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Western Alliance Bancorp
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Good day, everyone. Welcome to the Earnings Call for Western Alliance Bancorporation for the Second Quarter of 2018.
Our speakers today are Ken Vecchione, Chief Executive Officer; Dale Gibbons, Chief Financial Officer; and Robert Sarver, Executive Chairman. You may also view the presentation today via webcast through the Company’s website at www.westernalliancebancorporation.com.
The call will be recorded and made available for replay after 2:00 p.m. Eastern time on July 20, 2018, through August 20, 2018, at 9:00 a.m. Eastern time by dialing 1-877-344-7529, and then entering passcode 10121936.
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 statement.
Some factors that could cause actual results to differ materially from historical or expected results include those listed in the filings with the Securities and Exchange Commission. Except as required by law, the Company does not undertake any obligation to update any forward-looking statements.
I would now like to turn the call over to Ken Vecchione. Please go ahead.
Good afternoon, everyone. Welcome you to Western Alliance second quarter earnings call.
This quarter represents our 32nd consecutive quarter of recorded net income. Joining me on the call today are Dale Gibbons and Robert Sarver. This quarter, we produced net income and earnings per share of $104.7 million and $0.99, respectively. Both, net income and EPS grew 30% from the same period last year. These results were achieved in conjunction with accelerating economic growth, rising hourly wages, increasing consumer confidence and higher personal spending.
Unemployment continues its decline and more people are returning to the workforce. Recent tax bill legislation and the administration softening approach to regulation continue to provide support and momentum to the economy. Our business model, which focuses on National Business Lines, in conjunction with a regional presence in the Southwest produced strong loan growth and even better deposit growth. For the quarter, total loans were $16.1 billion, up $578 million from prior quarter and up $1 billion for the first half of this year. Year-over-year, loans grew $2.1 billion or 15.4%.
Deposits expanded $733 million to nearly $18.1 billion from Q1. Year-over-year, deposits rose to $2.1 billion or 13%, and year-to-date deposits were $1.1 billion. This performance moved the loan-to-deposit ratio from 89.7 as of the end of last quarter, to 89.2%. Net interest margin improved this quarter as our asset sensitive balance sheet and high level of non-interest-bearing deposits moved the NIM to 4.7% compared to 4.6% in the prior quarter.
Our growth this quarter has been entirely organic, providing us the optimality, not to chase pricey M&A targets and wait for opportunistic deals that will be more attractively priced. Asset quality continues to remain stable with special mention loans declining $35 million well classified accruing loans rose by a like amount.
Positive operating leverage assisted in the reduction of the Company’s efficiency ratio by 60 basis points to 42.1%. Embedded inside the efficiency ratio are several new organic loan and deposit initiatives that continue to show promise and progress. Going forward, depending on testing, performance and product rollout, we may, and I emphasize, ‘may’ bring forward some of these development cost from 2019 into this year, which could put temporary pressure on our 3 to 2 revenue to expense growth rate target.
Quarterly earnings added nearly $100 million to equity, increasing the tangible common equity ratio to 9.9% as total assets rose $607 million, providing the Company the ability to continue to support its organic growth objectives.
Finally, compared to prior quarter, tangible book value per share increased 19.5% annualized to $19.78, which is the byproduct of the 2.02 ROA and a return on tangible common equity that was above 20% for the second consecutive quarter.
And now, I’ll turn it over to Dale.
Thanks, Ken.
Net interest income rose $9.9 million from the first quarter to $224 million, driven by $541 million increase in average loans, as well as the 10 basis-point margin increase. Net interest income rose 16% from the year-ago period. Operating noninterest income was up $1.4 million from the first quarter to $14.1 million, largely due to more income from technology financing, resulting in total revenue up $11.3 million to $238.2 million, which was nearly 20% annualized growth from the first quarter. Operating expense rose $3.4 million or 13.5% annualized growth in the first quarter to $102.7 million.
Consistent with our expectations, revenue growth rate of near 20 was about 50% faster than 13.5% expense growth rate, even as the Company earned through $1.2 million in higher noninterest deposit expense incurred to support interest-bearing deposit growth. On a dollar basis, the $34.8 million increase in revenue from the second quarter of last year was more than double the $14.5 million increase in expense over the same period. The provision for credit losses was $5 million for the quarter and asset quality remained steady. Securities losses net of OREO gains was $0.5 million.
Effective tax rate climbed to 19.5% from 17.1 last quarter, which included a benefit from restricted share awards to Western Alliance stock vesting at a higher share price than when the equity grant awarded as our stock price has climbed. The diluted share count held essentially flat at a 105.5 million, resulting in EPS of $0.99.
For the next three pages an orange line has been added to the 2017 period to show what these ratios would have been without the reduction in tax exempt benefit due to the Tax Cuts and Jobs Act passed late last year. While the numbers in green are the actual reported performance, the numbers in orange provide continuity to the quarters in 2018, had the tax change been in effect in the prior year.
Investment yields rose 16 basis points during the quarter to 3.23% and has consistently climbed from the 2.87 adjusted yield in the second quarter of 2017. Similarly, loan yields declined during the past year after adjusting for the effect of the tax act rising 32 basis points from 5.49% in the second quarter of last year to 5.81% in the most recent period. As the percentage increased of the target Fed funds rate over the past year of 75 basis points, the adjusted trailing four-quarter loan beta was 43%. On the linked quarter basis, loan yields rose 22 basis points, resulting in a loan beta of 88%.
Interest bearing deposit costs rose 22 basis points in Q2, also with 88% beta from the first quarter as the Company responded to competitive pricing pressure with sufficient strength to continue its healthy organic growth and sustain its core deposit funding profile. From the second quarter of 2017, interest-bearing deposit costs rose 40 basis points, resulting in a 53% beta. However, this measure does not consider our relatively high level of non-interest-bearing deposits, which grew $446 million in the past quarter and $1.1 billion over the past year.
When all the Company’s funding sources are considered including non-interest-bearing as well as borrowings, total funding costs climbed 15 basis points for the quarter and 26 basis points over the past year to 0.61%, resulting in a linked quarter funding cost beta of 60% and the one-year trailing funding cost beta of 34%. Over both, last quarter and last year, the bank’s loan beta has exceeded its funding cost beta. The Company believes this metric provides more complete picture of WAL’s funding price sensitivity to rising rates and betas that only comprise a portion of the bank’s funding structure while also acknowledging the bank’s 44% proportion is non-interest-bearing deposits.
The interest margin climbed 10 basis points during the quarter to 4.70, primarily driven by the benefit of higher rates on our asset-sensitive balance sheet. From a year earlier and after adjusting the prior margin by the effect of lower taxable equivalent benefits, the second quarter margin climbed 21 basis points from 4.49, which was a 28% participation rate in the 75 basis-point increase in target Fed funds during the past year. This is slightly better than the guidance we have provided of a 5 to 6 basis-point improvement in the margin for each 25 basis points increase in the target Fed funds rate by the FOMC.
Accretion on acquired loans slipped to $5.1 million from $5.7 million in the first quarter. Forecasted accretion will fall to $2 million in future periods if all discounted acquired loans paid just their contractual principal commitments. However, because of loan prepayment activity, actual accretion will likely exceed this estimate.
The efficiency ratio decreased to 42.1% from 42.7% on a linked quarter basis, and is essentially flat from the 42.3% a year ago, after adjusting for the tax change. The $3.4 million increase in operating expense from the first quarter was driven by higher professional expenses and increased deposit cost as compensation charges held flat, and compares favorably to the rising revenue of $11.3 million for a 3 to 1 revenue to expense increase in dollars. Similarly, year-over-year revenue growth of $34.8 million was 2.4 times the $14.5 million increase in operating costs.
Our pre-provision net revenue was 2.61% and return on assets exceeded 2% for the first time in Company history. These metrics have consistently been in the top decile relative to peers.
Strong first quarter loan and deposit growth grew total assets to $21.4 billion at period-end. Our consistent balance sheet momentum continued during the quarter as the 15% annualized loan growth or $578 million was very close to the 16% annual growth, we reported in loans for the past three years. Similarly, annualized second quarter deposit growth of nearly 17% from the $733 million increase also compares to the three-year compounded deposit growth rate of 16%, which is the same as we had in loans. Deposit growth of $733 million exceeded loan growth of $578 million by $150 million and enabled us to reduce our federal home loan bank borrowings to only $75 million at June 30.
Our loan growth of $578 million was driven by C&I of $334 million and residential real estate loans up $131 million. All other loan categories declined modestly as a percentage of total loans. Our line of business, the growth was broad-based with every geographic region and NBL increasing from the first quarter. Deposit growth of $733 million was particularly strong in the Arizona and Nevada regions, and the tech and innovation business line. 60% of the deposit growth was non-interest-bearing while other categories increased moderately. Total adversely graded assets declined by $10 million during the quarter to $369 million as an increase in classified accruing loans was largely offset by a decrease in special mention credits.
Nonperforming assets comprised of loans on nonaccrual and repossessed real estate decreased to $62 million or only 29 basis points of total assets. Gross credit losses of $3.9 million during the quarter were partially offset by $1.3 million in recoveries, resulting in net losses of $2.6 million or 7 basis points of total loans annualized. The credit loss provision of $5 million compared to $6 million in the prior quarter as the required reserve to support strong loan growth was partially offset by a reduction in specific impaired credit allocations and increased the allowance for loan and lease losses to $147 million, up $15 million from a year ago. This reserve was 99 basis points of organic loans as of June 30th as acquired loans are booked at a discount to the unpaid principal balance and hence have no reserve at acquisition. For acquired loans, credit discounts totaled $20 million at quarter-end, which was 101.5% of the $1.3 billion purchase loan portfolio, primarily from the Bridge Bank and Hotel Franchise Finance transactions.
Our strong capital growth for the quarter exceeded our balance sheet growth and drove each capital ratio higher from the first quarter. Tangible book value per share rose $0.92 during the quarter to $19.78, and is up 18% in the past year. At 9.9%, our tangible common equity is in the top quartile of the peer group while return on tangible equity again exceeded 20%.
I’ll turn the call back to Ken.
Okay. Thanks, Dale.
Our business model, regional presence in the Southwest, combined with National Business Lines positions us for continued success in the back half of the year. Our loan pipeline looks strong as our regions and National Business Lines provide us the flexibility to move capital to better priced and better structured transactions. The National Business Lines carry with them less competition, more stable pricing, good asset quality and positive operating leverage.
Deposit growth will continue to challenge the industry, and despite our outstanding growth this quarter, continues to get management’s full attention. We take nothing for granted, but we expect our deposit growth to continue to fund loan demand.
Our tech and innovation, life science, HOA, and warehouse lending and National Business Lines continue to be an active source of deposits for us. And our approach to requesting deposits when providing loans gives us optimism we can continue to grow deposits alongside the loans.
Our NIM, supported by a high percentage of non-interest-bearing deposits and loan yields that have performed well but remain under pressure, should have an upward bias for the remainder of the year and dependent on additional rate increases by the Fed. We expect interest bearing deposit betas will modestly decline from here to year-end as we still target approximately 50% beta to the rate cycle with any future Fed actions supporting a higher NIM.
Year-to-date operating leverage has benefitted from a nearly 3 to 1 revenue to expense performance as revenues have risen $72.5 million and expenses $25.5 million year-over-year. This performance metric depicts the underlying leverage more clearly than comparing revenue growth percentages to expense growth percentages.
Asset quality remains stable and we work hard not to trade away deal structure for growth. We remain vigilant when conducting asset quality reviews and move expeditiously when borrowers show early signs of credit stress. Overall, our culture at Western Alliance combines an entrepreneurial approach with prudent credit and risk management practices. Management will continue to focus on both aspects of our business as we move into the second half of the year.
At this time, Robert, Dale and I would be happy to take your questions.
[Operator Instructions] Our first question comes from Timur Braziler of Wells Fargo Securities. Please go ahead.
Hi. Good morning. First one for Ken. The loan and deposit initiatives that you referred to, any additional color you can provide there? And I guess, what’s going to be the deciding factor, whether or not some of those expenses do get accelerated into 2018?
Okay. As I said on the last call, we’re not going to give any clear line of sight as to exactly what we’re doing. What I can say is, loan and deposit initiatives has organically grown, meaning we saw an opportunity inside of our book of business today to expand a particular area. We have a couple of those people already on, or in the Company and we do need to acquire a few more as we begin to push forward and grow those deposits. The second deposit initiative, we just hired the leader of that group at the middle to tail end of June. And right after this, I’m going to sit down and review his operating plan. And depending on how fast he can get that business up and running will depend on how quickly we hire the people. That’s probably about as much as I can offer at this time.
Okay. That’s helpful. And then, just maybe looking at the broader deposit base, is there any bifurcation in betas maybe versus -- in the Arizona and Nevada markets versus some of your other markets and other National Business Lines, any difference in competitive landscape?
It’s Robert speaking. Historically, the California market has carried lower cost to deposits than Arizona and Nevada, but I think the biggest things for our Company is -- and a lot of it’s been done through our strategy, is by far the majority of our customers are pretty DDA rich. And that’s really the value in our deposit franchise is our DDA. So, if you go, if you look back a balance sheet focus during the recession was capital. And then, as economy started getting better, it shifted to loan growth and now it’s deposits. And for the last 10 years, we’ve been just building, as Ken alluded to some of these business niches that have paid off pretty handsomely that we’ve organically grown, like municipal finance or Homeowner Association. So, we have very few borrowing segments, we have that aren’t DDA rich. And so, while our non-interest-bearing money could go up, we still continue to add significant amounts of DDA, and that’s really going to be the key to our deposit growth and our margin.
And just one last one for me. Looking at the other National Business Lines, loan growth this quarter, how much of that came from the warehouse business, and what’s that balance at the end of the quarter?
Yes. So, overall National Business Lines produced $424 million of incremental growth quarter-to-quarter. 200 of that came from warehouse lending. But, when you look at our National Business Lines and all of our regions, every single business contributed to quarter-over-quarter growth. So, we’re very pleased that our business activities are very broad-based in terms of pushing up total loan growth this quarter.
Our next question comes from Casey Haire of Jefferies. Please go ahead.
I wanted to touch on the loan growth specifically -- or the outlook rather, specifically the mix. CRE, obviously, is very, very competitive. You guys did manage some growth. You’re also pretty -- the resi growth was very strong this quarter and one of the strongest you’ve had in some time. Is that sort of -- is that how we should look at loan growth going forward, is CRE a little bit tougher, and how much more are you willing to take up the resi, which has not obviously been a big piece of the portfolio for you?
Yes. So, let me give you a macro answer first, and I will get to the micro. What we do every week is because we have so many business lines and regions, we’re able to allocate out our capital to the best risk reward opportunities we have. And therefore, that puts less pressure on our pricing throughout the business. So, if we see opportunities in one particular segment and we like the risk reward, we will push more there, if those opportunities are coming in. That’s number one. Number two, residential loans did grow by about a $127 million. It still only represents 3.4% of our total loans. And here, we entered into some forward flow arrangements with some of our warehouse lenders at attractive rates without the origination, distribution and compliance expense, which provide attractive operating leverage for us. However, we do not underwrite -- sorry, I want to say, however, we do underwrite all these loans ourselves.
And last but not least, on structure, because I always -- you have to put that alongside of pricing. We just don’t compromise on structure. And we’re fortunate that in the markets that we play in, we’re not competing a lot against the large money center banks which tend to sometimes, in our viewpoint, give up structure. So, we haven’t had as much structure pressure on us as maybe some of the other banks that have reported. However, there are lot more non-financial banks coming into the market as they see opportunities here. And it wouldn’t surprise me that we will see more structure pressure, but we just don’t give up on structure.
And just switching to sort of I guess capital management. Can you give us some updated thoughts on what the M&A environment is like? And I know bank pricing -- bank deal pricing has not been to your liking. But, what about loan portfolio opportunities, which appear to be decent opportunities in today’s environment?
Yes. I mean, first thing I’ll say, there is a lot for sale and more and more for sale. So, the number of banks that are interested in selling is growing. And I think as that continues to increase, there’ll probably be some better opportunities. As we’ve alluded to before, we’re primarily an organic grower and being able to compound out of 20% return year-after-year and grow our book value by like amount makes the hurdle little bit higher on these acquisitions.
We have found some very good opportunities to add value to the Company over the last 10 years with what I’d call, non-bank acquisitions. We continue to look at the lot of those. We think there is quite a bit of value there because we have the ability, unique ability to really grow our deposit base. A number of the companies are little more deposit constraint, and so that gives us an opportunity in today’s environment to look at some of these lending niche opportunities like I said, and like we did with the purchase from GE Capital and a couple of other purchases we’ve done. So, we’re open to continue to look at bank deals. As you said, a lot of the pricing is -- stuff has been pretty fully priced. And I think a number of these niche opportunities whether it’s through acquisition or organically, it is a pretty strong focus of ours.
Okay, great. But -- so, it seems like it’s a decent opportunity, what is holding you back from successfully landing on one of these? Is it pricing or is it just the risk profile?
No. I think that part of it is the risk profile, part of it’s pricing too. But a lot of it has to do with culture. We’re not a big consumer lender. So, we’re focused more on stuff in the commercial space. And we’ve got a few organic initiatives along these lines, which we think have a lot of opportunity. And organically, for us, it’s been a better way to add value. It maybe, doesn’t hit the P&L as much upfront but down the road, obviously there isn’t any dilution. And so, it tends to be more accretive for our shareholders over the long term. But, we continue to look at a lot opportunities. I would say, we probably get shown half a dozen deals every week, different sizes, different shapes, and it’s increasing. So, we’re -- but, we have a high hurdle rate. When you’re returning 20% of equity, we’ve got to make sure, if we do a deal, we’re going to get that kind of return. So, I guess, it’s a high class problem to have, but we’re pretty disciplined in that regard.
And just lastly, I know you guys have talked about potentially rightsizing capital ratios, if you don’t find one of these deals. But, given that, it does seem like a good opportunity -- a good environment for deals. And you have some organic initiatives in the works. Does this mean that you are going to forgo rightsizing capital ratios in ‘19, if they continue to build and you are just happy to let them grow from here?
Yes. I don’t know if we talk about ‘19 right now, but I think that is an issue. I mean, our capital ratios are growing and that’s something we’ll continue to look at, it’s something that Board addresses every quarter. But right now, we have no plans to right size capital. And I do believe pressure with the pressure on deposits, as we’ve alluded to and it’s in the market that that will provide more opportunities for companies like us whose business model is, as I said DDA and deposit rich, there will be some more opportunities. So, I’m not concerned with opportunities quarter-to-quarter, as I’m finding the right opportunities and going after those.
Our next question comes from Arren Cyganovich of Citi. Please go ahead.
Just thinking about the competitive environment on lending, clearly there is credit spread compression on CRE. What are you seeing within your National Business Lines and what provides that ability to keep those credit spreads from tightening too much?
So, in the National Business Lines, we have seen pressure in warehouse lending, and we’ve seen some pressure in our hotel group. And so, -- and we have dropped our pricing, no doubt about that. But, we still continue to get a premium to what the market pricing is,. And every company says the same thing, which is it’s because of service and responsiveness. And that’s how we get the money, that’s how we get the spreads. So, yesterday, two deals came across my desk. And it was -- if we can say yes to these dynamics, these financial terms in the next 48 hours, the deal was ours. Right? And we pushed on it, we looked at it. We did our review. I would have liked to see more pricing. But, we’re still a getting 50 basis-point premiums what the market was, and we took the deal, and we got the deal, even more important. So, we’re seeing some pressure there. And we grudgingly as I said bring our rates down.
Okay, thanks. And…
I think one of the differences for us compared to some of the companies that I know you are alluding to is, we have so many different business lines and so many different credit opportunities that we are able to balance where we are maybe slowing down, where we’re speeding up based on market. And a number of the areas that we’re in, have a much fewer competitors in place, rather than just say CRE lending or construction real estate lending.
And then, are you able to put any kind of magnitude on, when you’re talking about the potential expenses you’d pull forward from 2019, is it material or is it just relatively small, and I’m just trying to gauge what you’re referring to there.
So, the answer is no. I don’t have that in front of me. And the reason is, we’re still trying to understand how big the opportunity is, depending on how big the opportunity is, and how fast we can bring it to market will determine how much we pull forward. So, on one of the initiatives, I said we just hired our senior leader. Yes, he’s going to need a couple more to people start getting this thing moving that will be a few more people. On the other deposit initiatives, we have a few people already in house that were on our payroll. We probably need to bring in a couple more. So, what we’re trying to do is, balance it into the constraints of our operating leverage as well.
And then just last quick question on model. The tax rate seems a little bit lower than what I was expecting, what’s your expectation for tax rate going forward?
Yes. There wasn’t anything in the second quarter of tax that I would call non-recurring. So, in essence, I call it a core number at about 19.5. That said, our taxable income is growing at a faster rate than our tax exempt income, which has been a little bit challenged since the tax act went into effect that reduced the benefit of holding tax exempt assets. And so, as a result, I would guide more toward 20%, but 19.5 was a core number for Q2.
But let me come back to your other question, because you asked about the new business initiatives. But, if you are thinking about what does it mean to our total expenses, then for Q3, we will see -- we could see an upward drift on expenses by maybe 2 to $3 million, more in that vicinity, just as we begin to roll in new projects and continue to try to hire producers. So, that maybe will give you some sense of guidance as to what’s coming forward -- coming ahead.
Our next question comes from Chris McGratty of KBW. Please go ahead.
On credit, it obviously looks very good. I think in the past, you talked about some caution growing the hotel portfolio. But as you stand at the midpoint of the year, maybe Robert or Ken, how are you thinking about portfolios due to prune, given the strong appetitive for assets in the industry?
I’m sorry. How do we think about what?
Just pruning the portfolio, is there any credit…
Pruning you said?
Pruning, correct.
Yes. We’re not pruning. We still see good opportunities when -- first, in the hotel, we try to have a model that says let’s be in the top MSAs, and within there, let’s be in primary and secondary locations, and then, let’s make sure we have operators that have more than 10 hotels that have done this for a number of years and that have good sponsorship and liquidity behind them. What we do look at is a lot of the demand-supply dynamics. And sometimes we will say no to funding a hotel because we think too much supply is coming online, and that in itself could lead to a problem down the road. But, we are not pruning. We see continued opportunities in the hotel space, and actually in just about most of all the National Business Lines.
I think one of the things that it is helping the market is the amount of institutional equity coming into a lot of projects. So, like, in the hotel space, we’re not competing on the onesies deals, the community banks and the local regional banks are doing. We’re doing more portfolio deals. I will say, one of the risks in real-estate right now is the cost and construction, a lot of projects have -- are showing significant cost overruns, especially in some of the bigger markets. And so, where we are, if you want to say the word, pruning, is being cautious on the amount of activity we have available and on the construction side where the sponsors have the liquidity in the resources community get projects done. And so, we’re a little more pickier in terms of our sponsorship. But, there is still plenty of business out there. So, the portfolio itself doesn’t have to shrink.
Just broadly, maybe think of another answer to this too. One of the things we’re doing is a lot of people ask what keeps me up at night. And one of the things that keeps me up at night is trying to find something that keeps me up at night. Right? Because things look pretty good these days. So, what we try to do, especially in the hotel group, which could have volatility, we’ve set the covenant levels at a higher level.
So we're hoping -- if anything happens, I will borrow trips at a higher covenant level which allows us to get there earlier, helps us re-margin the property, have additional liquidity put in there while property is really cash flowing and doing nicely. So that once of the ways, I won't see recruiting but we have put a higher level of conveyance in there.
And do we lose a deal or two because to that? Yes, but I feel good that if something trips in any one of our deals, we get there first and then we can work it out. So, I'd rather see our special mention jump off for a quarter or two and then have that loan, right that up to pass rather than find its way into sub or into a loss. So not exactly pruning, but we have set a level of expectations in terms of deal structuring at a higher level.
We have a full suite of service available in commercial real estate. And so and as you know, we’re -- that’s an area, we’re pretty savvy and pretty forward thinking. And in some other areas that you would look to and say maybe some of these prices are getting little higher or in terms of whatever, we've also shifted to the debt market where we're helping finance people they're lending in those areas.
So, if we think we don't want much exposure, we're worried about evaluation and cap rates and stuff, we make fiancé other lenders to do that businesses. And so therefore, we cut our exposure by 50%, instead of making a 70% loan to value on a certain asset class, we may have advanced 50% to an institutional and EBIT also making a 70% or 75% loan. So, there is lot of different ways to do it. But the way we look at the real estate, we look at it geographically, we look it by product ties and then we look at it on a macro basis to try to manage our risk.
Thanks for the color. Appreciate it. If I could ask for more deal on the securities portfolio, certainly the size will be dictated by your flows in deposits. But anything, any color on reinvestment rates which are buying [indiscernible] CPRSP in change quarter-on-quarter?
Yes. So, we’re replacing the portfolio at probably slightly higher than where we’re today, primarily buying GSE papers, 3.5 to 4.5 year, kind of target duration. The balance came down a little bit in Q2. I’m not looking to shrink the portfolio. I think it's going to be fairly flat through for the rest of 18.
Chris, I've got a question for you. How has the productivity of your interns been this summer?
Excellent, a lot of good training going on.
Our next question comes from Brett Rabatin of Piper Jaffray. Please go ahead.
I wanted to ask, I guess first just going back to the commentary around the deposit beta moderating. Can you maybe give a little more color around, is that a function of betas have increased, and so from here, there less meaningful? Or are you expecting mix shift change to maybe help the beta? Can you maybe just a little more color on the moderation question or commentary?
Sure, we were defensive early on this year in terms of moving deposits being responsive to kind of customer complaints, and we try to get in front of it a little bit and you saw that in the second quarter. I think we've effectively done that for the kind of the real situation we see that presently. And so consequently, I think our deposit beta are going to ease off from the pronounced rate they were adding 2Q. That said, we've long been expecting that the deposit betas through this cycle are going to be no different than what they are in prior cycles.
I know some people thought because we started out so slow so sluggish coming out with the basically deteriorate environment and they were going to stay low. I never thought that was going to be a case and so that's about a 50% data overall. We're still lower than that on a cumulative basis as the rate cycle began, but I'm looking for about a 50% kind of out from here.
And then, on the margin with the June rate hike, I guess I'm just curious, Dale. When deal curve looks to be flattening that's kind of made you little bit nervous about the forward margin. Can you maybe just put those, all of those banks under contacts about your thoughts on the margin from here?
Sure. So, our guidance has been about 5 or 6 bps for 25 from the FOMC. We think that's basically intact, what perhaps could work against that is what you are alluding to Brett, and that is what about -- what can we re-price and kind of the middle of the curve, if the CRE book prices up at this swaps curve essentially and that really hasn’t move that much since the beginning of 2018. I think that's correct, but as the proportion of the time the total effect on the loan yields and the NIM, it's going to be fairly muted.
We have 25% of our loans are tied to prime, 30% are 30-day LIBOR, 5% are 90-day LIBOR, so that's a total of 60%. And then the rest of you see, the re-prices, only re-prices as it maturities and most of our CRE loans have duration or about four years or so. So, if you are not re-pricing near as many dollars kind of that space, but yes, so 60% of our loans are basically floating rate that should move the margin up. But if we don’t see the yield curve move in a parallel shift, it could be a little more muted at 5 to 6 that were indicated.
Our next question comes from Brad Milsaps of Sandler O'Neill. Please go ahead.
It looks like you may be hired about 60 people during the quarter. That's maybe little heavier than normalized. I was just kind of curious, if you can break those down maybe between revenue producers versus more back-office infrastructure type folks? And I think you've kind of alluded to it, can it maybe a lot of that? Is in the run rate and with the kind of OpEx guidance you gave few minutes ago on the call?
Yes, so we went up a little over 60 people quarter-to-quarter. Our hiring in Q1 happened to be light, but I would break down those 60 people as follows. 40% are revenue producing or people that support the revenue producers. About 25% of that happened to be interns. And then, the remainder of about third happens to be the infrastructure folks to help make the Company kick in the back-office.
And then just to follow up on loan growth, Dale. Was warehouse -- I was just kind of curious, what the type of contribution it had to the kind of the period and loan growth for the quarter?
88 million mortgage warehouse loans.
Our next question comes from Jon Arfstrom of RBC Capital Markets. Please go ahead.
Just to follow up on Brad's question. On commercial, you had a strong commercial loan growth quarter, and like last quarter, period-end is also significantly higher than the average. So, two part question, maybe talk a little bit about the key drivers of commercial during the quarter? And how you’re feeling about the outlook there it seems a bit stronger?
Yes, on the commercial side, we’re constructive. We like what we see and the flow of opportunities has been consistent for the first half of this year, nothing unusual there.
I mean it really was broad base. The tech was up. B2B regions were up. So, we feel pretty strongly that it got momentum to it. I would point out that our loans, we call it a telephone situation, telephone line situation here where they tend to peak at the last day of the quarter, there are something that closed and stuff like that and then they ease of a little bit.
So, we do have a significant variance between our average balances and our ending balance. That’s a little more pronounced in the second quarter than usual. So I think that may change, but we do look for -- I would look for our average balance to increase significantly. But you can’t necessary draw liner lines from to 630 to what you think we’re going to be at 930 giving kind of the what guidance we’re giving and called that the average is going to be little lower than that.
And then a bigger picture question on back on M&A, but you're over 20 billion and a lot of banks with that $50 billion, SIFI threshold talked about when they get the 30 or 35 that is started to get treated like a bigger bank. And I'm just curious from your perspective maybe kind of Robert lifting that $50 billion cap. Does that make us think differently, strategically about the Company longer-term?
Yes, a little bit, but I think the key in terms of risk management is trying to be ahead yourself and I look at it more of an evolving process. There is lot of work you need to do or what you used to have to do or maybe still have to do at 50 billion that we do now just because we think it's a prudent way to run the Company. So to me it's just an evolving process, the risk management fees, I just look don't look at the absolute dollar amount kind of regardless of the regulations. It's just what that to manage the Company itself.
Our next question comes from Michael Young of SunTrust. Please go ahead.
Maybe starting with just a bigger picture question either for Robert or Ken, just given where we’re adding the economic cycle and spread dependency of the business. Is there anything that you all are doing or thinking about at some point to be more defensive either by adding kind of non-spread driven businesses or extending duration, et cetera in the loan book? And what would maybe trigger that?
So, the things that we’re doing defensively or what I already comment on, we’re just trying to raise the covenant levels. So things do go long where they are first in first of the front of the borrower to help reconcile that, rectify that I should say. That’s pretty much where we’re heading, as you've mentioned that over the economy is little bit so along its recovery. But the southwest economy is coming and we see economic growth having a positive impact on all sectors of real estate.
We see that CRE continues to be an attractive investment alternative. We see large inventory of renters that want to fuel new home purchases and multifamily development. Unemployment is dropping in this area, particularly in Arizona, we see more companies looking to relocate here for variety of reasons, mostly cost and talent levels. So I think we're doing the right things at this time and I'm somewhat optimistic about where the economy is going in the future.
We are certainly watchful about emerging signs. And there's been a lot of talk about some of the macroeconomic elements, trade disputes and things like that. So far I think these, they haven't had an effect here, but we're watching them, and if we thought things were turning and I think that does affect kind of what we were looking at. And perhaps we would -- while we were not going to bid on the interest rates, we might shift our asset sensitive profile to be a little more neutral.
All our credit people and our management people bid through the last two recessions. And so I think while we're domestic about where the economy is, we're also conducting our business in a way that we hit a recession starting tomorrow we've got our selves protective, and we do that primarily through our collateral position, advance rates and our sponsor capacity, financial capacity. I remember the un-banker, they talked about the five Cs of lending and when I went through the first recession, I learned that there is really only three Cs of lending and that is collateral creates character. And so, we're very collateral focused.
And switching gears completely just to the deposit portfolio that's related to kind of bridge bank. Can you give us a sense of the size of the DDA balances from that? And have you seen any incremental pressure in that book of business to kind of migrate into interest-bearing accounts?
So, the DDAs there probably sit about $1.3 billion and generally the tech business runs almost two times deposits to loans. Life science runs even higher than that and then off course just HOA is off the charts in terms of deposits the loans. So, that's what helps give us pushes -- that's what help push this quarter. Our non-interest bearing DDA is up to the level that it stabilized.
I mean the tech group and this is similar to other players in the space. I mean the proportion of their deposits that are non-interest bearing significantly exceeds that of any other area of the Company.
But not seeing any news or renewed pressure on any of those books specifically?
No. That isn’t where the competitive pressure lies with those types of credit to more to do with structure and getting comfortable with what -- for entity that maybe has revenue, but it is losing money and how do you lend against that safely whether that's asset base lending or something like that?
Our next question comes from Gary Tenner of D.A. Davidson. Please go ahead.
My questions have largely been answered. Just wanted to ask on the expense side, a couple of items with some sequentially higher numbers, some of that related to some of the repossessed asset related expenses. But particularly legal and professional up about $7 million sequentially. Is that a number with some kind of artificial noise of volatility in it? Or is there -- is that 8 million number we should be seeing by going forward?
Well, it might be a little elevated in Q2 but the noise of volatility really was more in Q1 which was a little bit low for various maybe seasonal reasons. So, the Q2 is a better run rate number, but it does bounce around. I mean those are specific contracts or projects that are being undertaken and so it's not constant expense streamline like some compensation element would be.
Q1 was seasonally little bit lower.
Our next question comes from Brocker Vandervliet of UBS. Please go ahead.
Just following up on one of your earlier questions on tech and life sciences, and how does that -- when you speak of the risk reward across the niche businesses, how does the risk award here scale out versus the others right now versus a year or two ago?
So, tech and innovation and life sciences, they have some of the highest yield in the Company. And so, the return is appropriate for the risk that we take. What we also try to do is ensure that we don't give up on structure and we've seen there, if there is one place in the book that we see more competitive pressure in terms of relaxing structure is intact and innovation. We have been followed that but that's where we see some of the relaxation from some of our competitors.
So, in terms of the risk reward, these credits -- what's a little bit different about these credits, they’ve got be actively monitored. We have businesses that are producing revenue but generally aren’t producing net income yet. And if there is something that goes in this, the key there is getting there quickly early and working with the sponsors. And that gives us comfort to the revenue side of getting the higher yield that we’re getting in that business.
Is that an area that you continue to parachute people into? Or you feel like you got the troops on the ground that you need at this point?
So, we've got really well qualified people to do this at bridge. There is a little bit more of a war for talent up in the Bay Area. And so, we're always looking to get people there but the price of those people have escalated little bit, and so, we’re always on the lookout for folks there, but we like our team that’s there now, very much itself.
This concludes our question-and-answer-session. I would like to turn the conference back over to Ken Vecchione for any closing remarks.
Thank you all for joining us today and we look forward to coming back to you with our third quarter results. Enjoy your day. Thanks.
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.