Good day, everyone. Welcome to the earnings call for Western Alliance Bancorporation for the Q2 of 2018. Our speakers today are Ken Vecchione, Chief Executive Officer Dale Gibbons, Chief Financial Officer and Robert Sarver, Executive Chairman. You may also view the presentation today via webcast through the company's website at www.westernalliancebancorporation.com. The call will be recorded and made available for replay after 2 p.
M. Eastern Time on July 20, 2018, 344-7,529 and then entering passcode 10,121,936. The discussion during this call may contain forward looking statements that relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. The forward looking statements contained herein reflect our current views about future events and financial performance and are subject to risks, uncertainties, assumptions and changes in circumstances that may cause our actual results to differ significantly from historical results and those expressed in any forward looking statement. Some factors that could cause actual results to differ materially from historical or expected results include those listed in the filings with the Securities and Exchange Commission.
Except as required by law, the company does not undertake any obligation to update any forward looking statements. I would now like to turn the call over to Ken Vecchione. Please go ahead.
Good afternoon, everyone. Welcome to Western Alliance's 2nd quarter earnings call. This quarter represents our 32nd consecutive quarter of record net income. Joining me on the call today are Dale Givens and Robert Sauber. This quarter, we produced net income and earnings per share of $104,700,000 and $0.99 respectively.
Both net income and EPS grew 30% from the same period last year. These results were achieved in conjunction with accelerating economic growth, rising hourly wages, increasing consumer confidence and higher personal spending. Unemployment continues its decline and more people are returning to the workforce. Our recent tax bill legislation and the administration's softening approach to regulation continue to provide support and momentum to the economy. Our business model, which focuses on national business lines in conjunction with a regional presence in the Southwest, produced strong loan growth and even better deposit growth.
For the quarter, total loans were $16,100,000,000 up $578,000,000 from prior quarter and up $1,000,000,000 for the first half of this year. Year over year, loans grew $2,100,000,000 or 15.4 percent. Deposits expanded $733,000,000 nearly $18,100,000,000 from Q1. Year over year deposits rose $2,100,000,000 or 13 percent and year to date deposits were $1,100,000,000 This performance moved the loan to deposit ratio from 89.7 as of the end of last quarter to 89.2%. Net interest margin improved this quarter as our asset sensitive balance sheet and high level of non interest bearing deposits moved the NIM to 4.7% compared to 4.6% in the prior quarter.
Our growth this quarter has been entirely organic, providing us the optionality not to chase pricey M and A targets and wait for opportunistic deals will be more attractively priced. Asset quality continues to remain stable with special mention loans declining 35,000,000 while classified accruing loans rose by a like amount. Positive operating leverage assisted in the reduction of the company's efficiency ratio by 60 basis points 42.1%. Embedded inside of the efficiency ratio are several new organic loan and deposit initiatives that continue to show promise and progress. Going forward, depending on testing, performance and product rollout, We may, and I emphasize may, bring forward some of these development costs from 2019 into this year, which could put temporary pressure on our 3 to 2 revenue to expense growth rate target.
Quarterly earnings added nearly $100,000,000 to equity increasing the tangible common equity ratio to 9.9 as total assets rose $607,000,000 providing the company the ability to continue to support its organic growth objectives. Finally, compared to prior quarter, tangible book value per share increased 19.5 percent annualized to $19.78 which is the byproduct of the 2.02 ROA and a return on tangible common equity that was above 20% for the 2nd consecutive quarter. And now, I'll turn it over to Dale.
Thanks, Ken. Net interest income rose $9,900,000 from the first quarter $24,000,000 driven by $541,000,000 increase in average loans as well as the 10 basis point margin increase. Net interest income rose 16% from the year ago period. Operating non interest income was up $1,400,000 from the first quarter to $14,100,000 largely due to warrant income from technology financing resulting in total revenue up $11,300,000 to $238,200,000 which was nearly 20% annualized growth from the Q1. Operating expense rose $3,400,000 or 13.5 percent annualized growth from the Q1 to 102,700,000 Consistent with our expectations, the revenue growth rate of near 2020 was about 50% faster than the 13.5% expense growth rate Even if the company earned through $1,200,000 in higher non interest deposit expense incurred to support interest bearing deposit growth.
On a dollar basis, the $34,800,000 increase in revenue from the Q2 of last year was more than double the $14,500,000 increase in expense over the same period. The provision for credit losses $5,000,000 for the quarter as asset quality remained steady. Securities losses, net of OREO gains was a 500,000 The effective tax rate climbed to 19.5 percent from 17.1% last quarter, which included a benefit from share awards of Western Alliance stock vesting at a higher share price than when the equity grant was awarded as our stock prices climbed. The diluted share count held essentially flat at $105,500,000 resulting in EPS of $0.99 For the next three pages an orange line has been added to the 2017 period to show what these ratios would have been without the reduction in tax exempt benefits due to the Tax Cuts and Jobs Act passed late last year. While the numbers in green are the actual reported performance, the numbers in orange provide continuity to the quarters in 2018 has the tax change been in effect in the prior year.
Investment yields rose 16 basis points during the quarter to 3.23 percent and has consistently climbed from the 2.87 adjusted yield in the Q2 of 2017. Similarly, loan yields have climbed over the past year after adjusting for the effect of the Tax Act rising 32 basis points from 5.49% in the Q2 of last year to 5.81 percent in the most recent period. As a percentage increase of the target set funds rate over the Past year of 75 basis points, the adjusted trailing 4 quarter loan beta was 43%. On a linked quarter basis, loan yields rose 22 basis points resulting in a loan beta of 88%. Interest bearing deposit costs rose 22 basis points in Q2, also an 88% beta from the 1st quarter as the company responded to competitive pricing pressure with sufficient strength to continue its healthy organic growth and sustain its core deposit funding profile.
From the Q2 of 2017, interest bearing deposit costs rose 40 basis points, resulting in a 53% beta. However, this measure does not consider our relatively high level of non interest bearing deposits, which grew $446,000,000 in the quarter and $1,100,000,000 over the past year. When all the company's funding sources are considered, including non interest bearing as well as borrowings, Total funding costs climbed 15 basis points for the quarter and 26 basis points over the past year to 0.61 percent, resulting in a linked quarter funding cost beta of 60% and a 1 year trailing funding cost beta of 34%. Over both last quarter and last year, the bank's loan beta has exceeded its funding cost beta. The company believes this metric provides more complete picture of Wall's funding price sensitivity to rising rates and betas that only comprise a portion of the bank's funding structure, while also acknowledging the bank's 44% proportion of non interest bearing deposits.
Interest margin climbed 10 basis points during the quarter to 4.70, primarily driven by the benefit of higher rates on our assets sensitive balance sheet. From a year earlier and after adjusting the prior margin by the effect of lower taxable equivalent benefits, the 2nd quarter margin climbed 21 basis points from 4.49, which was a 28% participation rate in the 75 basis point increase in target Fed funds during the past year. This is slightly better than the guidance we have provided of a 5 basis point to 6 basis point improvement in the margin reached 25 basis points increase in the target Fed funds rate by the FLNG. Accretion on acquired loans flipped to $5,100,000 from $5,700,000 in the Q1. Forecasted accretion will fall to $2,000,000 in future periods if all discounted acquired loans paid just their contractual principal commitments.
However, because of loan prepayment activity, actual accretion will likely exceed this estimate. The efficiency ratio decreased to 42.1% from 42.7% on a linked quarter basis and is essentially flat from the 42.3% a year ago after adjusting for the tax change. The $3,400,000 increase in operating expense from the Q1 was driven by higher professional expenses and increased deposit costs as compensation charges held flat and compares favorably to the rise in revenue of $11,300,000 for a 3 to 1 revenue to expense increase in dollars. Similarly, year over year revenue growth of $34,800,000 was point four times the $14,500,000 increase in operating costs. Our pre provision net revenue was 2.61% and return on assets exceeded 2% for the first time in company history.
These metrics have consistently been in the top decile relative to peers. Strong first quarter loan and deposit growth to total assets to $21,400,000,000 at period end. Our consistent balance sheet momentum continued during the quarter as the 15% annualized loan growth of $578,000,000 was very close to the 16% annual growth we've reported in loans for the past 3 years. Similarly, annualized 2nd quarter deposit growth of nearly 17% from the $733,000,000 increase Closely compares to the 3 year compounded deposit growth rate of 16%, which is the same as we have in loans. Deposit growth of $733,000,000 exceeded loan growth of $578,000,000 by $150,000,000 enabled us to reduce our Federal Home Loan Bank borrowings to only $75,000,000 at June 30.
Our loan growth of $578,000,000 was driven by C and I of $334,000,000 and residential real estate loans up 131. All other loan categories declined modestly as a percentage of total loans. Our line of business, the growth was broad based with every geographic region NBL increasing from the Q1. Deposit growth of $733,000,000 was particularly strong in the Arizona and Nevada regions in the Tech and Innovation business line. 60% of the deposit growth was non interest bearing, while other categories increased moderately.
Total adversely graded assets declined by $10,000,000 during the quarter to 369,000,000 as an increase in classified accruing loans was largely offset by a decrease in special mentioned credits. Non performing assets comprised of loans on non and repossessed real estate decreased to $62,000,000 or only 29 basis points of total assets. Gross credit losses of $3,900,000 during the quarter were partially offset by $1,300,000 in recoveries, resulting in net losses of $2,600,000 or 7 basis points of total loans annualized. The credit loss provision of $5,000,000 compared to $6,000,000 in the prior quarter as the required reserve to support strong loan growth was partially offset by a reduction in specific impaired credit allocations and increased the allowance for loan and lease losses to 147,000,000 of $15,000,000 from a year ago. This reserve was 99 basis points of organic loans as of June 30, acquired loans are booked at a discount to the unpaid principal balance and hence have no reserve at acquisition.
For acquired loans, credit discounts totaled $20,000,000 at quarter end, which was 101.5 percent of the $1,300,000,000 purchase loan portfolio, primarily from the Bridge Bank and Hotel Franchise Finance transactions. Our strong capital growth for the quarter exceeded our balance sheet growth and drove each capital ratio higher from the Q1. Tangible book value per share rose $0.92 during the quarter to 19.78 and it's up 18% in the past year. At 9.9%, our tangible common equity is the top quartile of the peer group, Our return on tangible equity again exceeded 20%. I'll turn the call back to Ken.
Okay. Thanks, Dale. Our business model, Regional presence in the Southwest combined with national business lines positions us for continued success in the back half of the year. The loan pipeline looks strong as our regions and national business lines provide us the flexibility to move capital to better priced and better structured transactions. The national business lines carry with them less competition, more stable pricing, good asset quality, and positive operating leverage.
Deposit growth will continue to challenge the industry and despite our outstanding growth this quarter, continues to get management's full attention. We take nothing for granted, but we expect our deposit growth to continue to fund loan demand. Our tech and innovation, life science, HOA And Warehouse Lending National Business Lines continue to be an active source of deposits for us, and our approach to requesting deposits when providing loans gives us optimism we can continue to grow deposits alongside of loans. Our NIM, supported by a high percentage of non interest bearing deposits and loan yields that have performed well but remain under pressure, should have an upward bias for the remainder of the year and dependent on additional rate increases by the Fed. Expect interest bearing deposit betas will modestly decline from here to year end as we still target approximately 50% beta through the rate cycle with any future Fed actions supporting a higher NIM.
Year to date, operating leverage has benefited from a nearly 3 to 1 revenue to expense performance as revenues have risen $72,500,000 and expenses $25,500,000 year over year. This performance metric depicts the underlying leverage more clearly than comparing revenue growth percentages to expense growth percentages. Asset quality remains stable and we work hard not to trade away deal structure for growth. We remain vigilant when conducting asset quality reviews and move expeditiously when borrowers show early signs of credit stress. Overall, our culture at Western Alliance combines an entrepreneurial approach with prudent credit and risk management practices.
Management will continue to focus on both aspects of our business as we move into the second half of the year. At this time, Robert Dale and I will be happy
to take your questions.
Our first question comes from Timur Braziler of Wells Fargo Securities. Please go ahead.
Hi, good morning.
Good morning.
First one for Ken, the loan and deposit initiatives that you referred Any additional color you can provide there? And I guess what's going to be the deciding factor whether or not some of those expenses do get accelerated into 2018?
Okay. As I said on the last call, we're not going to give any clear line of sight as to exactly what What I can say is one of the deposit initiatives is organically grown, meaning we saw an opportunity inside of book of business today to expand a particular area. We have a couple of those people already on or in the company, And we do need to acquire a few more as we begin to push forward and grow those deposits. The second deposit initiative, we just hired the leader of that group at the middle to tail end of June. And right after this, I'm going to sit down and review his operating plan.
And depending on how fast He can get that business up and running will depend on how quickly we hire the people. That's probably about as much as I can offer at this time.
Okay, that's helpful. And then just maybe looking at the broader deposit base, is there any bifurcation in betas maybe in the Arizona, Nevada markets versus some of your other markets and other national business lines, Any difference in competitive landscape?
It's Robert speaking. Historically, the California market has carried lower cost deposits in Arizona and Nevada. But I think the biggest thing for our company is, and a lot of this has been done to our strategy, branches is our DDA. So if you go if you look back, the balance sheet focus during the recession was capital. And then as the economy started getting better, it shifted to loan growth and now it's deposits.
And for the last 10 years, we've been just building, As Ken alluded to, some of these business niches that have paid off pretty handsomely that we've organically grown like municipal finance or homeowners association. So, we have very few borrowing segments we have that aren't DDA rich. And so, while our non interest bearing money could go up. We still continue to add significant amounts of DDA and that's really going to be the key to our deposit growth and our margin.
Great. And just one last one for me. Looking at the other national business lines, so the loan this quarter, how much of that came from the warehouse business and what's that balance at the end of the quarter?
Yes. So overall, national business lines produced $424,000,000 of incremental growth quarter to quarter. Dollars 200 of that came from warehouse lending. But when you look at all of our national business lines and all of our regions, every single business contributed to quarter over quarter growth. So we're very pleased that our business activities are very broad based in terms of pushing up total loan growth this quarter.
Perfect. Thank you. Nice quarter. Thank you.
Our next question comes from Casey Haire of Jefferies.
I wanted to touch on the loan growth specifically or the outlook rather, specifically the mix. CRE obviously is very competitive. You guys did manage some growth. You were also pretty The resi growth was very strong this quarter, one of the strongest you've had in some time. Is that sort of Is that how we should look at loan growth going forward?
Is CRE a little bit tougher? And how much more are you willing to take up the resi, which has not obviously been a big piece of the portfolio for you?
Yes. So let me give you a macro answer first, and I'll get to the micro. What we do every week is because we have so many business lines and regions, we're able to allocate out our capital to the best risk reward opportunities we have. And therefore, that puts less pressure on our pricing throughout the business. So if we see opportunities in one particular segment and we like the risk reward, we'll push more there if those opportunities are coming in.
That's number 1. Number 2, residential loans did grow by about $127,000,000 It still only represents 3.4% of our total loans. And here we entered into some forward flow arrangements with some of our warehouse lenders at attractive rates without the origination, distribution and compliance expense, which provides attractive operating leverage for us. However, we do not underwrite I'm sorry, I want to say, however, we do underwrite all these loans ourselves. And last but not least, on structure, because I'd always you have to put that alongside of pricing, we just don't compromise on structure, all right?
And we are fortunate that In the markets that we play in, we're not competing a lot against the large money center banks, which tend to sometimes in our viewpoint give up structure. So we haven't had as much structure pressure on us as maybe some of the other banks that have reported. However, there are a lot more non financial banks coming into the market as they see opportunities here, and it wouldn't surprise me that we'll see more structure pressure, but we
just don't give up on structure.
Understood. Thank you. And just switching to sort of, I guess, capital management. The can you give us some updated thoughts On what the M and A environment is like, I know bank pricing bank deal pricing has not been your liking, but what about loan portfolio opportunities, which appear to be decent opportunities in today's environment?
Yeah. I mean, the first thing I'll say is, there's a lot for sale and more and more for sale. So, the number of banks that are interested in selling is growing. And I think as that continues to increase, there'll probably be some better opportunities. As we've alluded to before, we're primarily an organic grower and being able to compound out a 20% return year after year to grow our book value by like amount makes the hurdle a little bit higher on these acquisitions.
We have found some very good opportunities to add value to the company over the last 10 years with What I call non bank acquisitions, we continue to look at a lot of those. We think there's quite a bit of value there Because we have the ability unique ability to really grow our deposit base, a number of their companies are a little more deposit constrained. And so that gives us an opportunity in today's environment to look at some of these lending niche opportunities like you said and like we did with the purchase from GE Capital and a couple other purchases we've done. So, we're open to continue to look at bank deals. As you said, a lot of the pricing is stuff's been pretty fully priced.
And I think a number of these niche opportunities, whether it's through acquisition organically, It is a pretty strong focus of ours.
Okay, great. So it seems like it's a decent opportunity. What is holding you back From successfully landing on one of these, is it pricing or is it just the risk profile?
No, I think Part of it is the risk profile, part of it is pricing too, but a lot of it has to do with culture. We're not a big consumer lender, so We're focused more on stuff in the commercial space and we've got a few organic initiatives along these lines, which we think have a lot of opportunity. And organically, For us, it's been a better way to add value. It maybe doesn't hit the P and L as much upfront, but down the road, obviously, there isn't any dilution. And so, It tends to be more accretive for our shareholders over the long term.
But we continue to look at a lot of opportunities. I would say we probably It's shown a half a dozen deals every week, different sizes, different shapes and it's increasing. So we're But we have a high hurdle rate. When you're returning 20% of equity, we got to make sure if we do a deal, we're going to get that kind of return. I guess it's a high class problem to have, but we're pretty disciplined in that regard.
Understood. And Just lastly, I know you guys have talked about potentially rightsizing capital ratios, if you don't find one of these deals. But given that, it does seem like a good environment for deals and you have some organic initiatives in the works. Does this mean that you're going to forego rightsizing capital ratios in 2019 if they continue to build and you're just happy to let them grow from here?
Yes. I don't know if we talked about 2019 right now, but I think that is an issue. I mean, our capital ratios are growing And that's something we'll continue to look at. It's something the Board addresses every quarter. But right now, we have no plans to right size capital.
And I do believe With the pressure on deposits, that we've alluded to and that's in the market that that will provide more opportunities for companies like us, whose business model is, as I said, DDA and deposit rich, there'll be some more opportunities. So I'm not concerned with Quarter to quarter is I am finding the right opportunities and going after those.
Great. Thank you.
Our next question comes from Arren Cyganovich of Citi. Please go ahead.
Thanks. Just thinking about the competitive environment on lending, clearly there's credit Spread compression on CRE, what are you seeing within your national business lines? And what provides that ability to keep those credit spreads from tightening too much?
So international business lines, we have seen pressure in warehouse lending, and we've seen some pressure in our hotel group. And so and we have dropped our pricing, no doubt about that. But we still continue to get a premium to what the market pricing is. And every company says the same thing, which is it's because of service and responsiveness, And that's how we get the money. That's how we get the spreads.
So yesterday, 2 deals came across my desk. And it was, if we can say yes to these dynamics, these financial terms in the next 48 hours, the deal is ours, All right. And we pushed on it. We looked at it. We did our review.
I would have liked to have seen more pricing, but we were still getting a 50 basis premium is what the market was, and we took the deal. And we got the deal, even more important. So we are seeing some pressure there. And we grudgingly, as I
said, bring our rates down.
Okay. Thanks.
I think that one of
the differences for us compared to some of the companies that I know you're alluding to is, we have so many different business lines and so many different credit opportunities that we are able to balance where we are maybe slowing down, where we are speeding up based on market. And a number of the areas that we're in have a much fewer competitors in place rather than just say CRE lending or construction real estate lending.
Right. Okay. And then are you able to put any kind of magnitude on when you're talking about the potential expenses that you'd pull forward from 2019, is it material or is it just relatively small? And I'm just trying to gauge what you were referring to there?
So the answer is no. I don't have that in front of me. And the reason is we're still trying to understand How big the opportunity is and depending on how big the opportunity is and how fast we can bring it to market will determine how much we pull forward. So On one of the initiatives, I said we just hired our senior leader. Yes, he's going to need a couple more people to start getting this thing moving.
That'll be a few more people. On the other deposit initiative, we have a few people already in house that were on our payroll. We probably need to bring in a couple more. So what we're trying to do is balance it in the constraints of our operating leverage as well.
And then just last quick question on models. The tax rate seems a little bit lower than what I was What's your expectation for tax rate going forward?
Yes. There wasn't anything in the Q2 of tax that I would call nonrecurring. So in that sense, I call it a core number at about 19.5%. That said, our taxable income is growing at a faster rate than our tax exempt income, which has been a little bit challenged since the Tax Act went into effect that reduced the benefit from holding tax exempt assets. And so as a result, I would guide more toward 20%, but 19.5% was a core number for Q2.
Let me come back to your other question because you asked about the new business initiatives. But if you are Thinking about what does it mean to our total expenses, then for Q3, we will see we could see an upward drift on by maybe $2,000,000 to $3,000,000 more in that vicinity, just as we begin to roll in new projects and continue to try to hire producers. So that maybe will give you some sense of guidance as to what's coming forward, Coming ahead.
Very helpful. Thank
you. Our next question comes from Chris McGratty of KBW. Please go ahead.
Hi, good morning. Thanks. On credit, you obviously look very good. I think in the past you've talked about some caution growing the hotel portfolio. But As you stand in the midpoint of the year, maybe Robert or Ken, how are you thinking about portfolios?
Do you prune Given the strong appetite for assets in the industry? Thanks.
I'm sorry, I missed that thought. So how do we think about what?
Just pruning the portfolio, is there any credits that you have?
Pruning, you said? Pruning, correct.
Yes. We're not pruning. We still see good opportunities. When first in the hotel, we try to have a model that says, Let's be in the top MSAs. And within there, let's be in primary and secondary locations.
And then let's make sure we have operators that have more than hotels that have done this for a number of years and they have good sponsorship and liquidity behind them. What we do look at is a lot of the demand supply dynamics. And sometimes we'll say no to funding a hotel because we think too much supply is coming online And that in itself could lead to a problem down the road. But we're not pruning. We see continued opportunities in the hotel space and actually in just about most of all the national business lines.
I think one of the things that is helping the market is the amount of institutional equity coming into a lot of projects. So like in the hotel space, We're not competing on the onesies deals that the community banks and the local regional banks are doing. We're doing more portfolio deals. I will say one of the risks in real estate right now is the cost in construction. A lot of projects have are showing significant cost overruns, in some of the bigger markets.
And so where we are, if you want to say the word pruning, is being cautious on the amount of equity we have available And on the construction side where the sponsors have the liquidity and the resources committed to get projects And so we're a little more pickier in terms of our sponsorship, but there's still plenty of business out there. So the portfolio itself doesn't have to shrink.
Just Robert, maybe think of another answer to this too. And one of the things we're doing is a lot of people ask what keeps me up at night. And one of the things that keeps me up at night trying to find something that keeps me up at night, all right, because things look pretty good these days. So what we've tried to do, especially in the hotel group, which could have volatility, We've set the covenant levels at a higher level. So we're hoping if anything happens, our borrower trips at a higher covenant level, which allows us to get there earlier, helps us re margin the property, have additional liquidity put in there, while the Property is still really cash flowing and doing nicely.
So that's one of the ways I won't say recruiting, but we have put a higher level of covenants in there. And do we lose a deal or 2 because of that? Yes. But I feel good that if something trips in any one of our deals, We get there first and then we can work it out. So, I'd rather see our special mention jump up for a quarter or 2 and then have that loan go right back up to pass rather than to find its way into sub or into a loss.
So, not exactly pruning, but we have set our level of expectation in terms of deal structuring at a higher level.
We have a full suite of service available in commercial real estate. And so and as you know, we're that's an area we're pretty savvy and pretty forward thinking in. So, in some of the areas that you would look to and say, well, maybe some of these prices are getting a little high or terms or whatever, we've also shifted to the debt market where we're helping finance people that are lending in those areas. So, if we think we don't want as much exposure, we're worried about valuations and cap rates and stuff, We may finance other lenders that do that business. And so therefore, we cut our exposure by 50%.
So, instead of making a 70% loan to value on On a certain asset class, we may advance 50% to an institutional entity that's also making a 70% or 75 So there's a lot of different ways to do it. But with the way we look at the real estate, we look at it geographically, we look at it by product types and then we look at it on a macro basis to try to manage our risk.
Thanks for that color. Appreciate it. If I could ask one more, Dale, on the portfolio, certainly the size will be dictated by your flows and deposits. But anything any color on reinvestment rates, what you're buying, CPR speeds and change quarter on quarter?
Yes, yes. So we're replacing the portfolio at probably slightly higher than where we are today, primarily buying GSE For 3.5 to 4.5 year target duration, the balance came down a little bit in Q2. I'm not looking to shrink the portfolio. I think it's going to be fairly flat for the rest of 2018. Thanks a lot.
Hey, Chris, I got a question for you. How is the productivity of your interns spend this summer?
Excellent. A lot of good training going on.
Okay, good. Good to hear. Good to hear.
Our next question comes from Brett Rabatin of Piper Jaffray. Please go ahead.
Hey, guys. Good morning.
Good morning.
I wanted to ask, I guess, first just going back to the commentary around deposit betas Moderating. Can you maybe give a little more color around is that a function of kind of the betas have increased and so from here they're less meaningful or are you expecting mix shift change to maybe help beta, can you maybe just give a little more color on the moderation question or commentary?
Sure, sure, sure. So we were defensive kind of early on this year in terms of moving deposits, being responsive to kind of customer complaints. And we tried to get in front of it A little bit and you saw that in the Q2. I think we've effectively done that for the kind of the rate situation we sit at presently. So consequently, I think our deposit betas are going to ease off from the kind of pronounced rate they were at in 2Q.
That said, we've long been expecting that the deposit betas through this cycle are going to be no different than what they are in prior cycles. I know some people thought because we started out so slow, so sluggish, coming off of basically a zero rate environment that they were going to stay low. Never thought that was going to be the case. And so that's about a 50% beta overall. We're still lower than that on a cumulative basis since the rate cycle began, But I'm looking for about a 50% kind of out from here.
Okay. And then on the margin, With the June rate hike, I guess I'm just curious, Dale, when the yield curve looks to be flattening, that's kind of made you a little bit nervous about the forward margin. You maybe just put all those things into context about your thoughts on the margin from here?
Sure. So our guidance has been about 5 or 6 bps What perhaps could work against that is what you're alluding to Brad and that is, what about what can we reprice in kind of the middle of the curve if CRE book prices off of the swap curve essentially and that really hasn't moved that much since the beginning of 2018. I think that's correct. But as a proportion of the kind of the total effect on the loan yields in the NIM, it's going to be fairly muted. We have 25% of our loans are tied to prime, 30% are 30 day LIBOR, 5% are 90 day LIBOR.
That's a total of 60% and then the rest that you see that re prices only re prices as it matures and most of our CRE loans Have a duration or about 4 years or so. So if you're not repricing near as many dollars kind of in that piece, but yes, so 60 of our loans are basically floating rate. That should move the margin up. But yes, if we don't see the yield curve kind of move in a parallel shift, can be a little more muted than the 5% to 6% that we're indicating.
Okay, great. Appreciate the color.
Our next question comes from Brad Milsaps of Sandler O'Neill. Please go ahead.
Hey, guys.
It looks like maybe you hired about 60 people during the quarter. That's maybe a little heavier than normal. I'm just kind of curious if you could break those down maybe revenue producers versus more back office infrastructure type folks. And I think you kind of alluded to it, Ken, that maybe a lot of that is in the run rate and with the OpEx guidance you gave a few minutes ago on the call?
Yes. So we went up a little over 60 people quarter to quarter. Our hiring in Q1 happened to be light, but I would break down those 60 people as follows. 40% are revenue producing or people that support the revenue producers. About 25% of that happened to be interns.
And then the remainder, about a third, happens to be the infrastructure folks to help make the company a tick in the back office.
Got it. Okay. And then just to follow-up on loan growth, Dale, was warehouse I was just kind of curious What type of contribution it had to kind of the period end loan growth for the quarter?
Yes. So $88,000,000 mortgage warehouse loans.
Okay. Not a big number. Okay. All right. Great.
Thank you very much.
Our next question comes from Jon Arfstrom of RBC Capital Markets. Please go ahead.
Thanks. Good morning, guys.
Good morning.
Good morning. Just to follow-up on Brad's question there. Commercial, you had a strong commercial loan growth quarter. And like last quarter, period end is also significantly higher than the average. So 2 part question, maybe talk a little bit about drivers of commercial during the quarter and how are you feeling about the outlook there?
It seems a bit stronger.
Yes. On the commercial side, we're constructive. We like what we see and the flow of Opportunities has been consistent for the first half of this year. Yes. Nothing unusual there.
I mean, it really was broad based. Tech was up, each of the regions were up. So we feel pretty strongly that it's got momentum to it. I would point out that our loans, we call it we have a telephone situation telephone line situation here where they tend to peak At the last day of the quarter, there's some things that closed and stuff like that and then they ease off a little bit. So we do have a significant variance Our average balance and our ending balance, that's a little more pronounced in the second quarter than usual.
So I think that that It may change, but we do look for I would look for our average balance to increase significantly, But you can't necessarily draw a linear line from 6:30 to what you think we're going to be at 9:30 given kind of the guidance we're given and called out the average is going to be a little lower than that.
Okay, okay, good. That helps. And then a bigger picture question back on M and A, but you're over $20,000,000,000 and a lot of banks with that $50,000,000,000 threshold talked about when they get to 30 years to 35 that they started to get treated like a bigger bank. And I'm just curious From your perspective, maybe Ken or Robert, lifting that $50,000,000,000 cap, does that make you think differently strategically about the company longer term?
Yes, a little bit. But I think the key in terms of risk management is trying to be ahead of yourself. And I look at it as more of an evolving process. Listen, there's a lot of what you need to do or what you used to have to do or maybe you have to do with $50,000,000,000 that we do now just because we think it's a prudent way to run the company. So to me, it's just an evolving process, the risk management piece, I just don't look at the absolute dollar amounts, kind of regardless of the regulations.
It's just what's best to manage the company,
Okay. Thank you.
Our next question comes from Michael Young of SunTrust. Please go ahead.
Hey, thanks for taking the question. Maybe starting with just a bigger picture question Either for Robert or Ken, just given where we're at in the economic cycle and the spread dependency of the business, is there anything That you all are doing or thinking about at some point to be more defensive either by adding kind of non spread driven businesses or extending duration, etcetera in the loan book and what would maybe trigger that?
So the things that
we're doing defensively are what I already comment on, which is trying to raise the covenant levels. So if things do go wrong, we're there 1st in front of the borrower to help reconcile that rectify that, I should say. That's pretty much where we're headed. As you mentioned that the economy is a little bit long in its recovery, but The Southwest economy is humming, and we see economic growth having a positive impact on all sectors of real estate. We see that CRE continues to be an attractive investment alternative.
We see large inventory of renters that want to fuel new home purchases multifamily development, unemployment is dropping in this area, particularly in Arizona. We see more companies looking to relocate here for a Variety of reasons, mostly cost and talent levels. So I think we're doing the right things at this time, and I'm somewhat optimistic about where the economy is going in the future.
We're certainly watchful about emerging signs. And there's been a lot of talk about some of the macroeconomic elements, trade disputes and things like that. Economic elements, trade disputes and things like that. So far, I don't think these they haven't had an effect here, But we're watching them. And if we thought things were turning, I think that does affect kind of what we're looking at.
And perhaps We would while we're not going to bet on interest rates, we might shift our asset sensitive profile to be a little more neutral.
All our credit people and our management people have been through the last two recessions. And so I think while we're optimistic about where the economy is, we're also Conducting our business in a way that if we hit a recession starting tomorrow, we've got ourselves protected. And we do that primarily through Our collateral position, advance rates and our sponsor capacity, financial capacity. I remember as a young banker, They talked about the 5 Cs of lending. And when I went through the 1st recession, I learned that there's really only 3 Cs of lending and that is collateral creates character.
And so, we're very collateral focused.
Okay, thanks. And Switching gears completely, just to the deposit portfolio that's related to kind of Bridge Bank. Can you give us a sense of the size of the DDA balances from that? And have you seen any incremental pressure in that book of business to kind of migrate into interest bearing accounts?
So the DDAs there probably sit about $1,300,000,000 And generally, the tech business runs almost 2 times deposits to loans. Life science runs even higher than that. And then, of course, just HOA is off the charts in terms of deposits of the loan. So that's what helps gives pushes That's what helped push this quarter our non interest bearing DDAs up to the level that it was.
Yes. I mean the tech group and this is similar to other players in the space. I mean the proportion of their deposits that are non interest bearing significantly exceeds that of any other area of the company.
But not seeing any new Renewed pressure in any of those books specifically?
No. That isn't where the competitive pressure lies with those types Some credit, it's more to do with structure and getting comfortable with what for an entity that maybe has revenue, but is losing money and how do you lend against that safely, whether that's asset based lending or something like that.
Okay. Thanks.
Our next question comes from Gary Tenner of D. A. Davidson. Please go ahead.
Good morning. Thanks for the
follow-up detail. My questions have largely been answered. Just wanted to ask on the expense side, a couple of items with some sequentially higher numbers, some of it related to some of the repossession asset related expenses, but particularly legal and professional of about $2,000,000 sequentially. Is that A number with some kind of artificial noise volatility in it or is there is that $8,000,000 a number we should be thinking about going forward?
Well, it might be a little elevated in Q2, but the noise or volatility really was more in Q1, which was a little bit low For various maybe seasonal reasons. So Q2 is a better run rate number, but it does bounce around. I mean, those are specific contracts projects that are being undertaken and so it's not a constant expense stream like the compensation element would be.
But Q1 was seasonally a little bit lower,
right? Yes.
Okay. All right. Appreciate that. Thank you.
Our next question comes from Brock Vandervliet of UBS. Please go ahead.
Great. Good morning. Just following up on one of the earlier questions on Tech and Life Sciences. I mean, how does that when you speak of the risk reward across the niche businesses, how does the risk reward Across the niche businesses, how does the risk award here scale out versus the others right now versus, say, a year or 2 ago?
So Tech and Innovation Life Sciences, they have some of the highest yields in the company. And so the return is appropriate for the risk that we take. What we also try to do is ensure that we don't give up on structure. And we've seen there if there's one place in the book That we've seen more competitive pressure in terms of relaxing structure is in tech and innovation. We haven't followed that, But that's where we see some of the relaxation from some of our competitors.
So in terms of the risk reward, These credits, what's a little bit different about these credits, they've got to be actively monitored. We have businesses that are producing revenue, but generally aren't producing net income yet. And if there is something that goes amiss, The key there is getting there quickly, early and working with the sponsors. And that gives us comfort to the revenue side of getting the higher yields that we're getting in that business.
Is that an area that you continue to parachute People into or you feel like you've got the troops on the ground that you need at this point?
So we've got really well qualified people to do this at Bridge. There is a little bit more of a war for talent up in the Bay Area. And so we're always looking to get people there, But the price of those people have escalated a little bit. And so we're always on the lookout for folks there. We like our team that's there now very much so.
Great. Thank you.
This concludes our question and answer session. I would like to turn the conference back over to Ken Viciani for any closing remarks.
Thank you all for joining us today and we look forward to coming back to you with our Q3 results. Enjoy your day. Thanks.
The conference has now concluded. Thank you for attending today's