. But we think getting out there and dealing with our clients on a one-to-one basis is going to be helpful.And by the way, the same lessons that we learned in the Great Recession that getting there early, having conversations for the longer term helps our clients survive. But more importantly, they know that we'll be there when they start to see growth opportunities. And the combination of their growth opportunities, the ability to get through this gives them the ability to prosper longer term. And that's our approach when we sit down and we talk to our clients, Case.

Okay. Great. Just last one for me. You guys clearly prioritizing the PPP program for loan growth. Just a question, so what you -- how are you guys funding this? Just trying to get a sense for what the margin -- the incremental NIM might be. And how willing -- how -- regarding capital and liquidity, are you willing to go much higher on the loan-to-deposit ratio and -- as well as on the TCE ratio?

So you may have noticed, our ending balances for loans and deposits were significantly above the average balance for the first quarter. So we had $1.7 billion more in loans and $1.5 billion more in deposits. 2/3 of the deposit number was in DDA. That gives us, we think, momentum in terms of expanding PPNR into 2Q. You layer this $1.5 billion then on top of that, we have a myriad of ways to be able to fund this. One is we think we have additional deposit opportunities; two is the Federal Reserve has said they'll advance 100% on these loans; and three, we have another $10 billion of liquidity that we could get elsewhere. So we're not really concerned about funding that cost. I think it's going to be something around 25 basis points. If we put it to the Fed, it's 35 basis points to do that. And then we'll take these in. So that, again, I think, shows that we expect continued balance sheet growth into the second quarter primarily driven by these PPP notes.

Okay. And if I'm understanding the PPP, it comes on at around 2% with the fees associated. So it looks like about 1.75% incremental margin. Is that right?

Yes. So our weighted fee on the $1.5 billion we've done is 2.4%. And then these loans -- I mean the preponderance of this is fairly short term. We're going to call it 6 months. But then for the part that isn't forgivable, that has a tail that goes out 2 years. So on those actual loan rate on the entire program was 1%. So you get 2.4% on the entire bucket, and some of that is going to be accelerated in terms of recognition based upon the short-term nature of the forgivable element.

The next question today comes from Arren Cyganovich of Citi.

I was wondering if you could just talk a little bit about the working with the customers. I appreciate all the commentary. I guess I just want to have a better understanding of what proportion of your customers are actually getting deferrals now and how that -- how those are categories relative to the modifications that you're discussing.

I'm going to let Tim Bruckner, our Chief Credit Officer, take that off.

All right. Thank you. And this is, I think, a nice follow-on to the discussion we've just had. In the prioritization of this, the customer conversation, that dialogue is of top priority. So that started for us back in February. We've got 2 parts to this that have come into our common language. There's the trough, and then there's the recovery and stabilization and a new normal. As a bank and as a business, we know that the better that we do and the better that we help our borrowers through that trough in terms of proper planning, the better that asset stabilizes in the new normal.So the conversations are actually going very, very well. But there's obvious differences between borrowers and industries and businesses. And necessarily, there's different conversations and discussions. But what that lets us do as a business is then monitor that cash and liquidity through the trough and be best positioned in the recovery and then stabilization and in normal, whatever it is for their business. And so it's really a dialogue that started in February, and it will continue throughout this entire process. PPP is just part of it.

So Arren, this is Ken. Let me just -- it's an interesting question that you asked because there's not one singular answer for the entire portfolio. It depends on which portfolio you're talking about. But maybe some color behind the portfolios would be helpful here. So for example, we're talking to everyone in the hotel book, right? That's HFF. That's $2 billion. Well, 50% of those -- 50% of our clients have already made their P&I for April. And then 80% of the remaining 50% are in deep conversations with us, where we hope that we'll have something tied down in the next couple of weeks in terms of a modification program. And then they'll make their payments at that time or maybe they'll extend first, and then we'll get some payments after that.So that's the hotel book, and that's how the conversation is going there. The conversations, say, in lot banking is quite different. We're actually getting inbound calls. And we're -- and people are asking us, "Are you going to be there when we find opportunities?" And then our question is, "Well, are you looking for deferments?" And we've had a couple of deferrals. We've got a couple of clients call in and say, "I'm not going to ask for anything. I'm looking at the future. I need you to stand with us."So those are just two different ways. The book is different. Our gaming book, okay, is completely different than what's happening. We think our gaming book, other than 5 or 6 small deferrals that we made on principal, we think our overall gaming book has enough liquidity to survive into the summer, right, which is -- so that makes our conversation there a little bit different. We can take a little bit more time. We can see how the Main Street lending facility can be accessed because the gaming companies could not access the PPP program.So every different segment of our book has a different conversation. And that's why, if I can reiterate again, and Tim was very early on this in our -- we do a weekly senior operating committee meeting, but in the second or third week of January, he just stood up and said, "Okay. We're going to have senior leaders be in charge of books of business across the entire company that have workout experience, heavy credit experience, has been through something like this. And therefore, we can tell each discussion differently." That's -- for example, Robert running the hotel business -- Robert was born with hotel business in his veins. Why wouldn't he take that on and run with that, all right?And so we look for different strengths to match up against the portfolio here. I'm sorry, it was a longer answer, but I hope I gave you some color as to how we're managing our conversations with our clients.

The next question today comes from Brock Vandervliet of UBS.

Just big picture to start. Do you think this is going to be a mild or severe recession in the scale of recessions that you've -- that we've experienced in the past?

Well, my answer keeps evolving as information evolves. And I try not to be tick by tick, but certainly more pessimistic than I was in early March than mid-March, given the 22.5 million people have recently filed for unemployment claims. So I think it's going to be deeper than I've ever experienced, all right? But I think our answers or our approach was one that we anticipated that it was going to be longer than what people thought. We just didn't think the severity of what we're seeing was going to be as deep.

Okay. And more specifically around investors' real concerns here, for the hotel book, like what percentage of properties would you say go bankrupt in an average recession? What...

Okay. So I'm sorry, Brock. I didn't mean to cut you off.

Yes. Go ahead.

Okay. So we went back and we looked at the GE -- this was originally the GE business, and we bought it in GE -- from GE in 2016. So when we went back and we looked at their performance level from 2007 to 2015. And during that time, during those 8 years, total losses amounted to $52 million. Average charge-offs of 60 basis points, with peak losses coming in 2010 at 3.3%. They had a portfolio of about $1 billion in size.Now what's important to note is their portfolio was completely different than the model that we constructed. Their portfolio was more of a shotgun approach. They had weak flags. We do not. They have small operators. We do not. They had weak sponsors. We do not. And they had LTVs of 75% and our LTVs, as I said earlier, are about 60%. So we have a different model than what they have, but that's our best look back to get a gauge on what may happen going forward, adjusting for the difference of our model. Tim, you want to comment?

I just want to add one thing to that is I think if you really look at it to our sponsorship and sophistication of investor competition, is a lot different than that legacy portfolio as well. We really have the larger operators, the higher level of sophisticated investor. When we have these dialogues and say, "Come on, we're solving for something here that isn't 90 days." We have folks that understand why and how we can work together and do that. And that's going to keep the leverage down on this portfolio. How we do on that puts us in the position and the rebound that we want to be at.

And lastly, the debt service coverage ratios that you show on Page 20, are those as of Q1? Or are those through April? Because clearly, the hotel performance has gotten -- deteriorated.

Yes. Now they're through Q1, Brock. We wouldn't have that information that quickly for April.

The next question today comes from Brad Milsaps of Piper Sandler.

Ken, I think you gave the stat on the tech book that 14% of the companies had cash on hand six months or less, which was pretty consistent with history. I was curious if you could give that same kind of stat for the hotel book. Obviously, I know that the PPP program is having an impact there as well. But just kind of wanted to get any kind of sense on kind of the forward look on debt service coverage for that book, if you could look at it in a similar way to -- as you look at the tech book.

Well, I don't have the stat on what the collective liquidity is for the hotel book. We are -- that is one of the single most important questions we have, our clients. And it's -- we're gathering that information as we speak. They generally don't run with a lot of liquidity. And now here's my however: my however is if you are a recently opened hotel, which we have a couple, they have liquidity. Because they had that liquidity on their balance sheet, getting ready for the opening. So they're okay. If you're a hotel that was building up your reserve to do a pit, you have some of that liquidity. If you're a hotel that's been operating for a while and distributions have gone back to your investors, you have less. And therefore, we have to talk to you to go to the investors to get a capital call to come in for you to get a defer -- to get some deferral. So a little bit different, and that's why one of the things that I can keep repeating here, case by case, individual hotel by individual hotel and our individual property throughout the whole book of business.

Okay. And just maybe a follow-up -- two follow-ups. One, how large is the gaming book? And then secondly, I think at the end of last year, you had about $8.5 billion of unfunded commitments in total for the whole loan portfolio. Can you talk about the potential for those to be drawn down, maybe where you've cut those 2 and implications of that would have on capital?

So I'll take the easy question, and then I'll slip it over to Dale for the harder one. The simple answer is $500 million on gaming.

Yes. So the most significant draw we've ever had on unfunded has been 8% of that amount, which, frankly, we got close to kind of where we were with this drawdown. We're not seeing any more additional draws at this time. We're -- in fact, we've had some kind of repayments of some of those draws.So we don't see -- and a lot of these draws there -- I mean they're -- or these commitment lines, we don't think they would really kind of ever be drawn down in terms of the structure behind some of these credits. So while we have these unfunded elements to them and we did have a drawdown in March predominantly, we're not seeing anything else subsequent to that.

The next question today comes from Chris McGratty of KBW.

Quick question on just the balance sheet trajectory. Given the comments about the growth and the draws, any thoughts on adjusting the resi mortgage strategy a bit just in light of the capital and liquidity?

So the resi -- the purchase of resi mortgages may be far more opportunistic right now than we've ever seen as some of our clients are selling their mortgages at significant discounts, which will allow us to go ahead and buy at higher yields than we bought in Q1. So we're going to look at that. The keyword we used to use -- or we used for our share repurchase was opportunistic. Same thing here. If we can get the right risk/reward trade-off, in fact, there are resi mortgages available that have better or lower LTVs, lower DTI and higher FICO scores that are selling for much higher yields than what we've recently purchased, say, at the end of 2019. So we'll look at that and if there's opportunity there, we're going to take advantage of it.

I think an important thing on this program as well as on the hotel book is collateral. I mean we are in strong collateral positions that -- such that it would take considerable sustained valuation declines to ever pierce where we are in terms of risk of loss.

Okay. And just if I could follow up, Dale, in terms of either the CET1 or the tangible. Obviously, this quarter had a big jump down just because of the growth. Where do you comfortably run those ratios in this environment over the next few quarters?

Well, I mean, so we saw a decline in those two. Now with the PPP program, that could pull down our TCE. It really won't have an effect on CET1 because those are all 0% risk weight as their SBA back. But we could see this number come down into the 8s.

Okay. And then maybe the last one, if I could do it. The color on the hotel history of loss was great. Could you do a similar run-through of the tech book in terms of peak losses when you didn't own it? I think they were kind of in the mid-single digit but the early stage. But just blended, I think they were around 2%, 3%. Any color would be great.

Your right collection is correct. I don't have those in front of me, but we'll pull them up. As you know, they're available on SNL.

Yes. The last time I looked at it, and it was a while ago and it wasn't for this particular situation, as I said in my prepared remarks, there was a 2x coverage of the warrant income to the credit losses. And as you know, credit losses come early and the warrant income comes later. But when you look at it overall, that the warrant income that we get has always covered the -- more than covered the credit losses. Unfortunately, we -- it just can't be timed to be in the same quarter.

I think it's also notable that our mix has changed since then as well. So we're now doing a significant portion of our growth has been in these capital call and subscription lines. It's not something that Bridge was engaged in as a stand-alone enterprise but something that we entered as part of our risk mitigation strategy, essentially last year, to really lend into areas that have had 0 to no losses historically for not just us but for other participants in the space.

Yes. Let me give you some color as part of our review. Just so you know, I'll speak for Tim Bruckner for a second. But every Monday at my SO, senior operating committee meeting, we set the tone for what we're going to try to accomplish that week, that month, that quarter and so forth, depending on the circumstances. And then we run two senior loan committees on Tuesdays and Thursdays. Basically, we're not really approving senior loan packages, but we are reviewing large credits that are being worked on for modification. And then Tim holds individual weekly meetings with each one of our risk segments. So we're daily talking to a segment and getting live information.So on the Tech & Innovation, which is as live as I can get it, I was asking the credit officer there last night, "How would you describe our book of business?" And the way he just said -- what he said was, "I see rating turbulence, but I don't see large losses." So things can move around in terms of pass, not pass. But he's -- at this point, the book is behaving well at this point.

I might add just one more point to that. We've seen the support from the sponsorship. What -- we're in these transactions at a low loan-to-value with a number of rounds typically in front of us before we're in. And so what we're seeing is if anything takes a hit here, it's a hit on valuation before it impacts our loans. So the rounds are clearing. The funding is occurring. The valuations might be slightly lower, but the capital is still flowing in this segment, and that gives me some comfort.

The next question comes from Timur Braziler of Wells Fargo.

Maybe for Dale first. You had indicated that you're starting to see some of the utilization come back. Is that in the technology book as well? Or are those utilization rates still increasing?

Our utilization rates are fairly stable from where we are right now on both sides, both on the Tech & Innovation as well as in the corporate finance area.

Okay. And then of the 14% of the tech loans, which have 6 months or less of liquidity, have any of those been funded up in the last couple of weeks? Or was your commentary in the prepared remarks for other relationships?

No. What's there now has not been funded up. We had a couple of sponsors put money into a couple of projects right before the end of the quarter, which was helpful to us. But overall, that number has been relatively steady in Bridge's history.But we are encouraged by what we're seeing away from us with sponsors completing their rounds. We actually had credit that wasn't in any trouble in our life science yesterday that got a substantial amount of sponsor financing. So we're not seeing the sponsor financing run away from us or run away from the industry.

Okay. And then just one more on the loan modification. It looks like, at least through quarter end, the majority of it was within your Arizona and Nevada portfolios. I guess what's driving that? Is that forbearance on residential loans? Or why such a high number out of those two geographies?

It's really the pace and cadence of those customer discussions. Those discussions drive it. The discussion results in an assessment of liquidity, liquidity necessary to bridge the trough. In some cases, that liquidity already exists. The solution, which may include some form of modification, is tailored to the liquidity goal. So it's really just the pace and cadence of those discussions.

Okay. And then last question from me for you, Ken. With your commentary that you're a little more pessimistic now than you were in mid- to late-March, I'm just wondering how that correlates with using the baseline Moody's assumption for allowance. So we see another tick higher for adjustment on the existing portfolio? Or at this time, are you still comfortable with the $30 million that was provided for the existing book in detail?

So I'm comfortable with the provision that we provide at quarter end based on everything we knew at that time, right? I'm sorry, I just had a senior moment. Second part of your question was?

Do you want to add more to it?

Yes. Do you want to take that or...

Well, so obviously, this seems to change almost by the hour in terms of what the expectations are. And since then, we've had some worse news. We've had north of 20 million people file unemployment. We may be got teased with some good news with -- last night with a treatment that looks like it's going to be -- proved to be efficacious for this.In the next 75 days, my guess is there's going to be a lot more news. And so we're going to reassess this at the end of June in terms of what that looks like. If we can get things back and some track upward again in terms of the economic outlook, I could see things getting better. If that's not the case, if we're still doing kind of in this lockdown phase, I don't think that's -- we're probably looking at additional provision in the second quarter. Can't really say right now.

Yes. I'm sorry, recaptured my thought. I froze there for a moment thinking. But I think what's going to be surprising to folks is that the pace of charge-offs are going to be -- or the cycle is going to be pushed out and elongated because of the PPP program and because of the Main Street lending facility. And I think people -- I think investors will be surprised that there aren't heavy charge-offs coming early on. Maybe on some of the smaller businesses, you would expect to see them. But on some of the larger credits, I don't see charge-offs coming to the back part of the year if they come at that time, right? And so now added to Dale's comments, depending on how quickly the country opens up and the speed and the pace, we'll then determine what we need to do as we look forward at the end of Q2.

The next question today comes from Jon Arfstrom of RBC Capital Markets.

Thanks for that comment, Ken. I was just going to ask about that, but maybe we'll go at it a different way in the provision. So Dale, the -- I think what you're saying is things are a little better by late June, early July that $30 million incremental in the provision would go away for Q2. Is that the right way to think about it?

Well, I wouldn't necessarily say that, that $30 million would be reversed. I mean if the outlook at the end of June is similar to what it was at the end of the first quarter, I think that there's no additional amount given for deterioration of credit conditions. So I think that holds with that $30 million. For that to be released back into income, I think we probably have to get to a farther period down the road and say, "You know what, we actually are well on our way toward reducing our unemployment rate. We're bringing people back in." And so the outlook is better than kind of what is the base case for Moody's at the end of the first quarter. And we're -- we have -- that has an extended return. I mean that's -- some of that really is held down through the end -- through 2021. If instead you get back to something that resembles more of, pick your letter, right, a V or a U instead of like a lazy U or an L, I think there's a possibility that you could release that.I think what Ken said was we're not really expecting to experience charge-offs if and when they come, until after these periods of the PPP program, the Main Street Lending Program and as well as the rules allowing for certain types of some of these restructurings that can be done in the site of this overall pandemic. That's going to push out recognition of loss at least, I think, a couple of quarters.

Yes. That all makes sense. I'm not saying reversal. I'm just saying it doesn't show up again in Q2. I guess the other question is on margin. It appears like you're set up reasonably well from a margin perspective. I appreciate all the disclosure, but give us an idea of some of the near-term, longer-term puts and takes, how you're thinking about the margin.

Yes. So we have a lot of clients that are at their floors. We talked about that. I would say competitively at this point in time, spreads have widened out as rates came down and as uncertainty rose. If that settles in, you could see that maybe some of the spreads would actually come down over time, which could put pressure on earning asset yields on a more longer-term basis.I think that assumes that things are getting better economically. Well, if things are getting better economically, maybe the Fed has been inclined to look at where we are in the zero band and start putting that back up. So you could be in a scenario that you actually don't see rates coming down in terms of loans generally because at the same time spreads are declining, maybe overall base rates start to rise because people are comfortable in terms of kind of the recovery of the economy. So -- but those are two dynamics that I really don't know how to gauge.But we're at the 0 bound here. I don't see -- obviously, I don't think things are going to get lower. The Fed has come out and said that they're against negative rates. I think that would certainly be a mistake to go there. So I mean you maybe have this kind of overall lighter compression over time. But as of right now, that's certainly not the case. As Ken indicated on the residential side, in particular, we actually have seen rates rise. And in fact, spreads in residential loans have increased in some cases and really haven't participated in terms of the rate cuts that have taken place.

Okay. Good. And then Ken, maybe one more for you. You talked earlier about $1.5 billion in organic loan growth. Maybe 1/3 of it was credit drawdowns is, I think, what you said. Can you talk a little bit about the quality of that growth, how you think about that? Is -- it seems like still a big number for a lot of uncertainty in the economy. So maybe just bigger picture, broader, talk about the quality of the growth and maybe some of the drivers of that.

Yes. So the loan growth was $2 billion. The credit drawdowns brought it down to what would have been $1.5 billion. That was our estimate somewhere early into the quarter when we started to see some opportunities build. Now where that growth came from, capital call lines. Industry has never had a loss. Came from warehouse lending. We've had that business 11-plus years. We've never had a loss. It came in resource financing. Not only have we never had a loss, but the team that's been running that business for 35 years has never had a loss.So you don't -- if you can forget about the pandemic for a second and go back to our approach in 2019, we started talking about derisking the balance sheet. CLD was coming down, which it has. And we were up -- you saw the uptake in our residential book of business and our warehouse lending and our capital call lines and resort financing. So those businesses are 0 or very low-risk loss businesses. And I would expect the volume for Q2 to match what we did in Q1 on an organic basis, but I would expect the growth to come in those business segments that I just mentioned.

The next question today comes from Tyler Stafford of Stephens.

Maybe just to start on that last question there or last comment, can you just talk about the balance sheet growth expectations this year? Obviously, a strong start here in the first quarter. You mentioned some of the drawdowns on the line. But just how should we think about both loan and deposit growth for the remainder of the year relative to that prior kind $600 million to $800 million range?

I'm not going to put a number out there. There are just so many moving factors. I have a little more visibility around Q2. And I think I would plan absent the PPP loan portfolio. I think I would plan on the lower end of that range, $500 million to $600 million on deposits, $500 million to $600 million on loans. And if we surprise to the upside, then great. We put in on the deposit side a number of different programs that we thought -- we hope that could be successful and/or maybe take some market share from our peer group.We'll see if we can make that happen for the rest of the year. But I think towards the lower end of that range would be the right thing to do. And don't forget, when we spike in Q2 and have some of that spike hold on to Q3 because of the PPP loans, they're going to just fall away towards the back half of the year.

Fair enough. Fully recognize there's lots of puts and takes there. The rest of my questions have been asked and answered.

The next question today comes from David Chiaverini of Wedbush Securities.

A follow-up on the hotel book. You mentioned that loan modifications are going through at the end of the year. But hypothetically, if hotels remain empty until a vaccine is developed, which could be 12 to 18 months from now, at what point and under what scenario would you move to foreclose on the hotel properties?

David, if it came across as the end of the year, I meant the end -- I thought I said the end of the quarter or during the second quarter, if that's what you...

So yes, what we're looking for is we're looking for solutions that combine capital contribution from the borrower with our ability to give them a deferral or some relief in the modification that takes us beyond 3 months, beyond 6 months, which we see a lot of the other competitors doing. It seems like they're just handing out kind of 3-month deferrals and say, "Well, let's address this again in June or July." We're not doing that. We're trying to bridge to a longer time line.In terms of what does this look like? So I mean these borrowers, they have obligations. We're going to be able to give them some relief on this type of thing, but -- and a lot of them have considerable resources to draw upon. So is there a situation whereby some of them become very stressed and we see migration down to special mention down to substandard? I think that's certainly the case. What's it going to take for us to foreclose on one of these? Well, we have a value. We have shareholders that we need to respond to, and we're going to be accountable to that, and we're going to be responding to that. That's why we think the loan-to-value is so important here because if somebody isn't -- if somebody doesn't want to be able to continue here or has to throw in the keys, then it's like, okay, well, as long as hotels overall haven't fallen more than 40% of original value, we probably have very nominal risk of loss because of where we are in the strong LTV.

That's helpful. And then shifting gears, you mentioned about how the Main Street Lending Program should benefit some of your larger customers. I was wondering, will you be able to swap out your existing loans for the new loan under the facility and essentially transfer the risk to the government?

No. No, the program doesn't allow for that in terms of -- when you issue a Main Street Lending Program, it has to be a new disbursement. It can't pay off something that's already outstanding.

Okay. And do you believe the program is big enough to make a difference? Because looking at the SBA PPP program that those funds were exhausted fairly quickly.

Well, I mean they were exhausted fairly quickly. And I guess it remains to be seen whether they're going to reauthorize that for another $250 million. I'm not sure that the process for the Main Street Lending Program is going to be as complicated a pathway as it is for the Federal Reserve. You don't have to have 2 different parties from different -- opposite ends of this political spectrum to be able to unite on something and agree. You have to get the FOMC, the Board of Governors of the Federal Reserve System to agree on this. So I don't know. I mean I think it remains to be seen what the demand is. They put it out there at $600 million. It seems like that's got some room to go. It obviously goes to much larger enterprises. $2.5 billion of revenue, 10,000 employees. So we'll see about kind of what that looks like. But I haven't heard anything about that, but I think they want to get it going and maybe see what the demand is before they go on from there.But again, we expect to be early. We were early with PPP. We got $1.5 billion. If you look at the proportion of what we did in PPP relative to our size to the overall banking community in the country, we had a much higher penetration than most institutions.

And then the last one for me is. In the slide deck, it was mentioned about 82% of the variable rate loans with floors are at those floors. Can you remind us, what's the average life or average stated maturity of those loans?

Well, the average stated maturity of our loan book is just under 4 years, and it's going to track pretty closely with that.

The next question today comes from Gary Tenner of D.A. Davidson.

I just wanted to ask a couple of question on the PPP. Dale, I think you had mentioned that as those get funded, they'll be on the balance sheet for up to 6 months. I thought the time line for when the bank or borrower could, I guess, apply to have the loan forgive was about 7 weeks. Is that -- is there something different than what -- am I understanding that...

Well, let me clarify a little bit. So you obtain a PPP loan and the portion of that, that is forgivable, i.e. that's used to cover employee compensation, certain elements of rent and other -- the basic expenses, that's the part that can be forgiven by the SBA. And so that is going to be a shorter time line. The actual PPP loans themselves are two years. So what we see is we see what was the usage -- somebody gets a loan for X amount. What is the usage of that? About 2/3 of the amount used for these loans has been for something that should be ultimately forgivable because those funds are going to be used to support those particular items that are identified in the legislation. The back 1/3 is something that isn't forgivable. And so that's going to be more of a term structure for 2 years.

Okay. And the fees on that, you'll be accounting for them through spread income? Or is that -- will that through other?

It will go through spread income. And it will be front-end loaded because of the kind of the odd nature of how these loans are going to amortize with a payment forgiveness and then the borrower responsible for the rest.

Right. So it would artificially inflate the margin, say, in the second quarter. And then a lesser impact is to get paid off beyond that?

Yes. Second and third.

And then just a follow-up in terms of the paydowns. I think, Ken, you mentioned some paydowns from those -- of the loans that were drawn in March, you've seen some of the repayments. So can you maybe quantify what you've seen in terms of the repayments on some of those lines?

It's been modest. What I meant to say is we're not seeing additional draws of any significance, and there's been some modest payments. It seems to have been stabilized. And that echoes what I'm hearing from these other institutions. I think BofA made a particular comment about this. But if you look at where these corporate finance loans, who the syndicator is, it's JPMorgan, it's BofA, it's Wells Fargo, it's the larger institutions. And I think what we're seeing really mirrors what they're talking about.

The next question comes from Michael Young of SunTrust Robinson Humphrey.

Maybe just a follow-up, Ken, on your comments about net charge-offs and when they'd be realized. I guess maybe in particular, could you just talk about high level where you think those will come from at this point? It sounds like maybe you don't expect as much from hotel given the collateral base there, but would it be more tech and life sciences businesses with less collateral base or some of the C&I categories, in particular, shared national credits or anything like that, that maybe we're not seeing or focusing on right now?

So I think I took a little bit of a step out there saying, "I just think charge-offs will be a little bit later. My crystal ball isn't as clear to say which group is it who are going to have the charge-offs. And I don't feel comfortable really putting that out there at this time. I just don't -- if things are changing so quickly that I would clearly be wrong. And I'd just rather hold back my intuitive feel on that. But I do feel generally that charge-offs will come later in the year and not as early as people think.

Okay. And then maybe, Dale, just on the shared national credit book. I think that was the strategy that you guys had had in the past on a small basis. Maybe it'd gotten up to about $1 billion, maybe outstanding at one point. Can you just tell us the balance at this point? And anything that we should be looking at there in terms of mitigating factors?

Yes. I mean we're probably at about $1.4 billion. I mean most of the draws that have come down, have come down in SNCs. And as we've talked about in the past, this is a low investment-grade portfolio. The syndicators are, as I just mentioned, the large banking companies that we participated in. We've -- at times, we've tried to do so, so that we can augment our ability to push for deposits from some of these enterprises that are in our markets. And so we've taken a little piece of them.

Okay. And then maybe just last one for me. Just on the expenses. Obviously, a pretty decent step-down this quarter related to, I assume, lower comp expectations. But is that kind of a new run rate that we should kind of base growth off of from here? Or any other factors that maybe shifted meaningfully with everyone working from home, et cetera?

No. I think we're on a lower trajectory from where we were with the step-down. We're continuing to do the necessary investments that we have in technology to make sure our platform continues to support what we're doing today, which is basically executing on our -- in our business resumption continuity programs. Ken?

Well, it looks like we've exhausted all the questions. So we ran longer. We thank you for spending time with us. We look forward to talking to you again, and we wish you a good weekend, health and safety out there for everyone. And we'll be in touch. Thank you all.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.