Good day, everyone. Welcome to the Earnings Call for Western Alliance Bancorporation for the Q1 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 o'clock Eastern Time, April 23, 2019, through May 23, 2019 at 9 a.
M. Eastern Time by dialing 1-eight seventy seven-three forty four-seven thousand five hundred and twenty nine, passcode 10,130,331. 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. Now for the opening remarks, I would like to I'll turn the call over to Ken Vecchione. Please go ahead.
Thank you, operator, and good afternoon, and welcome to Western Alliance's Q1 earnings call. Joining me on the call today are Dale Gibbons and Robert Sauber. I will provide an overview of the quarterly results, and then Dale will walk you through the bank's financial performance in greater detail. Afterwards, we'll open the line and Robert, Dale and I will take your questions. This quarter, we continue to build on our strength 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 $120,800,000 or $1.16 per share compared to $119,100,000 $1.13 per share for Q4. Balance sheet growth was exceptional. Year over year net income rose 19.7 percent and EPS grew nearly 21%. Total loans were 18 $100,000,000 an increase of 9% on a linked quarter annualized basis from $17,700,000,000 from year end.
Year over year loans rose 16.4 percent assisted by $1,000,000,000 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 $1,000,000,000 from quarter end, supported by the $223,000,000 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 $1,400,000,000 has almost been fully funded by deposit growth of $1,300,000,000 Our strong deposit performance lowered the loan to deposit ratio to 89.6 percent from 92.4 percent.
Continued balance sheet growth and NIM of 4.71 percent generated $33,400,000 in revenue growth compared to an expense increase of $13,400,000 As such, revenues rose faster than expenses and we achieved our 2.5 to 1 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 percent as we continue to post industry leading performance. Our financial results were accompanied by strong asset quality. Charge offs for the quarter were $1,200,000 or 3 basis points.
Non performing assets were $61,600,000 up $15,900,000 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 4 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 share repurchase represents 1,800,000 shares at a combined cost of $39.95 The share repurchase program will add $0.02 per quarter and 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. And 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 and P's Global Market Intelligence Best performing regional bank for 2018. We were the top performer among banks with $10,000,000,000 to $50,000,000,000 in assets outpacing our peer group in 5 of the 6 metrics that focus on profitability, asset quality and loan growth. For the last 2 years, we held the number 2 spot. I want to personally thank the nearly 1800 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. And Dale will now take you through the financial performance.
Net interest income rose $3,800,000 from the 4th quarter to $247,300,000 driven by an $854,000,000 increase in average loan growth. Net interest income rose 15.5 percent from the year ago period. The provision for credit losses was $3,500,000 for the quarter as asset quality remained steady with $406,000,000 in loan growth and $1,200,000 in net loan losses. Non interest income is up $1,800,000 from the 4th quarter to 15.4 as a $1,200,000 decrease in warrant income was more than offset by fair value gains on securities of $2,800,000 compared to fair value losses of $600,000 in the Q4 of last year. Non interest expense was up $1,800,000 as compensation costs rose $4,000,000 primarily due to seasonal factors as FTE fell slightly to 17.73.
The salary cost increase partially offset by a decrease in deposit costs of $1,300,000 to $5,700,000 as the average balance of non interest bearing demand deposits declined from Q4. The 4th quarter also included a loss on repossessed real estate of $1,500,000 Income tax expense rose $4,600,000 to 20 5.5 for the 4th quarter as it benefited from discrete tax some discrete tax benefits. Share repurchases during the Q4 pulled down the average diluted share count for the Q1 to 104,500,000 resulting in diluted EPS of 1 point Effective in Q1, net interest drivers are calculated based on the actual number of days in the quarter the year. Previously, these metrics were annualized assuming a 30 day month and a 3 60 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 yield remained consistent with the prior quarter, increasing one basis point to 3.47 and up 36 basis points over the past year. Loan yields declined 35 basis points over the past year from a 5.67 in Q1 of 2018 is 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 Q1 from the 4th, 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 3 basis points to 4.71 as our earning asset yield increased 13 basis points exceeded our funding cost increase over the quarter. Accretion on acquired loans declined from $5,400,000 in the 4th quarter to $2,800,000 in the first. Excluding this accretion, the 4th quarter core margin was 4.59%, which rose 7 basis points in the Q1 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 $1,000,000,000 and the remaining marks quarter end were $19,200,000 Going forward, accretion will fall to $1,600,000 per quarter if all discounted acquired loans paid just their contractual 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 Q1 of 2018, the ratio decreased 30 basis points to 42.7%. On a taxable equivalent basis, operating revenue increased $33,300,000 to 266,000,000 in the Q1 of 2019 compared to the year ago period. Over the same term, operating expense increased $13,400,000 to $112,800,000 which is in line with our 2.5 to 1 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 $406,000,000 to over $18,000,000,000 and deposit growth of $1,000,000,000 brought our deposit balances to over $20,000,000,000 at quarterend. 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 $1.13 over the quarter and $4.34, 23 percent over the past year, despite having repurchased 1.7 percent of our outstanding shares over the same period. Our loan growth of $405,000,000 driven by residential loans increasing $245,000,000 and construction growth of $149,000,000 to 12.6 percent 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 1,500,000,000 These loans lower our credit risk profile while reducing our asset sensitivity as we enter a period of rate stability. Deposit growth of $1,000,000,000 was driven by increases in savings in money market deposits, CDs and non interest bearing VDA. During the last year, deposits grew across all deposit types, while the largest increases also were in savings and money market accounts of 1,500,000,000 and interest bearing DDA of $724,000,000 Average growth over the last two quarters, loans were up $692,000,000 and deposits were up similar average of $650,000,000 For the past year, loan growth of $2,560,000,000 was fully funded by deposit growth of 2,850,000,000 Total adversely graded assets increased $42,000,000 during the quarter to $358,000,000 as special mentioned credits increased $45,000,000 From the prior year, total adversely graded assets decreased $21,000,000 due to a 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 decreased to increase of 62,000,000 to 0.2 6 percent of total assets compared to 20 basis points in the prior quarter and have decreased from 33 basis points in the prior year.
Gross credit losses of $2,300,000 during the quarter were partially offset by $1,100,000 in recoveries, resulting in net credit losses of $1,200,000 or 3 basis points of total loans annualized. The credit loss provision of $3,500,000 decreased from the prior quarter as net loan losses declined and loan growth skewed toward residential real estate. The allowance for loan to lease losses rose to $155,000,000 up $10,000,000 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 $13,100,000 at quarter end, which were 1.35 percent of the $1,000,000,000 purchase loan portfolio, Primarily from Bridge Bank and Hotel Franchise Finance transactions.
Despite our strong balance sheet growth driven by $1,000,000 increase in deposits, Capital ratios generally picked up slightly from the prior quarter. The ratios also reflect about a 15 basis point decline and the share repurchases which took capital down by $38,000,000 during the Q1. 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 $600,000,000 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 percent excluding discount accretion from purchased loans.
As we move through 2019, we expect our core NIM will remain stable to the Q4 'eighteen level of 4.59 percent as it will come down modestly from the Q1 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 to reduce credit risk volatility through the business cycle. To summarize the Q1, 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. And our first question will come from Brett Rabatin of Piper Jaffray.
Hey guys, good morning.
Good morning.
First, I guess congrats on the ranking. That's nice. I 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 and what's typically a more seasonal quarter?
Yes, a couple of things on that. One, our HOA business just It went up $356,000,000 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 1. Point 1, I guess, is none of our deposit initiatives contributed meaningfully to this deposit growth number.
All right. So we're still expecting some benefits from these deposit initiatives down the road. Next, we're out there just talking to our customer base. So for example, In Bridge, we've been signing up a lot of Bridge clients that are more deposit heavy and borrower light. So 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.
And then lastly, we just went up and down the line 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 Q1 that we bought and they targeted to come in, in the Q4. So it was a little push out from Q4.
That's
right. Okay. And then 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?
So there are 2 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. So we flip flop between the 2. We're trying to continuously grow the forward flow, Have that be a bigger proportion as we go forward of our residential growth. And then again, we'll look and try to pick off portfolios If they meet our pricing hurdles.
And are your pricing hurdles changed any or I'm sorry, go ahead.
Yes. So we were they've come down a little bit. So we were in the Q4, we were picking up stuff in kind of the higher 4s. That number is more toward the mid force today. We didn't when the 10 year dipped down to below 2.40, we didn't really do anything.
But 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.
And 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 For your deposit growth, but what in terms of the interest bearing side, what kind of Deposit costs do you expect going forward just given the competitive environment as it cooled off or just some color on the deposit cost side?
Yes, I mean 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 Q1, But I think that there's still a little bit of modest pressure.
Okay, great. And on the securities 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?
Yes, the reinvestment rate is in the kind of the mid-3s In terms of what we're getting and frankly, I mean with the residential option on the loan side that we have, I mean those yields are about a point Higher than what we're getting if we do went into RMBS or something like that. So you might see that continue a little And that gives us kind of a yield pickup relative to the securities book, even though we're getting a yield decline from construction to residential.
Okay. So 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 mean, it could drop I'm not projecting it's It's going to drop this much, but I think it's expected to bleed off a few $100,000,000
Okay. And just last On the construction side, it looks like you guys want to work down that concentration. Are you happy to I think you said it's a high watermark from here. Is it going to, a trip from here? Or are you just going to grow into that 10% concentration?
Because that is obviously, I mean, that's your highest yielding loan bucket.
Yes, I think we like to work both the numerator and the denominator In that equation, so of course, as we grow loans, that will help the denominator and we're being more selective on the deals that we're doing going forward. And with the attrition in the portfolio, I think we'll be able to bring down the numerator as well.
Okay, great. And just last one housekeeping, the tax rate for the balance of the year?
Yes, yes. So we benefited a little bit in the Q1 from vesting of RSAs at a higher price than when they were awarded, but it wasn't that much. 18% go forward, looks about right.
Great. Thank you.
Thanks. And 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?
Yes, they're Contributing to overall growth and what I'm trying to do is to start weighing ourselves away from Commenting specifically on the loan verticals. So the people have been hired more or less For both verticals and it's just now part of our overall loan growth in what we do.
Okay. And then I guess switching gears maybe just to capital, obviously the share buyback has been good to see some activity on stocks up a good bit Today, just how are you thinking maybe about managing capital visavisorganicgrowthversussharebuyback through the rest of this year and maybe even kind of
Yes, it's Robert Sarver. We've been opportunistic in terms of buying our shares back When we think the market's 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. And so 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.
So we're going to continue to have the capital base to fund that. But we're at the point where We're going to be taking a hard look at our capital levels. And 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 2 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.
Good morning.
Dale, just wanted to follow-up quickly on the margin. I don't want to split hairs, but I think you guided last Quarter to a stable core NIM with the assumption of maybe a midyear rate hike. Looks like we probably won't get that, but you essentially Left your guidance the same. Is it just really is that really driven by your ability you think you'll be able to maybe control deposit costs a little bit better? I'm just kind of curious any additional color there around your assumptions?
Yes. So our core margin was 4.59% in the 4th quarter. It was up a bit in the Q1. We believe I think a 4.59% core margin estimate for the end of this year is pretty reasonable. And with all those factors kind of playing in, in terms of the mix shift on the loans, What we can do in terms of holding on funding costs and what we're how we're going to be growing our deposits.
So yes, I mean, I could see it kind of Weaning off a little bit from here, but 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. So our NIM over the last 9 quarters has been between 4.61 and 4.71 and our core NIM has been between 4.54 and 4.66. So We've been holding a rather steady NIM over the last, I'll say, 9 quarters or 7 to 9 quarters.
It's actually been if you go back 20 years, it's been stable. So if you take out like some of the we 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 has been within 50 basis points for 20 years.
That's great. And 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 you any other steps you may be taking. I know swaps probably don't make sense maybe at the moment, but I know you'd have about $7,000,000,000 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?
Yes. Over 90% of our loans are made with floors, Which I think will help in the decline. Right now, we're projecting that rates are flat throughout 2019. And I don't know if I can But 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.
And 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.
And the next question comes from Arren Cyganovich 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 I guess Your ability to add those if you see the right opportunity.
Well, sure. I mean, we're We wouldn't do anything that we think is going to make sense longer term for the company. I mean, what are 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 up? So I'd rather get there more structurally, but we'll do whatever makes sense.
It's a common discussion we've had amongst each other talking about that for many banks. But Anyways, the C and I loans were down modestly quarter to quarter. Is there anything in particular that was driving that? And what's your outlook for C and I loan growth going forward?
Yes, there was nothing that was driving it, a little bit warehouse lending is a little lighter in Q1, so That's not unusual, but as I said, we look at our loan pipelines and we're very encouraged in all categories. Okay. Thank you.
And the next question comes from Chris McGratty of KBW.
Good afternoon. Thanks for the question. Going back to capital, Robert or
Dale For
any view, the capital targets, you're building capital 50 to 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 910.
On tangible? Yes, non TCE.
Okay. And so based on kind of the $600,000 a quarter of growth and all you've laid out for guidance, I mean, 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, I guess, Dividends perhaps play longer term and maybe inorganic growth, any comments there?
Yes. I mean,
as I said For a long time, we've tried to be opportunistic. And for the last couple of quarters, our best use of capital and our best M and A strategy has been to buy some of our own shares back. And we look at it, we review it with our Board every quarter, and we try to look out over the next 12, 24 months to see where we're at and go according to that. So we've tried Reinvest in our own company, we felt recently that buying our own stock back is better than the dividend. But 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 6 months and right now, I'd say it's pretty quiet on the Western front. And as I said a little bit earlier, we just and 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 it 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, there's been a goal to grow that business. 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.
Yes. A lot of that growth was new. I mean, we spend basically 9 months of the year harvesting Potential sales leads and generally the deposits move in Q1 with a little bit of a follow through in Q2. And that's what you saw this quarter And this is what you've seen in previous years.
Okay. And then 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 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?
So we're seeing a very active pipeline there. And 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, and that's just as well for us. But there is a lot of activity. We are seeing some companies being bought and sold as you would expect.
They had a great DC fundraising year last year. And of course, you can see some of the stuff that's coming to market in the valuations. So the M and A activity environment is very strong there. But we'll continue to grow and 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?
It also includes the residential real estate. As you know, we're acquiring those loans from our national warehouse clients. And so how that's managed is so all the residential, the $1,000,000,000 we've gained in the past year in residential shows up in that business line.
Okay, understood. And then 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 construction total concentration.
So our construction book is very, 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 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 or sometimes they have partner disputes or also in the case of Bridge, we're waiting for cash to come in From the investor 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. So sometimes we see some loans there slide into special mention, but there isn't any theme here. And again, I'll just point to that these are at historic low levels.
So it only takes just one credit to bounce and you could see some movement on these numbers.
The next question comes from Brock Vandervliet of UBS.
Good morning.
Hey, Mark.
Hey. Just a little more color on the resi loans That you're sourcing. So those are from your partners, partner banks That you're financing, are most of those jumbos or agency conforming? What's kind of the composition?
There are some jumbos in there. There's not that many. The average balance is about $450,000 The LTV is under 70% And the FICO's are about $760,000,000 So but what they are is the preponderance of them are not conforming there For one reason or another. So maybe they're jumbo, maybe they're second homes or something like this, We're getting, we think 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 stocks 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%, but we re underwrite every single loan and that's very important.
Got it. And just shifting gears to C and I, should we Kind of expect growth through remainder of the year in 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.
And the next question comes from Jon Arfstrom of RBC Capital Markets.
Thanks. Good morning.
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?
Yes. So the typical bank has about Close to 4 times the concentration in residential real estate that we do. I don't think we're going to get that high. But I mean, if we grew this, We grew $1,000,000,000 in the past year. If we grew it $1,500,000,000 a year, just to put something out, this could go on for another 4 years.
So 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. So 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 the economy quite well. And also offset, should demand slacken elsewhere. We're not seeing that now.
Right now, we're seeing good opportunities All of our loan categories, but 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, This will put us fairly stable situation in terms of 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?
So 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. And we're aware of them and we tend to grow through them. Non bank lenders, we're not seeing a lot of them. I mean, when we do occasionally, they show up in the tech and innovation portfolio.
And mostly, they're actually showing up below us in the mezzanine debt or the sub debt. So 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 And then Ken, just one follow-up. Deposit initiatives, you talked about how the new initiatives did not contribute to growth. I'm assuming that was 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?
Yes, we are. And we're growing it slowly. We're making sure one of those 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. So yes, I mean, there was some contribution to the loan to the deposit growth, not much, But there was some.
And we do 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.
The next question comes from Tyler Stafford of Stephens.
Hey, thanks for taking the questions. Just a couple of follow ups for me. Dale, you mentioned a few times lower credit costs given the resi growth. So I was just wondering if you could give some color on where you see the GAAP reserve ratio settling out by year And then any preliminary thoughts to CECL as of yet when the calendar turns over?
Yes. I mean, so 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 The past couple of years, a few basis points a quarter. Looking at CECL, we've got I think everyone's going to make disclosures probably more detailed in their second quarter cues. We don't expect to be outsized in terms of whatever charge you might be 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. And so I think we're going to probably be on the lower end of the spectrum of what you're going to see in the 2nd quarter numbers.
Okay, great. And then just last for me. I may have missed this, but 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, yes.
Great. Thanks. And next we have a question from David Chiaverini of Wedbush Securities.
Hi, thanks. A couple of 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. But 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. And what's interesting about this business, it's as much about customer service and technology. And 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 This was about $40,000,000,000 to $50,000,000,000
And I just got to say, because I know a lot of our people listening, we did cross over $3,000,000,000 in HLA deposits. And when you think about that from a standing start of 0 with 1 person 10 years ago. We're very proud of that track record and the accomplishment of that group.
That's great. And then shifting to the Technology and Innovation segment. I saw that year over year deposit growth was Very good there, but sequentially from the Q4 into the Q1, 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 2 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. So we're always working to catch up on the loan growth, but we had a good 2018 in deposit growth and we're expecting the same For 2019. So sometimes it comes in 1 quarter or not.
It's very hard to control that and to project that out.
There wasn't anything in their seasonality or in their pipelines that believes us that leads us to believe there's any change in terms of the momentum they have.
Got it. And then 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 deposit growth be faster than loan growth if those initiatives have better results?
That's inclusive, but we have Very moderate expectations. As I said, we want to do this right on the customer side first. And then If we get it right, then we'll ramp it up. So we have it, just consider it to be inclusive.
Thanks very much.
Okay. You're welcome.
This concludes our question and answer session. I would like to turn Conference back over to Ken 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.
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