Good day, everyone, and welcome to the earnings call for Western Alliance Bancorporation for the Q3 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. Sternalliancebancorporation.com. The call will be recorded and made available for replay after 2 p.
M. Eastern Time on October 19, through November 19, 2018 at 9 am Eastern Time by dialing 1-eight seventy seven-three 3,447,529 and entering passcode 10,124,472. 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, and welcome to Western Alliance's 3rd quarter Joining me on the call today are Dale Gibbons and Robert Sauber. Dale and I are going to walk through the slide deck that's been posted on the website Then we'll open the lines for your questions. Western Alliance again delivered consistent results for the quarter with higher organic loan and deposit balances, stable margin and efficiency ratio while maintaining asset quality. The bank also reinvested a one time tax benefit by investing in its future by selling low yielding securities and reinvesting for shorter durations and higher yields. We also funded the company's foundation, which will reduce expenses in the future.
For the quarter, on an annualized basis, Western Alliance increased net tangible book value over 18%, Total revenue by 15% and earnings by 30%, achieving a 207 basis point return on assets, 20.6% return on average tangible equity, while maintaining asset quality standards, which continues to be the focus of the company. As the economic expansion continues, our focus on credit quality will become even more important. Yesterday, we reported record earnings for the 3rd quarter of $111,000,000 and EPS of $1.05 both are up more than 30% from the same period last year. This was our 33rd consecutive quarter of record net income. At September 30, total loans were $15,700,000,000 up $595,000,000 from the prior quarter and up $1,600,000,000 for the year.
Year over year loans grew $2,200,000,000 or 15.2 percent. Deposits rose $821,000,000 to 18,900,000,000 From Q2, year over year deposits rose $2,000,000,000 or 12%. The interest margin improved 2 basis points to 4.72 compared to 4.70 in the prior quarter despite a lower benefit from accretion on acquired loans. Adversely graded assets continue their low loan decline as NPAs to total assets stand at only 1 quarter of 1%. Expense management kept the efficiency ratio essentially flat at 41.5%.
Quarterly earnings added $100,000,000 to equity, increasing the tangible common equity ratio to 10% as total assets rose $808,000,000 providing the company the ability to continue to support organic growth. Before turning the presentation over to Dale, I would like to put our financial results into context. Industry loan growth is becoming challenging, a bit tougher pricing competition and elevated pay downs. Western Alliance Grew through these issues in the quarter, but they are real concerns we will face going forward. At this time, I'll turn it over to Dale.
Thanks Ken.
At the
end of 2017, the company undertook several tax saving strategies that accelerated And deferred revenue until this year. This resulted in $108,000,000 tax loss for 2017 that we expected to carry forward. However, being able to carry this loss back instead results in a one time tax benefit of $15,000,000 As we are able to deduct the loss in 35 percent tax rate years rather than 21% to carry forward, this benefit was recognized in the 3rd quarter. The company utilized most of this benefit as we funded our foundation by $7,600,000 which should eliminate the need for funding in 20 and some years beyond. We sold approximately $110,000,000 of securities at a $7,200,000 loss and reinvested the proceeds at higher yields and shorter durations.
We also incurred $1,200,000 loss for mark to market changes held at fair value, largely from the run up in rates in September. These treasury actions will produce higher net interest income in future periods. We also had a $1,200,000 non recurring charge for our 401 plan. The tax savings on the $17,200,000 of adjustments was $3,600,000 which when added to the $15,000,000 in tax savings from the loss carryback totals the 18 point increased net income by $1,500,000 or 0.01 dollars per share during the quarter. Looking at the as adjusted column, Operating pre provision net revenue for the Q3 was $141,900,000 Pretax income was 136 Income tax expense would have been $26,200,000 on the $136,000,000 of pretax income, which would have brought net income to 110,000,000 and EPS of $1.04 Net interest income rose $9,900,000 for the 2nd quarter to $234,000,000 driven by $621,000,000 increase in average loan growth.
Net interest income rose 16% from the year ago period. Operating non interest income was down $1,200,000 from the 2nd quarter to $12,900,000 largely due to a decrease in warrant income, which was elevated in the 2nd quarter. Total revenue was up $8,700,000 to $246,900,000 which was nearly 15% annualized growth from the 2nd quarter. Operating expense rose $2,300,000 or 9% on an annualized basis from the 2 $205,000,000 largely due to an increase in incentive compensation costs. With revenue growth of 15% compared to expenses rising 9%, the company achieved its 3 to 2 target revenue to expense growth rate.
On a dollar basis, the revenue rise of $8,700,000 was 3.7 times to $2,300,000 expense increase. The provision for credit losses was $6,000,000 for the quarter as asset quality remained steady. We achieved nearly $600,000,000 in quality loan growth and incurred $3,100,000 in net loan losses. The effective tax rate on a normalized basis was essentially flat at 19.3%. Diluted share count was also basically unchanged at 105,400,000 resulting in normalized EPS of 1.04 The next three pages, an orange line has been added to the 2017 periods to show what these ratios would have been without the reduction and tax exempt benefits due to the Tax Cuts and Jobs Act passed late last year.
While the numbers in green are the 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 yield remained stable during the quarter at 3.24 percent, but has consistently climbed from the 2.92% yield in the Q3 of 20 17. The investment yield in the 2nd quarter has also benefited from some semiannual dividend payments that occur in Q2 and Q4, which increased the yield during that quarter by about 3 basis points. Loan yields have climbed over the past year after adjusting for the effect of the tax cut rising 33 basis points from 5.57% in the Q3 of 'seventeen to 5.90% in the most recent period. As a percentage of the increase in the target Fed funds over the past year of 100 basis points, the adjusted trailing 4 quarter loan beta was 33%.
On a linked quarter basis, yields rose 9%, resulting in a loan beta of 36%. Interest bearing deposit costs rose 15 basis points In 3Q, a 60% beta as the company continues to respond to competitive pricing pressure with sufficient strength to continue its healthy organic growth and sustain its core deposit funding profile. In the Q3 of 2017, interest bearing deposit costs rose 48 basis points or 48%
beta. While all
of the company's funding sources are considered including non interest bearing deposits and borrowings, Total funding costs increased 6 basis points for the quarter and 29 basis points over the past year to 0.67%, resulting in a linked quarter funding cost beta of 24% and a 1 year trailing funding cost beta of 29%. Over both last quarter and last year, the bank's loan beta has exceeded its funding cost beta. The company believes this metric provides a more complete picture of wealth funding price sensitivity to rising rates and betas that only comprise a portion of the bank's funding structure and acknowledges the bank's 42% non interest bearing deposit composition. The interest margin increased 2 basis during the quarter to 4.72, primarily driven by the benefit of higher rates on our asset sensitive balance sheet. From a year earlier and after adjusting for the prior margin by the effect of lower taxable equivalent benefits, the margin climbed 19 basis points from 4.53, which is fairly consistent with our estimate of 5 to 6 basis points of margin improvement per 25 basis points increase in the Fed funds rate by the FOMC.
The reduction in acquired loan accretion Forecasted accretion will fall to $2,000,000 in future periods if all discounted acquired loans paid adjust their contractual principal commitments. However, because of loan prepayment activity, actual accretion will likely exceed this estimate. The efficiency ratio decreased to 41.5 percent from 42.1% on a linked quarter basis and is up slightly from 41% a year ago after adjusting for the tax change. The $2,300,000 increase in expense for the Q1 was driven by for the Q2 was driven by increased incentive compensation costs. Year over year revenue growth of $35,200,000 was 2.2 times the $16,000,000 increase in operating expenses.
Our pre provision net revenue ROA was 2.64% and the return on assets was 2.07%. These metrics have consistently been in the top decile compared to peers. Continued loan growth and deposit growth total assets to $22,200,000,000 at period end. Our consistent balance sheet momentum continued during the quarter as the 15% annualized loan growth of $595,000,000 was very close to the 16% annual loan growth we reported for the past 3 years. Similarly, annualized 3rd quarter deposit growth of 18% from the $820,000,000 increase closely compares to our 3 year compounded deposit 16%, the same as we had in loans.
Deposit growth of $821,000,000 exceeded our $595,000,000 in loan growth by $226,000,000 and enabled us to reduce our FHLB borrowings to 0 at September 30 and lowered our loan to deposit ratio from 89.2 percent to 88.5%. Our loan growth of $595,000,000 was driven by residential growth of $296,000,000 and C and I up $209,000,000 and construction up 129. Year over year loan growth is spread across all loan types with the largest growth also in residential, C and I and construction. Loan growth for the quarter was split between geographic regions and the NBLs with approximately 43% of the growth in geographic regions and 56% in national business lines. Deposit growth of $821,000,000 was spread among all markets and business lines.
Deposit growth during the quarter was driven by an increase of $590,000,000 in savings and money market accounts, enabling us to eliminate our short term borrowings, which Higher funding cost. Year over year deposits grew across all deposit types with the largest increase also in savings in mining market was 759,000,000 Total adversely graded assets declined by $10,000,000 during the quarter to $358,000,000 as an increase in classified Loans were offset by a decrease in special mention. Non performing assets comprised of loans on non accrual and repossessed real estate decreased to $57,000,000 or only 1 quarter percent of total assets. Gross credit losses of $4,800,000 during the quarter were partially offset by $1,700,000 in recoveries, resulting in net losses of $3,100,000 or 8 basis points of total loans annualized. The credit loss provision of $6,000,000 compared to $5,000,000 in the prior quarter as the reserve increased to support higher loan balances.
The allowance for loan and lease losses rose to $150,000,000 up $14,000,000 from a year ago. This reserve was 0.97% of non acquired loans September 30, 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 $17,000,000 at quarter end, which were 1.4 percent of the $1,200,000,000 purchase loan portfolio, primarily from Bridge Bank and Hotel Franchise Finance transactions. Our strong capital growth for the quarter exceeded our balance sheet growth and is up 18% in the past year. At 10%, our tangible common equity ratio is in the top quartile of the peer group.
Our return on tangible common equity again exceeded 20%. I'll turn the call back to Ken.
Thanks, Dale. After a strong Q3, we expect balance sheet growth to moderate in the 4th quarter. Competitive pricing pressure on both sides of the balance sheet may mute our margin expansion in 2019. However, we expect our 4th quarter margin to increase similar to our prior guidance in part benefiting from the securities reinvestment strategy Gail just mentioned. We have held our 3 to 2 operating leverage growth rate for the Q3 of 2018, absorbing a $700,000 increase in non interest bearing deposit costs and funding of new balance sheet initiatives that have yet to generate revenue.
Primarily as a result of these charges, We do not expect to see efficiency improvements continuing at the historical pace and expect to migrate our target 3 to 2 revenue growth rate target to 1 in dollars with a revenue increase to be 2.5 times the amount of the increase in operating expenses. In other words, a 40% marginal efficiency ratio. The modest loan losses we incurred in 2018 have been related to borrow And not systemic issues in any of our business lines. We do not have any information that leads us to change This viewpoint and the outlook for asset quality remains stable. At this time, Robert Dale and myself are happy to take your questions.
We will now begin the question and answer session. Our first question comes from Casey Haire of Jefferies. Please go ahead.
Thanks. Good morning, guys. Good morning. Wanted to start off, I guess, in the securities book actually, it sounds like you guys did some restructuring in the quarter and are going to Come out a little bit stronger in the Q4. If possible, could you give us what the spot rate is on that securities book today versus the 3.25% in the 3rd quarter?
Yes, it's up 6 basis points from this transaction.
Okay, got you. All right. Okay. And then the revenue development initiatives that you guys so there's if I'm understanding you correctly, there's nothing On the top line from these initiatives currently, when might we expect to start to see them show up in the P and L?
Okay. So all businesses are progressing, but not yet producing meaningful results. So remember, we have 2 deposit businesses, 2 loan businesses. On what I call deposit business number 1, it's now up and running and new deposits are expected sometime in Q4, Okay. But we still have some more organizational and team build out that will be completed in the quarters to come.
Deposit business too, we're not expected to be operational until sometime in the middle to late Q3 of 2019 And then we would expect deposits coming in at the end of 2019. On our loan businesses, we had 2 we mentioned. On the first one, the team is in place. We have loan commitments and loan growth will follow in Q4 going forward. And on the 2nd loan business, the team build out continues.
We did book some small loan volume this quarter, But we really expect to grow it as we've always said in 2019.
Okay, fair enough. And then I guess just switching to actually I'll just leave it there. Thanks.
Thanks.
Our next question comes from Michael Young of SunTrust. Please go ahead.
Hey, good morning.
Good morning. Good morning.
Just to follow-up on Casey's question, the new kind of guidance on Revenue to expense growth or marginal efficiency ratio, is that inclusive of those businesses and your current outlook for when they'll Kick up and start running or is that exclusive of
those? No, that's inclusive.
Got it. And Just on the growth this quarter, there was strong residential growth. Was that more of a portfolio acquisition? Or is that something that you're shifting focus towards going forward with some of the more competitive pricing in some of the other areas?
So let me just kind of take a half step back and give you a viewpoint into what we're doing here. We buy residential loans from our warehouse lending customers After we fully underwrite them. So we have access to their branch networks without the build out expense, Without having marketing expenses and without having compliance expenses. And if we don't like the loans, We're not obligated to buy them. So this approach in general helps us improve Our operating leverage and we get to cherry pick the best of the residential loans that we like.
Having said that, there also was a purchase in this quarter. But generally as you see residential loans grow in the future, it's going to be because of this strategy that we're putting that we have put in place.
Okay. And you just feel better about the pricing dynamics and risk reward in that vertical now than some of the other areas?
Yes, we do. And these are variable rate loans, 1, 3, 5 years. And we're going to watch this stuff Closely, we will depending on our interest rate viewpoint, we'll either push into it or pull back as we need to.
Think we're getting into this at a better time. I mean, for those that have been in the residential real estate lending portfolio for Sector for years, they put on loans at 3%. Part of the reason why our margin exceeds that is because our mix of residential real estate is only about A tenth of what the average bank gives our size. So you're going to see that proportion growing over time.
Okay. Makes sense. Thanks.
Our next question comes from Brett Rabatin of Piper Jaffray. Please go ahead.
Hey, good morning.
Good morning.
Wanted to ask, I guess, first in thinking about the central business lines, The growth was pretty concentrated in the other segment. I was hoping maybe you could talk about that a little bit. And then I was kind of surprised to see a little bit of a decrease in the tech side of that platform. I was just curious if you could talk about those two things.
So the tech side, we do some equity financing in the tech side. And so those loans come in, they come out. They have a little bit more volatility to them. So that's probably the tech side. I mean, I will say just in general, Tech and Innovation, very busy, very busy on the deposit side.
They're having one of their best fundraising years since the dot Comm error, okay. So we're pulling in a lot of deposits on that side, but loans could go up and down depending on takeouts. We're seeing a lot of strategic takeouts of our portfolio. So that's like sort of meant overall where We have things to grow through. And while we had a great quarter, we're just a little cautious about that Q4's Total growth.
Did I answer your question there, Brett?
Yes. And then I guess the other part was just the other businesses is What was the concentration there?
So in terms of overall growth like Our C and I went up about $209,000,000 Residential, we went up, talked about that. Construction and land went up about 129,000,000 So CRE, investor and owner occupied came down slightly. We're seeing payoffs there, mostly because people are taking out being taken out of their properties.
Yes, within the sector reporting, the segment reporting, it's mostly in our mortgage warehouse operation.
Okay. And then just wanted to ask, you talked about real concerns on Competitive pressures and some moderating growth. As we're thinking about, maybe it's too early to talk about 2019 full year, but You guys have been a stellar growth bank. Is would it still make sense to think about 2019 as double digit or would that moderate?
No, I think so. I think we still have good strong balance sheet growth opportunities in front of us. I think we've been That throughout 2018. We some of these new business lines are going to come into play next year as well. I don't believe that the rate of improvement we've seen on our efficiency ratio is going to continue at the same pace it's been in the past.
Now this In 2018, it was a little bit of a flat year on total efficiency because we had some of these changes whereby we reinvested part of the tax benefits Into employees. But that we don't expect that to continue. But at the same time, We don't necessarily see that there's going to be as many rate increases going forward. And so I think we're going to be Well set for double digit improvements in earnings per share next year as well.
Yes. And let me just add to that. I want to make sure my comments are taken in a very balanced way, okay? We're going to have loan growth. We're going to have deposit growth.
We'll probably hit we're not changing consensus for the full year. So None of that is changing. We're just trying to tell you. We're trying to be cognizant of the world that's out there, okay? By the way, we had a lot of these same problems going into Q3.
And quite frankly, the summary I said to my team here today earlier was loan growth, good deposit growth, even better. And that's what we're shooting for, for Q4 as Well, so I just want to make sure there's balance here in what we're saying and you understand what we're trying to do.
Okay. That's great color. Appreciate it.
Our next question comes from Brad Milsaps of Sandler O'Neill. Please go ahead.
Hey, good morning, guys.
Good morning. Good morning.
Ken, I was curious, I think we may have touched on this in previous calls, but Just want to get an update on the construction book you guys have had a fair amount of growth this year. Can you help us remind us kind of How that delineates between kind of residential, commercial, any other way you might slice and dice? I just want to kind of get a sense of Kind of everything you've got in there at this point.
Yes. I think that's a fair question. And given some of the reported results in the industry, I'm going to make this a little bit broader for a moment because I think this is on investors' minds. So let me just Kind of note several things for you and we start with the following. Just in our Special mention in sub books, we only have about $8,000,000 of construction and land loans,
all right?
That's 1. 2, there are no substandard or special mention multifamily loans, okay. We only have like one loan, which is an investor real estate industrial building that is in special mention and that's for under $1,000,000 Closed end family loans totaled about $11,000,000 in sub and special mention. For the entire book is less than 3 quarters of 1% of our total loan book, all right? Back to your question, when you look at our construction land book of about $2,200,000,000 there's 30% that sits in What we call lot banking, and that's with very, very strong sponsors at LTVs that do not exceed 55%,
All right.
And the team that we brought over a couple of years ago never had a loss even in the downturn,
All right.
We also have about 30% of our CL and D book in single family homes, And we watch that very closely. Absorption rates are still holding. We're not seeing any downturn there. And then the rest of the stuff is in CRE, Investor and owner occupied. And again, the economy is doing well.
Generally that market is doing well. I'll just leave it there, but that was a little broader viewpoint brush to asset quality. I'll just add one other thing too that's probably just maybe important to know or just tidbits of information. 1, we don't do any condo financing. You're not going to find us doing condo financing in Miami or New York or Chicago.
And we're pulling back in certain areas that we think Over time, could create a little more problems in the marketplace. So we've pulled back lending to any Contractors and those that are marginal performers in our book, we are strongly encouraging them to seek other banks. So we are trying to take asset quality comes before everything else in this company. And that matters to us we're trying to be as proactive as we can at all times.
It's Robert. I'll just add on to that. On our commercial real estate financing, We've got significant amounts of equity in our projects and we have Strong contractors, assurance bonds or guarantees to get contracts finished. So even though we've seen some issues with some cost overruns, we haven't had Any problems in our book there? On the residential side, on the construction side, on the housing side, A number most of the markets we're in are fairly high profile markets.
The ratio of land to housing is a little higher than the national average, And we require 50% cash upfront on finished lots. And so as that gets rolled into the house construction, The houses we're financing typically are loan on the house that's being built is somewhere around a 65% loan to value, so we have a fair amount of cushion should home prices begin to soften a little bit.
That's helpful. And just to follow-up on the $2,200,000,000 Do you guys have a sense of kind of what Ultimately that kind of migrates to on your balance sheet or is most of that taken out by other sources?
On a
corporate basis?
Well, some of it gets taken out by other sources. And as a percentage of our total Loans, we're going to keep it about where it is now. And over time, probably, you'll see a migration downward more than upward.
There's some of those permanent, but most of it gets taken out.
Okay. And then Dale, just like a final kind of housekeeping. The recognition of the tax benefit, does that change sort of your ongoing tax rate as you think about 2019?
No, no, I think the 19% in the 19% range is kind of where we're headed.
Okay, great. Thank you, guys.
Our next question comes from Jon Arfstrom of RBC Capital Markets. Please go ahead.
Yes, thanks. Hi, guys.
Hey, how are you doing?
Good. Question for you just on lending again. It seems like a lot of the banks are Same things that are somewhat similar to you, they're backing away a bit. And there's this non bank narrative that keeps coming up. And just curious if you guys are seeing any Change in who you're competing against and has their behavior appetite changed at all?
Is it intensifying?
Yes, that's a good question. So the answer is we are seeing more funds that we're competing against. They're coming in at lower yields and higher advance rates, and they are becoming More of a difficult competitor. We tend to price our loans, all loans. We tried to get premium pricing to the existing market that's out there.
And that is Creating a little bit of a headwind for us, but we're able to fare rather well because of service. A few things. When we tell you the deal is done, the deal is done, we don't re trade and we get it closed when you want to get it done. And those are very, very big important issues for our borrowers and they will pay up on that. And so we've had some success with that.
But yes, we are seeing more institutional money flowing here.
The flip side of that is that A large percentage of these funds are up for sale right now. They're heading to the exit quickly.
Yes. I was just going to answer that question. What do
you think changes that? Yes.
Well, what changes is that is number 1, when you're a lender that needs to borrow money from other people to make loans, You have your funding sources dry up quicker should the economy change a little bit. And a number of the people who started these companies, they don't want to take the risk of going through another cycle. So we are getting inundated with offering books Of non bank lenders for sale. And I think that's going to create opportunity in 2 ways. 1, I think there's Maybe to buy some of these companies at really attractive prices because the supply demand in them for sale is changing.
And 2, It's going to reinforce to borrowers that a bank is a more stable place to borrow money from. And so I think there's kind of a silver lining in that.
Okay. My next question for you was Do higher rates create more strategic opportunities for you? And I think you just answered that question.
Yes. I think not only higher rates
do, but I think a little bump in
the road does 2, I mean, you're going to see a tale of 2 cities, I guess, where
You're going
to see further differentiation between valuations of companies based on performance and part of that performance is going to be taken into account Their credit performance, their margins, their liquidity, their funding, their capital position. So we're always a little bit contrarian Here and we're part of the reason we've been accumulating some capital and not so quick to pay a dividend is waiting for opportunities like this where there's some bumps in the road. The amount of opportunities we're getting shown is high. And So I think that's kind of the counter to a little bit of a rocky road out there for some of the companies is I think You're going to see a bigger differentiation. That differentiation, we've always had that differentiation in book value, but I think our Differentiation in our price to earnings ratio should help us in terms of looking at some opportunities, which we'll be very select on, but We'll, I think, have some opportunities to make some interesting acquisitions over the next couple of years.
Okay, great. Thanks. Thanks for the help guys.
Our next question comes from Gary Tenner of D.
I think you just addressed my question with regard to capital with the Questions or your answers to the previous question, but as it relates to the margin and the commentary around that, you kind of Positioned the trailing information in terms of the relative data between loans and deposits. So I mean With what your forecast was on margin, you kind of alluded to previous guidance on margin, if I heard you correctly. Can you just kind of reiterate What those expectations were and if you think the relative loan betas could stay ahead of the deposit betas?
Yes, I'll take half and throw the other half of the question over to Dal. But We expect to see margin expansion in Q4. So I want to be clear on that, all right? And as We get closer to 2019, we'll have a better viewpoint on that, but we're just trying to balance What we see are some of the pricing pressures extending out over time, okay, With what we're trying to do on the liability side and to grow the book of business. You want to take the beta part?
Sure. Yes. So When we were going into the Q2, we highlighted that we expected that there was going to be a period of stronger betas on funding cost And we saw that in Q2. And in our last call, we said we thought they were going to slow down in Q3, which they did. From here, I think our Probably going to be fairly stable at our current run rate.
So what that does is it gives us an opportunity again to have margin expansion. We had a rate rise, of At the end of September and that's not reflected kind of in our numbers. And then we had a couple of technical things I would say that should improve us as well. One of them was the securities Trade that we did where we sold $110,000,000 picked up, that's going to be about a basis point and a half on the margin. And then we also had the Everyone is familiar with the LIBOR deal where LIBOR really shot up in 2Q and then eased off in Q3.
I think right now Q4 looks like it's probably going to be more normalized. That would help. So we're fairly optimistic that we're going to see margin expansion in Q4. I don't know that we won't see that in 2019. I think we well weigh, but the concern that we have is that if there is going to be fewer changes or whatever from the FLMC or increased competition that that may mute our margin expansion a little bit compared to what it's been and maybe the 5 to 6 basis points for 25 means to get haircut down, but I really that's just speculation.
No, I appreciate the additional color. Thank you.
Our next question comes from Chris McGratty of KBW. Please go ahead.
Hey, good morning. Thanks for the question. Dale, maybe a comment on the deposit pricing, taking your comments a little bit further. You've got about 25%, 26% of your book between the tech and the HOA businesses. Interested in kind of what's been going on with the pricing in those portfolios And compared to
the rest of the book?
It's fairly nominal. I mean, they have very low betas, Continue to again, I think in those sectors, it's not deposit pricing with what those relationships are driven on, it's driven by technology On the HOA side and it's driven by credit on the tech side.
Yes, technology and service on the HOA side.
Okay. That's great. And then, Dale, I missed the comment, I apologize. The securities portfolio, how should we be thinking about The absolute size, given what you did
in the quarter and kind of the prospects for sounds like a little bit slower balance sheet growth?
Well, I'm not sure there's going to be slower balance sheet growth, but where we are today, we have our deposits have been growing faster than loans That gives us more in the securities portfolio as it's kind of the accordion for the balance sheet. Going forward, I think that we're still going to see deposit growth probably in excess of loan growth. And so that could portend for higher balances in that portfolio.
Yes. I mean, we didn't talk about it, but our loan to deposit ratio dropped to 88.5% from last quarter, which was 89.2%.
Okay. And just Ken, while I have you, the comment about balance sheet or maybe I misheard you or maybe could you repeat it? You're growing kind of mid teens, lot of mid teens this year, year to date. Is the message kind of moderation close to 10 going forward kind of Overall balance sheet or is it kind of inside of that?
I'm just trying to clarify. I'm not going to give guidance certainly as it runs into 2019. We're not there yet. I'm Just trying to say that it's going to be a little bit slower than what
we did in this quarter, okay?
And but we'll wait and see. I mean, Quite frankly, I thought Q3 was going to be a little bit slower and we really hit the ball out of the park. And But I just want to make sure that folks on the phone know that we're balanced in what we're seeing. And so we just want to kind of Tell you that it will grow, but maybe not to the tune that it has been growing. But we'll see.
All right. All right. Awesome. Thank you very much.
Our next question comes from Timur Braziler of Wells Fargo. Please go ahead.
Hi, good morning. First question is on the mortgage warehouse business. That Seeing some pretty strong growth here over the last few quarters, despite some of the more Broad industry trend. Just wondering what's going on in that business? How much are you guys actively adding to that business and driving that growth?
And Kind of what the expectation should be for growth within that line item as application volume continues to get hit?
So warehouse lending comprises a few businesses inside of that, MSR lending, warehouse lending, note financing are all Captured in that heading, we like the business.
It's we
got good opportunities. Pipeline is very active, And we still get premium pricing to the marketplace. So we're going to continue to pursue that line of business.
We have not been affected there as much as some others. Our business mix has always been skewed toward purchase money rather than refi And that's given us less volatility in the past. I think that's likely to continue. To the degree you do see a reduction in terms of permanent financing demand For purchases, we have these other sectors that Ken mentioned that
are also
growing well. MSRs, of course, Increase in value at higher rate levels.
Okay. So as we look at that business line, There hasn't really been too much yield concession in growing it. You've been able to kind of grow it at the yields you're looking to get out of that business?
We're not struggling with the growth in that business at all. That business is seeing some Pricing pressure, but I'll tell you that we get premium pricing to what the market is at currently at.
And if we have customers Who aren't willing to pay us what we think is a good risk adjusted return, we let them leave. And we've let Couple of those leave in that department this quarter who have gone to places with significantly lower pricing.
So that's okay. Understood. That's helpful. And then just maybe one more on the lending side. Given the kind of continuance of the increasing Petition in lending from some of these non bank and different funds.
Is it safe to assume that at least in the near term, we Should expect more of the loan growth to come from the national platforms or is the basis small enough where you guys can continue to pick up deals that you're
So let me give more insight here. We have a very active pipeline in all the businesses In all the regions. And we are seeing good deals with strong asset quality, okay? We lose deals. We're losing them for pricing, right?
You're not going to get us to go below sub-two 100, Right. We believe that we should get premium we should premium price our loans because of what we deliver. And we get them a lot, but we lose deals because people we think are being Too aggressive on pricing. So our pipeline is very active. Let's make sure that's clear, All right.
But we're not going to chase and be the lowest person out there delivering the lowest spread. We don't think that's good. We don't think it's good for our investors. We don't think it's good for the shareholders. Just don't think it's good.
So the pipeline is very active. We got a lot of great opportunities. We are following the market down grudgingly. We're doing that, but we are losing out to some people that I think our pricing too tight.
But far and away our competition continues to be Wells Fargo, Bank of America and U. S. Bank. Okay. That's helpful.
That's who we compete against on a daily basis.
Right. Just sorry, one last one for me on a question that was already asked. Given the expectation that deposit Growth kind of outpaces loan growth or the hypothetical that that scenario continues. We saw a little bit of cash flow this quarter. I know you had indicated that you could park some of Access funds into the securities book.
I'm just wondering within the securities portfolio itself, are there further opportunities for restructuring? And as you start to think about redeploying some of those funds, maybe talk through the duration of the portfolio and thoughts around kind of Structure as we enter or as we're still in this rising rate environment.
I mean, a large preponderance of our Securities investments are in mortgage backed securities of one type or another, whether that's CMOs or PACS or tax. And I think that's where the funds are going to be going kind of prospectively. Duration is a bit over 4 years. We shortened that up a little bit with kind of what we've been doing in this last period. I don't want to push it too much shorter Because we're still asset sensitive and it seems like that we still have some rate increases in front of us.
But at some point in time, I think maybe we've Move for a more neutral position if we thought that was prudent. But we are doing things that are maybe slowing that down a little bit like with the Residential loan acquisitions we've been taking in. So combination between some of those residential loan acquisitions as well as continued MBS purchases, I think is where you're going to see the preponderance of our liquidity being deployed.
Perfect. Thank you.
Our next question is a follow-up from Gary Tenner of D. A. Davidson. Please go ahead.
Thanks for the follow-up question. I just wanted to revisit really quickly on the resi real estate lending. I mean, it's still it's just barely over 5% of your book, but it was half of your loan growth this quarter, 20 So just wondering about the kind of quarter by quarter decision making process around that. It sounds like you've got really a spigot Of supply that you could turn on and off and kind of put it on your balance sheet at the pace that you
Yes.
And it's also a couple of things.
I mean, we looked at
it in 2 ways Going back a year when we start planning what we're going to do and that is a good alternative to our investment book of mortgage backed securities And also a good hedge against higher competition in the C and
I and commercial real estate business.
All right. Perfect. Thank you.
Our next question is from David Chiaverini of Wedbush. Please go ahead.
Hi, thanks. I wanted to ask a question about You said in the prepared remarks about the efficiency ratio and how historically you've had been growing revenue at a 3:two ratio of the growth in expenses. And you mentioned about how going forward to think about it as an efficiency Ratio of 40%. Now does that apply where you're referring to the new businesses that are coming on board? Or should we now think of the business as managing towards that 40% efficiency ratio and that revenue growth could be similar to expense growth going forward?
Well, so right now, we're in this investment period of these new businesses, and we're also looking at Increases in our deposit costs that we break out in our non interest expense. That has challenged our 3:two growth ratio. And so looking forward, we're saying, okay, we should be able to at least do 2 $0.5 to $1 in terms of revenue to expense. I would hope that when these situations kick in gear that we can continue to improve our efficiency ratio and take it below 40%. But it's not going to go at this we're not going to be improving at the same rate we have historically.
So I look at where what Our opportunities here in terms of double digit balance sheet growth, margin expansion, a little slower improvement on efficiency ratio and I still see that we're double digits In terms of EPS improvement.
This concludes our question and answer session. I would like to turn the conference back over to Ken Vecchione for any closing remarks.
Thanks everyone. Listen, we were very pleased with our results this quarter and we look forward to talking to you again about 4th quarter results in the near future. Thanks everyone.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.