Good day, everyone. Welcome to the earnings call for Western Alliance Bancorporation for the first quarter 2019. 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, April 23, 2019, through May 23, 2019, at 9:00 A.M. Eastern Time, by dialing 1-877-344-7529, passcode 10130331. 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. For the opening remarks, I would like to turn the call over to Ken Vecchione. Please go ahead.
Thank you, operator. Good afternoon and welcome to Western Alliance's first quarter earnings call. Joining me on the call today are Dale Gibbons and Robert Sarver. I will provide an overview of the quarterly results. Dale will walk you through the bank's financial performance in greater detail. Afterwards, we'll open the line. Robert, Dale, and I will take your questions. This quarter, we continue to build on our strengths and carry forward the momentum from last year. We delivered record growth in revenue, net income, and earnings per share as we maintain industry-leading return on assets, return on average tangible common equity, and operating efficiency. Western Alliance posted healthy results this quarter as net income rose to $120.8 million, or $1.16 per share, compared to $119.1 million and $1.13 per share for Q4. Balance sheet growth was exceptional.
Year-over-year net income rose 19.7%. EPS grew nearly 21%. Total loans were $18.1 billion, an increase of 9% on a linked-quarter annualized basis from $17.7 billion from year-end. Year-over-year loans rose 16.4%, assisted by $1 billion of residential growth. As discussed on previous earnings calls, we view residential loans as a thoughtful, responsible alternative to manage loan growth. Deposits grew over $1 billion from quarter-end, supported by the $223 million rise in non-interest-bearing deposits. Linked-quarter annualized growth was 21.5%, compared to the 16.4% from prior year. Over the last two quarters, loan growth of $1.4 billion has almost been fully funded by deposit growth of $1.3 billion. Our strong deposit performance lowered the loan-to-deposit ratio to 89.6% from 92.4%. Continued balance sheet growth and NIM of 4.71% generated $33.4 million in revenue growth compared to an expense increase of $13.4 million.
As such, revenues rose faster than expenses, and we achieved our two and a half to one revenue to expense operating growth target. Operating efficiency ratio was 42.4%, an increase from the 41.5% for Q4 while declining from prior year's efficiency ratio of 42.7%. Return on assets was 2.12%, and return on average tangible common equity was 20.49% as we continue to post industry-leading performance. Our financial results were accompanied by strong asset quality. Charge-offs for the quarter were $1.2 million, or 3 basis points. Non-performing assets were $61.6 million, up $15.9 million from prior quarter, but remain at near historical low levels. Non-accrual loans and REO to total assets was 26 basis points, in line with the past four quarters. Given the continued pressure on bank stocks, we opportunistically repurchased shares.
For the quarter, we purchased nearly 941,000 shares at $40.30, and when combined with last quarter's share repurchase represents 1.8 million shares at a combined cost of $39.95. The share repurchase program will add $0.02 per quarter in incremental EPS going forward. Tangible common equity ratio increased to 10.3% inclusive of the share repurchase program. The common equity Tier 1 ratio was 10.7%, flat to the prior quarter. Lastly, tangible book value grew 5% or $1.13 from the prior quarter to $23.20. Before I turn the call over to Dale, I want to acknowledge that Western Alliance took the number one spot as S&P Global Market Intelligence's best-performing regional bank for 2018. We were the top performer among banks with $10 billion to $50 billion in assets, outpacing our peer group in five of the six metrics that focus on profitability, asset quality, and loan growth.
For the last two years, we held the number two spot. I want to personally thank the nearly 1,800 people of Western Alliance for their hard work, dedication, and enthusiasm. Also, Moody's recently completed their bank credit review and now grade our long-term deposits as A2, which is equivalent to an A rating at other rating agencies. The strong deposit rating will further support our deposit gathering activities. Dale will now take you through the financial performance.
Net interest income rose $3.8 million from the fourth quarter to $247.3 million, driven by an $854 million increase in average loan growth. Net interest income rose 15.5% from the year-ago period. The provision for credit losses was $3.5 million for the quarter, as asset quality remained steady with $406 million in loan growth and $1.2 million in net loan losses. Non-interest income is up $1.8 million from the fourth quarter to $15.4 million, as a $1.2 million decrease in warrant income was more than offset by fair value gains on securities of $2.8 million, compared to fair value losses of $600,000 in the fourth quarter of last year. Non-interest expense was up $1.8 million as compensation costs rose $4 million, primarily due to seasonal factors as FTE fell slightly to 1,773.
The salary cost increase was partially offset by a decrease in deposit costs of $1.3 million to $5.7 million, as the average balance of non-interest bearing demand deposits declined from the fourth quarter. The fourth quarter also included a loss on repossessed real estate of $1.5 million. Income tax expense rose $4.6 million to 25.5% for the fourth quarter, as it benefited from some discrete tax benefits. Share repurchases during the fourth quarter pulled down the average diluted share count for the first quarter to 104.5 million, resulting in diluted EPS of $1.16. Effective in Q1, net interest drivers are calculated based on the actual number of days in the quarter and the year. Previously, these metrics were annualized assuming a 30-day month and a 360-day year. We believe that this change results in linked-quarter results that are more comparable. Prior period amounts have been recalculated to reflect this change.
Investment yields remain consistent with the prior quarter, increasing one basis point to 3.47%, and up 36 basis points over the past year. Loan yields have climbed 35 basis points over the past year, from 5.67% in first quarter of 2018 to 6.02% in the most recent period. On a linked-quarter basis, loan yields rose 10 basis points. Interest-bearing deposit costs rose 11 basis points in the first quarter from the fourth, which is the same rate of increase when all of the company's funding sources are considered, including non-interest bearing deposits and borrowings. Net interest margin during the quarter increased three basis points to 4.71%, as our earning asset yield increase 13 basis points exceeded our funding cost increase over the quarter. Accretion on acquired loans declined from $5.4 million in the fourth quarter to $2.8 million in the first.
Excluding this accretion, the fourth quarter core margin was 4.59%, which rose seven basis points in the first quarter to 4.66%. At the bottom right, you can see the ending acquired loan balances and the associated rate and credit marks. Our remaining acquired loans are just under $1 billion, and the remaining marks at quarter end are $19.2 million. Going forward, accretion will fall to $1.6 million per quarter if all discounted acquired loans paid just their contractual principal commitments. The efficiency ratio increased 90 basis points to 42.4% on a linked-quarter basis as a result of seasonal compensation costs and fewer days in the quarter. For the first quarter of 2018, the ratio decreased 30 basis points to 42.7%. On a taxable equivalent basis, operating revenue increased $33.3 million to $266 million in the first quarter of 2019, compared to the year-ago period.
Over the same term, operating expense increased $13.4 million to $112.8 million, which is in line with our two and a half to one revenue increase in dollars to expense increase guide. Deposit costs, which are incurred to support DDA balances, fell for the first time in a year as deposit funding pressure eased in concert with the cessation of rate increases by the FOMC. Our pre-provision net revenue return on assets was 2.58%, and ROA was 2.12%. These metrics continue to be in the top decile relative to peers. Our consistent balance sheet momentum continued during the quarter as loans increased $406 million to over $18 billion, and deposit growth of $1 billion brought our deposit balances to over $20 billion at quarter end. Our loan-to-deposit ratio declined in the current quarter and is unchanged from a year ago at 89.6%.
Tangible book value per share increased to $1.13 over the quarter and $4.34, or 23%, over the past year, despite having repurchased 1.7% of our outstanding shares over the same period. Our loan growth of $405 million was driven by residential loans increasing $245 million and construction growth of $149 million to 12.6% of total loans. We expect this proportion to be the high watermark for this loan category as we take down construction loans to under 10% of total loans by the end of next year. Year-over-year, loan growth is led by residential loans, which have tripled in the past year to $1.5 billion. These loans lower our credit risk profile while reducing our asset sensitivity as we enter a period of rate stability. Deposit growth of $1 billion was driven by increases in savings and money market deposits, CDs, and non-interest bearing DDA.
During the last year, deposits grew across all deposit types, while the largest increases also were in savings and money market accounts of $1.5 billion and interest bearing DDA of $724 million. Average growth over the last two quarters, loans were up $692 million and deposits were up a similar average of $650 million. For the past year, loan growth of $2.56 billion was fully funded by deposit growth of $2.85 billion. Total adversely graded assets increased $42 million during the quarter to 358, as special mention credits increased $45 million. From the prior year, total adversely graded assets decreased $21 million due to decrease in special mention, partially offset by an increase in classified accruing.
Non-performing assets comprised of loans on non-accrual and repossessed real estate increased to $62 million, to 0.26% of total assets, compared to 20 basis points in the prior quarter, and a decrease from 33 basis points in the prior year. Gross credit losses of $2.3 million during the quarter were partially offset by $1.1 million in recoveries, resulting in net credit losses of $1.2 million or three basis points of total loans annualized. The credit loss provision of $3.5 million decreased from the prior quarter as net loan losses declined and loan growth skewed toward residential real estate. The allowance for loan and lease losses rose to $155 million, up $10 million from a year ago. This reserve was 90 basis points of non-acquired loans at March 31st, as acquired loans are booked at a discount to the unpaid principal balance and hence have no reserve at acquisition.
For acquired loans, credit loan discounts totaled $13.1 million at quarter end, which were 1.35% of the $1 billion purchase loan portfolio, primarily from Bridge Bank and Hotel Franchise Finance transactions. Despite our strong balance sheet growth driven by $1 billion increase in deposits, capital ratios generally ticked up slightly from the prior quarter. The ratios also reflect about a 15 basis point decline from the share repurchases, which took capital down by $38 million during the first quarter. Even with these share repurchases, tangible book value rose $1.13 to $23.20, in part benefiting from a reduction in unrealized losses on available for sale for securities that are recorded as part of other comprehensive income, which fell by 75% during the quarter as interest rates declined. Tangible book value is up 23% in the past year.
At 10.3%, our tangible common equity ratio is in the top quartile of the peer group. I'll turn the call back to Ken.
While there has been some market volatility regarding a potential slowdown in economic conditions, within our markets, we have observed little change in business activity as our credit and deposit pipelines remain strong. We expect loan and deposit growth to continue apace at about $600 million per quarter, consistent with our recent experience. Loan growth will continue to be led by residential as we reduce our credit risk profile and asset sensitivity. Deposits should grow in concert with loans as non-interest-bearing deposits remain at Q1 levels. Our actual Q1 NIM was 4.71% and 4.66%, excluding discount accretion from purchase loans. As we move through 2019, we expect our core NIM will remain stable to the Q4 2018 level of 4.59%, as it will come down modestly from the first quarter due to the mix shift from lower construction and higher residential loans.
Should the margin drift marginally below our Q4 benchmark as we accelerate our exposure to residential loans, there should be some offset from lower provisioning requirements for this asset class. Coupled with our balance sheet growth, net interest income growth should continue to be double digits. Our operating efficiency should be stable on a year-over-year basis as we continue to produce an additional $2.50 of revenue for each dollar of additional expense. From time to time, however, we will continue long-term investing in new products and technology that may introduce modest volatility in this ratio performance while achieving our earnings per share goals. Asset quality remains strong and stable, as the economy continues to motor along. Moving into residential real estate should reduce credit risk volatility through the business cycle.
To summarize the first quarter, we grew loans, had exceptional deposit growth, increased our NIM, achieved our 2.5 to 1 revenue to expense growth target, maintained stable asset quality, continued to opportunistically repurchase shares, grew year-over-year net income by nearly 20%, EPS by 21%, and positioned the company to carry forward its momentum into the following quarters. At this time, Robert, Dale, and I are happy to take your questions.
We will now begin the question and answer session. To ask a question, you may press star then one on your touch tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Our first question will come from Brett Rabatin of Piper Jaffray.
Hey, guys. Good morning.
Morning.
First, I guess congrats on the ranking. That's nice. Wanted just to get some color if I could. I know, Ken, you've been asking for business and trying to get more deposits from some of your clients. Can you talk maybe a little bit about the deposit flows in 1Q? It's a bit of an anomaly for you guys to have such strong deposit growth vis-a-vis the industry in what's typically a more seasonal quarter.
Yeah, a couple things on that. One, our HOA business just killed it. Went up $356 million in deposits. This was the best quarter they've ever had in the 10 years that we've been running this business. That's benefit one. Point one, I guess, is none of our deposit initiatives contributed meaningfully to this deposit growth number. All right? We're still expecting some benefit from these deposit initiatives down the road. Next, we're out there just talking to our customer base. For example, in Bridge, we've been signing up a lot of Bridge clients that are more deposit heavy and borrower light. You might not see the growth in Bridge on the loan side, but you're seeing it on the deposit side in terms of what we're bringing in. Lastly, we just went up and down the line talking to our customers.
It's nothing more than we are a pay-for-performance culture and everyone performed very well this quarter.
Brett, I might also add, we had some deposits that came in in the first quarter that we bought, and they targeted to come in in the fourth quarter, so it was a little push out from Q4.
Mm-hmm. That's right.
Okay. It sounds like the strategy really hasn't changed on the resi piece in terms of, that was about 60% of the growth this quarter. It sounds like that may continue. I was just curious, as rates went lower, if you guys might dial that back a little bit, but it doesn't sound like that's the case. Can you talk maybe just about putting on resi mortgages at current rates, and just does the current rate environment impact what you might be doing in terms of origination?
There are two paths to growing the residential book. One is our forward flow agreements, where we get better pricing than if we were to buy in bulk. We flip-flop between the two. We're trying to continuously grow the forward flow, have that be a bigger proportion as we go forward of our residential growth. Again, we'll look and try to pick off portfolios if they meet our pricing hurdles.
Are your pricing hurdles changed any? I'm sorry, go ahead.
Yeah. They've come down a little bit. We were in the fourth quarter, we were picking up stuff in kind of the higher fours. That number is more toward the mid-fours today. When the 10-year dipped down to below 240, we didn't really do anything. We expect to be back in, and we expect to continue to shift our loan mix toward residential real estate throughout 2019.
Okay. Great. Appreciate the color.
Our next question will come from Casey Haire of Jefferies.
Thanks. Good morning, guys. Just wanted to follow up, I guess, on the NIM, on the deposit side of things. Obviously, a very strong quarter for you deposit growth. In terms of the interest-bearing side, what kind of deposit cost do you expect going forward, just given the competitive environment? Has it cooled off? Just some color on the deposit cost side.
Yeah. It's largely cooled. You can see this from just market rates from a variety of sources, and I'm sure you've heard this from others as well. I think that there's still a little bit of pressure in funding costs that will probably pay out in Q2 and maybe a little bit in Q3, but probably for Q2 for sure. It would be more muted relative to what we saw in the first quarter. I think that there's still a little bit of modest pressure.
Okay, great. On the security side, Dale, obviously you shrank that book a little bit and you had some positive mix shift into loans. What's the strategy in terms of the securities portfolio and what is the reinvestment rate today?
Yeah, the reinvestment rate is in kind of the mid 3s in terms of what we're getting. Frankly, with the residential option on the loan side that we have, those yields are about one point higher than what we're getting if we went into RMBS or something like that. You might see that continue a little bit, and that gives us kind of a yield pickup relative to securities book, even though we're getting a yield decline from construction to residential.
Okay. We should expect the securities portfolio to bleed from here. Is there a minimum, a base level where you wouldn't want to see the securities book exceed or go below?
It could drop significantly from here. I'm not projecting that it's going to drop this much, I think expect it to bleed off a few hundred million.
Okay. Just last, on the construction side, it looks like you guys want to work down that concentration. I think you said it's a high watermark from here. Is it going to attrit from here, or are you just going to grow into that 10% concentration? Because that is obviously your highest yielding loan bucket.
I think we like to work both the numerator and the denominator in that equation. Of course, as we grow loans, that'll help the denominator, and we're being more selective on the deals that we're doing going forward. With the attrition in the portfolio, I think we'll be able to bring down the numerator as well.
Great. Just last one, housekeeping. The tax rate for the balance of the year?
We benefited a little bit in the first quarter from the vesting of RSAs at a higher price than when they were awarded. It wasn't that much. 18% go forward looks about right.
Great. Thank you.
Thanks.
Next we'll have a question from Michael Young of SunTrust.
Hey, good morning. I wanted to see if we could start with the new loan verticals. You commented a little bit on the deposit verticals, but any new update on the loan vertical that kind of came into fruition in 4Q or the one upcoming for kind of mid this year?
Yeah. They're contributing to overall growth, and what I'm trying to do is to start weaning ourselves away from commenting specifically on the loan verticals. The people have been hired more or less for both verticals, and it's just now part of our overall loan growth and what we do.
Okay. Then I guess switching gears maybe just to capital, obviously the share buyback's been good to see some activity on. Stock's up a good bit today. How are you thinking maybe about managing capital vis-a-vis organic growth versus share buyback through the rest of this year and maybe even kind of your longer term strategy there?
It's Robert Sarver. We've been opportunistic in terms of buying our shares back. When we think the market's a good opportunity for us at the right prices, take advantage of some of these dips. Obviously, we're in a very strong capital position, but we do think we have a lot of organic growth opportunity. For us, the last 15 years, our first priority has been strong organic growth because that inures value long term to our shareholders. That's our best choice. We're going to continue to have the capital base to fund that. We're at the point where we're going to be taking a hard look at our capital levels. Obviously there's some level in which it's probably a little bit too high and we're kind of getting close to that.
I'll also say that two-thirds of the capital generation is being soaked up by loan growth.
Okay, great. Thanks.
The next question comes from Brad Milsaps of Sandler O'Neill.
Hey, good morning, guys.
Morning.
Dale, just wanted to follow up quickly on the margin. I don't want to split hairs. I think you guided last quarter to a stable core NIM with the assumption of maybe a mid-year rate hike. Looks like we probably won't get that. You essentially left your guidance the same. Is that really driven by your ability that you think you'll be able to maybe control deposit costs a little bit better? Just kind of curious, any additional color there around your assumptions.
Yeah. Our core margin was 459 in the fourth quarter. It was up a bit in the first quarter. I think a 459 core margin estimate for the end of this year is pretty reasonable. With all those factors kind of playing in terms of the mix shift on the loans, what we can do in terms of holding on funding costs and how we're going to be growing our deposits. Yeah, I could see it kind of weaning off a little bit from here. It's not significant and really holding with where we were a year ago.
Our NIM and our core NIM, I'll say, has been remarkably stable. Our NIM over the last nine quarters has been between 461 and 471, and our core NIM has been between 454 and 466. We've been holding a rather steady NIM over the last, I'll say, nine quarters or so. Seven to nine quarters.
It's actually been, if you go back 20 years, it's been stable. If you take out some of the, went through the recession and you have to take out some of the interest income when you put a loan on non-accrual. If you kind of adjust for that, our NIM's been within 50 basis points for 20 years.
No, it's great. Dale, I understand what you're doing on the residential side to extend duration and maybe take away some of the asset sensitivity. Curious if any other steps you may be taking. I know swaps probably don't make sense maybe at the moment, but I know you have about $7 billion of loan floors that are, I think around 4.7%. Are you guys aggressively adding more of those or anything else to do to kind of reduce some of the asset sensitivities we kind of stabilize here?
Yeah. Over 90% of our loans are made with floors, which I think will help in a decline. Right now we're projecting that rates are flat throughout 2019, and I don't know if I can see farther than that. We haven't done any kind of overt intervention like putting on a swap particularly just to hold the margin. I think we can get there in the timeline we need to by what we're doing on the residential side. We've got a lot of runway in front of us relative to our relatively modest concentration in that sector relative to peers.
Great. Thank you.
Thanks.
The next question comes from Aaron Saganovich of Citi.
Thanks. Just following up on that last comment. Would you choose to add swaps as a way of reducing the asset sensitivity if you see the right opportunity? What's your ability to add those if you see the right opportunity?
Well, sure. We'd do anything that we think is going to make sense longer term for the company. One of the problems you get into if you get there through some inorganic financial engineering method, then the next question is, well, what about when the swap comes off? I'd rather get there more structurally. We'll do whatever makes sense.
Yeah. It's a common discussion we've had amongst each other talking about that for many banks. Anyways, the C&I loans were down modestly quarter-to-quarter. Is there anything in particular that was driving that? What's your outlook for C&I loan growth going forward?
Yeah, there was nothing that was driving it. A little bit warehouse lending is a little lighter in Q1, that's not unusual. As I said, we look at our loan pipelines and we're very encouraged in all categories.
Okay. Thank you.
The next question comes from Christopher McGratty of KBW.
Yeah. Good afternoon. Thanks for the question. Going back to capital, Robert or Dale or
For any of you, the capital targets, you're building capital 50-75 basis points a year, even with the buyback and the growth. What's the right ratio we should be looking at in terms of targets, either level and/or ratio? Thanks.
Somewhere between nine and 10.
On tangible?
Yeah, on TCE.
Okay. Based on kind of the $600 a quarter of growth and all you've laid out for guidance, you're going to be probably 100 basis points above that by the end of next year, if we're right on the models. Where does dividends perhaps play longer term and maybe inorganic growth? Any comments there? Thanks.
Yeah. As I said, for a long time, we've tried to be opportunistic, and for the last couple quarters, our best use of capital and our best M&A strategy has been to buy some of our own shares back. We look at it, we review it with our board every quarter, and we try to look out over the next 12, 24 months and see where we're at and go according to that. We've tried to reinvest in our own company. We felt recently that buying our own stock back was better than a dividend. I wouldn't preclude that in the long term, depending on where we see other opportunities from an inorganic standpoint.
Maybe a quick follow-up on that, Robert. Kind of activity flow in deals, how would you describe kind of where we're at kind of in the spring of 2019 deal flow?
I would say at this point, if I look back over the last six months and right now, I'd say it's pretty quiet on the Western front. As I said a little bit earlier, in looking at deals and looking at the deals that came across our desk, our best opportunity was our own stock. I'm not quite sure why we trade at the levels we do, but we feel it's a disconnect, and that's why we bought our shares back.
Great. Thanks.
The next question comes from Timur Braziler of Wells Fargo.
Hi. Good morning. Maybe just following up on the growth in HSA this quarter. I know in the past it's been a goal to grow that business. How much of that new growth is new, and I guess what's the trajectory there going forward?
Well, usually, you mean HOA, not H, right?
I'm sorry, yes. HOA, yes.
A lot of that growth was new. We spend basically nine months of the year harvesting potential sales leads, generally, the deposits move in Q1 with a little bit of a follow-through in Q2. That's what you saw this quarter, and this is what you've seen in previous years.
Maybe switching over to tech lending and the linked quarter decline in loans within that space. I know deposits are still growing there, but there's been a lot of new competition. I guess, what's the commentary from you guys at Bridge, and what's your outlook on lending in that space?
We're seeing a very active pipeline there. As I said earlier, we're bringing on a lot of new customers. They're not dipping into the credit side as much as we thought, but they're bringing over a lot of deposits. That's just as well for us. There is a lot of activity. We are seeing some companies being bought and sold, as you would expect. They had a great VC fundraising year last year. Of course, you can see some of the stuff that's coming to market and the valuations. The M&A activity environment is very strong there. We'll continue to grow. Listen, if we can't get it on the loan side, we'll get it on the deposit side. We have plenty of places to place it.
Okay, that's good color. Switching over to the other national business lines. I know historically that's been driven primarily by mortgage warehouse. I think if I heard correct, that was weaker this quarter. I guess, what drove the growth in that business this quarter?
Well, it also includes the residential real estate. As you know, we're acquiring those loans from our national warehouse clients. How that's managed is, so all the residential, the $1 billion we've gained in the past year in residential shows up in that business line.
Okay. Understood. One more, if I could. Any color you can provide on the linked quarter increase in commercial non-performers, and is that in any way correlated with the commentary around construction growth and looking to get that down to 10% of the total concentration?
Our construction book is very clean with very little in special mention or graded loans. There really wasn't much that was going on that there's a story here on our book. Basically, the things that we see are self-inflicted wounds by our customers. They sometimes either try to grow too quickly. They don't control their costs. Their systems to capture revenue and expenses are antiquated. Sometimes they have partner disputes. Also in the case of Bridge, we're waiting for cash to come in from the [Anesta Group], and sometimes that's a little bit slow. There's always a chicken game here as they want to put it in, but they want to put it in at the last possible moment. We'd like to have it earlier. Sometimes we see some loans there slide into special mention. There isn't any theme here.
Again, I'll just point to that these are at historic low levels. It only takes just one credit to bounce, and you could see some movement on these numbers.
Good color. Thank you.
You're welcome.
The next question comes from Brock Vandervliet of UBS.
Good morning.
Hey, Brock.
Hey. Just a little more color on the resi loans that you're sourcing. Those are from your partner banks that you're financing. Are most of those jumbos or agency conforming? What's kind of the composition?
There's some jumbos in there. There's not that many. The average balance is about $450,000. The LTV is under 70%, and the FICOs are about 760. What they are is the preponderance of them are not conforming for one reason or another. Maybe they're jumbo, maybe they're second homes or something like this, where we're getting a little bit better yield, but really not undertaking any more additional kind of credit risk than what we would with something that had a lower balance or something like that. In fact, the LTVs are such that we think we've got pretty good protection.
Let me just add one thing there. The LTVs are about 67%, and the DTI is about 36%. We underwrite every single loan, and that's very important.
Just shifting gears to C&I. Should we kind of expect growth the remainder of the year in the low double-digit category, or some other level there?
No, I think that's reasonable. Low double digits.
Okay. Great. Thank you.
You're welcome.
The next question comes from Jon Arfstrom of RBC Capital Markets.
Thanks. Good morning.
Good morning.
Can you guys just remind us of how large you want the residential portfolio to be in terms of how long is the runway here of growth?
The typical bank has about close to four times the concentration in residential real estate that we do. I don't think we're going to get that high. If we grew this, we grew it $1 billion in the past year. If we grew it $1 billion and a half a year, just to put something out, this could go on for another four years. I don't know how long it is, but it's as far as we can see with confidence in terms of kind of where we're looking for the economy and things like this to trend. I think we're going to probably push into it more deeply if we think that we're on the verge of an economic turn. We think they're going to withstand volatility in economies quite well. Also, offset if should demand slacken elsewhere. We're not seeing that now.
Right now we're seeing good opportunities across all of our loan categories. We certainly want to put some on here as a way to, again, as Chris commented earlier, take some of the asset sensitivity off the balance sheet and prepare us that, I don't know if the next rate change is up or down, but this will put us fairly stable situation in terms of so that we have marginal margin impact based upon what the FOMC might do.
Okay. All right. That's helpful, Dale. We haven't heard the term payoffs or non-bank competitors in a couple of calls. Is that largely eased and you'd say it's maybe back to normal and competitors are behaving, or is that still part of the narrative?
Payoffs are just a normal cost of business here. I don't think they're coming in any faster than they have in the previous quarters. We're aware of them, and we tend to grow through them. Non-bank lenders, we're not seeing a lot of them. When we do, occasionally they show up in the tech and innovation portfolio. Mostly they're actually showing up below us in the mezzanine debt or the sub-debt. There, I don't mind them being there because they provide another source of capital for us and give us more comfort in what we're doing.
Okay, good. Thank you for that. Ken, just one follow-up. Deposit initiatives. You talked about how the new initiatives did not contribute to growth. I'm assuming that's part of the plan and curious if you're still optimistic in terms of your initial expectations for some of the new verticals.
We are, and we're growing it slowly. One of the important things in these initiatives is making sure we service the customers and we don't get ahead of ourselves with growth ambitions. It's really the service ambition that comes first and then growth will follow. There was some contribution to the deposit growth. Not much, but there was some. We are fairly constructive about it going forward, and we do think these two initiatives will carry us towards the back half of this year and then into 2020.
Okay. All right. Thank you.
You're welcome.
The next question comes from Tyler Stafford of Stephens.
Hey, thanks for taking the questions. Just a couple follow-ups for me. Dale, you mentioned a few times lower credit costs given the resi growth. I was just wondering if you give some color on where you see the GAAP reserve ratio settling out by year-end, and then any preliminary thoughts to CECL as of yet when the calendar turns over?
Yeah. As we shift our mix, I think our reserve ratio is probably going to tail off at about the same rate of attrition as it's had for the past couple of years, a few basis points a quarter. Looking at CECL, I think everyone's going to be making disclosures probably more detailed in their second quarter 10-Qs. We don't expect to be outsized in terms of whatever charge we might be taking. As others have stated, the sector that gets hit the hardest on CECL is consumer, particularly kind of long live, high loss consumer, which first in line of that is credit card. We don't really have any of that. We have very modest consumer exposure at all. I think we're going to probably be on the lower end of the spectrum of what you're going to see in the second quarter numbers.
Okay, great. Just last for me. I may have missed this, just a question just around the pace of expense growth this year. Is 2.5 times operating leverage still the right and appropriate target you're thinking about for this year?
That's what we're shooting for, yep.
Great. Thanks.
Yeah.
Next we have a question from David Chiaverini of Wedbush Securities.
Hi. Thanks. A couple questions for you. First on the HOA business. You mentioned about how it was the best quarter ever in 10 years. Do you have any sense of what your market share is in this business? I'm curious, are you just scratching the surface here?
Well, I can't say there are enough reports to tell me what the market share is because a lot of stuff gets hidden in smaller banks. We know where some of the other guys are who are larger than us, and I think we have some room here to continue this growth. What's interesting about this business, it's as much about customer service and technology. If you have that right, there's a trade-off then on pricing. You don't have to price at the margin. You can price below that as long as you have the customer service and the technology to support the management companies of the HOA group.
When we went in the business 10 years ago, I remember the total market for this business was about $40 billion-$50 billion.
Yeah. I just got to say, because I know a lot of our people listening, we did cross over $3 billion in HOA deposits. When you think about that from a standing start of zero with one person 10 years ago, we're very proud of that track record and the accomplishment of that group.
That's great. Shifting to the technology and innovation segment. I saw that year-over-year deposit growth was very good there. Sequentially from the fourth quarter into the first quarter, it looked like the deposits declined modestly. What drove that decline? Was it seasonality or anything else?
I don't think you could put much analysis against just two quarters side by side. I'll just tell you that there's plenty of deposit growth for us out there, and there's also plenty of loan growth. The loan growth churns at a faster rate than the deposit growth does, we're always working to catch up on the loan growth. We had a good 2018 in deposit growth, and we're expecting the same for 2019. Sometimes it comes in one quarter or not. It's very hard to control that and to project that out.
Yeah, there wasn't anything in their seasonality or in their pipelines that leads us to believe there's any change in terms of the momentum they have.
Got it. The last one for me. When you mentioned earlier in the call about how deposit growth should keep pace with loan growth. The new initiatives that you've been talking about, is that inclusive in that guidance or would that be additive where you could actually see deposit growth be faster than loan growth if those initiatives have better results?
That's inclusive. We have very moderate expectations. As I said, we want to do this right on the customer side first. If we get it right, we'll ramp it up. Just consider it to be inclusive.
Got it. Thanks very much.
Okay. You're welcome.
This concludes our question and answer session. I would like to turn the conference back over to Kenneth Vecchione for any closing remarks.
Thank you all for joining us, and we look forward to talking to you on our next quarter earnings call. Thanks again.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.