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Western Alliance Bancorp  (NYSE:WAL)
Q1 2019 Earnings Conference Call
April 23, 2019, 12:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator --

Good day, everyone. Welcome to the Earnings Call for Western Alliance Bancorporation for the First quarter 2019. Our speakers today are Ken Vecchione, Chief Executive Officer; Dale Gibbons, Chief Financial Officer; and Robert Sarver, Executive Chairman. You may also view the presentation today via webcast through the Company's website at www.westernalliancebancorporation.com. The call will be recorded and made available for replay after 2 O'clock Eastern Time April 23rd, 2019, through May 23rd, 2019, at 9 a.M. Eastern Time, by dialing 1 (877) 344-7529, pass code 10130331.

The discussion during this call may contain forward-looking statements that relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. The forward-looking statements contained herein reflect our current views about future events and financial performance, and are subject to risks, uncertainties, assumptions and changes in circumstances that may cause our actual results to differ significantly from historical results and those expressed in any forward-looking statement. Some factors that could cause actual results to differ materially from historical or expected results include those listed in the filings with the Securities and Exchange Commission. Except as required by law, the Company does not undertake any obligation to update any forward-looking statements.

Now, for the opening remarks, I would like to turn the call over to Ken Vecchione. Please go ahead.

Kenneth A. Vecchione -- Chief Executive Officer

Thank you, operator, and good afternoon and welcome to Western Alliance's first quarter earnings call. Joining me on the call today are Dale Gibbons and Robert Sarver. I will provide an overview of the quarterly results, 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 continued to build on our strength and carried forward the momentum from last year. We delivered record growth in revenue, net income and earnings per share as we maintained industry-leading return on assets, return on average tangible common equity and operating efficiency. Western Alliance posted healthy results this quarter as net income rose to $120.8 million, or $1.16 per share, compared to a $119.1 million and $1.13 per share for Q4. Balance sheet growth was exceptional. Year-over-year net income rose 19.7% and EPS grew nearly 21%.

Total loans were $18.1 billion, an increase of 9% on a linked-quarter annualized basis from $17.7 billion from year-end. Year-over-year, loans rose 16.4% assisted by $1 billion of residential growth. As discussed on previous earnings calls, we view residential loans as a thoughtful, responsible alternative to managed loan growth. Deposits grew over $1 billion from quarter end, supported by the $223 million rise in non-interest bearing deposits. Linked-quarter annualized growth was 21.5% compared to the 16.4% from prior year. Over the last two quarters, loan growth of $1.4 billion has almost been fully funded by deposit growth of $1.3 billion. Our strong deposit performance lowered the loan-to-deposit ratio to 89.6% from 92.4%.

Continued balance sheet growth and NIM of 4.7% generated $33.4 million in revenue growth compared to an expense increase of $13.4 million. As such, revenues rose faster than expenses and we achieved our 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 20.4% as we continue to post industry-leading performance.

Our financial results were accompanied by strong asset quality. Charge-offs for the quarter were $1.2 million, or 3 basis points, non-performing assets were $61.6 million, up $15.9 million from prior quarter, but remain at near historical low levels. Non-accrual loans and OREO to total assets was 26 basis points, in-line with the past four quarters. Given the continued pressure on Bank's stocks, we opportunistically repurchase shares. For the quarter, we purchased nearly 941,000 shares at $40.30, and when combined with last quarter's share repurchase, represents 1.8 million shares at a combined cost of $39.95. This share repurchase program will add $0.02 per quarter in incremental EPS going forward.

Tangible common equity ratio increased to 10.3%, inclusive of the share repurchase program. The common equity Tier 1 ratio was 10.7%, flat to the prior quarter. 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 took the number one spot as S&P's Global Market Intelligence Best Performing Regional Bank for 2018. We were the top performer among banks with $10 billion to $50 billion in assets, outpacing our peer group in five of the six metrics that focus on profitability, asset quality and loan growth. Throughout the last two years, we held the number two spot. I want to personally thank the nearly 1,800 people of Western Alliance for their hard work, dedication and enthusiasm.

Also, Moody's recently completed their bank credit review and now grade our long-term deposits as A2, which is equivalent to an A-rating at other rating agencies. The strong deposit rating will further support our deposit gathering activities.

And Dale will now take you through the financial performance.

Dale M. Gibbons -- Chief Financial Officer

Net interest income rose $3.8 million from the fourth quarter to $247.3 million, driven by an $854 million increase in average loan growth. Net interest income rose 15.5% from the year ago period. The provision for credit losses was $3.5 million for the quarter as asset quality remained steady, with $406 million in loan growth and $1.2 million in net loan losses.

Non-interest income was up $1.8 million from the fourth quarter to $15.4, as a $1.2 million decrease in warrant income was more than offset by fair value gains on securities of $2.8 million compared to fair value losses of $600,000 in the fourth quarter of last year. Non-interest expense was up $1.8 million as compensation costs rose $4 million, primarily due to seasonal factors as FTE fell slightly to 17.73 . The salary cost increase was partially offset by a decrease in deposit costs of $1.3 million to $5.7 million as the average balance of non-interest bearing demand deposits declined from the fourth quarter. The fourth quarter also included a loss and repossessed real estate of $1.5 million.

Income tax expense rose $4.6 million to $25.5 million for the fourth quarter as it benefited from discrete tax benefits. Share repurchases during the fourth quarter pulled down the average diluted share count for the first quarter to 104.5 million, resulting in diluted EPS of $1.16.

Effective in Q1, net interest drivers are calculated based on the actual number of days in the quarter and the year. Previously, these metrics were annualized assuming a 30-day month and a 360-day year. We believe that this change results in linked-quarter results that are more comparable. Prior period amounts have been recalculated to reflect this change.

Investment yield remained consistent with the prior quarter, increasing 1 basis point to 3.47%, and up 36 basis points over the past year. Loan yields have climbed 35 basis points over the past year from a 5.67% in first quarter '18 to 6.02% in the most recent period. On a linked-quarter basis loan yields rose 10 basis points.

Interest-bearing deposit costs rose 11 basis points in the first quarter from the fourth, which is the same rate of increase when all of the Company's funding sources are considered including non-interest-bearing deposits and borrowings.

Net interest margin during the quarter increased 3 basis points to 4.71%, as our earning asset yield increased 13 basis points, and exceeded our funding cost increase over the quarter. Accretion on acquired loans declined from $5.4 million in the fourth quarter to $2.8 million in the first. Excluding this accretion, the fourth quarter core margin was 4.59%, which rose 7 basis points in the first quarter to 4.66%.

At the broad right, you can see the ending acquired loan balances and the associated rate and credit marks. Our remaining acquired loans are just under $1 million (ph) and the remaining marks at quarter end are $19.2 million. Going forward, accretion will fall to $1.6 million per quarter if all discounted acquired loans paid just their contractual principal commitments.

The efficiency ratio increased 90 basis points to 42.4% on a linked quarter basis as a result of seasonal compensation costs and fewer days in the quarter. For the first quarter of '18, the ratio decreased 30 basis points to 42.7%.

On a taxable equivalent basis, operating revenue increased $33.3 million to $266 million in the first quarter of '19 compared to the year ago period. Over the same term, operating expense increased $13.4 million to $112.8 million, which is in line with our 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 preprovision net revenue return on assets was 2.58% and ROA was 2.12%. These metrics continue to be in the top decile relative to peers.

Our consistent balance sheet momentum continued during the quarter as loans increased $406 million to over $18 billion, and deposit growth of $1 billion brought our deposit balances to over $20 billion at quarter end. Our loan-to-deposit ratio declined in the current quarter and is unchanged from a year ago at 89.6%.

Tangible book value per share increased to $1.13 over the quarter and for $4.34, or 23%, over the past year despite having repurchased 1.7% of our outstanding shares over the same period.

Our loan growth of $405 million was driven by residential loans increasing $245 million and construction growth of $149 million to 12.6% of total loans. We expect this proportion to be the high watermark for this loan category as we take down construction loans to under 10% of total loans by the end of next year.

Year-over-year, loan growth is led by residential loans, which have tripled in the past year to $1.5 billion. These loans lower our credit risk profile while reducing your asset sensitivity as we enter a period of great stability. Deposit growth of $1 billion was driven by increases in savings and money market deposits, CDs, and non-interest-bearing DDA. During the last year, deposits grew across all deposit types, while the largest increases also were in savings and money market accounts of $1.5 billion and interest-bearing DDA of $724 million.

Average growth over the last two quarters, loans were up $692 million and deposits were up a similar average of $650 million. For the past year, loan growth of $2.56 billion was fully funded by deposit growth $2.85 billion.

Total adversely graded assets increased $42 million during the quarter to $358 million, as special mention credits increased $45 million. From the prior year, total adversely graded assets decreased $21 million due to decrease in special mention, partially offset by an increase in classified accruing.

Non-performing assets comprised of loans on non-accrual and repossessed real estate, decreased to -- increased to $62 million, to 0.26% 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 $2.3 million during the quarter were partially offset by $1.1 million in recoveries, resulting in net credit losses of $1.2 million, or 3 basis points of total loans annualized. The credit-loss provision of $3.5 million decreased from the prior quarter as net loan losses declined and loan growth skewed toward residential real estate.

The allowance for owned and lease losses rose to $155 million, up $10 million from a year ago. This reserve was 90 basis points of non-acquired loans at March 31st, as acquired loans are booked at a discount to the unpaid principal balance and hence, have no reserve at acquisition. For acquired loans, credit loan discounts totaled $13.1 million at quarter end, which were 1.35% of the $1 billion purchased loan portfolio primarily from Bridge Bank and Hotel Franchise Finance transactions.

Despite our strong balance sheet growth driven by $1 billion increase in deposits, capital ratios generally ticked up slightly from the prior quarter. Ratios also reflect about a 15 basis point decline from the share repurchases, which took capital down by $38 million during the first quarter. Even with these share repurchases, tangible book value rose to $1.13 to $23.20, in part benefiting from the reduction in unrealized losses on available-for-sale securities that are recorded as part of other comprehensive income, which fell by 75% during the quarter as interest rates declined. Tangible book value was up 23% since 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.

Kenneth A. Vecchione -- Chief Executive Officer

While there's been some market volatility regarding a potential slowdown in economic conditions, within our markets, we have observed little change in business activity as our credit and deposit pipelines remain strong. We expect loan and deposit growth to continue apace at about $600 million per quarter, consistent with our recent experience. Loan growth will continue to be led by residential, as we reduce our credit risk profile and asset sensitivity. Deposits should grow in concert with loans as non-interest-bearing deposits remain at Q1 levels.

Our actual Q1 NIM was 4.71% and 4.66% excluding discount accretion from purchased loans. As we move through 2019, we expect our core NIM will remain stable to the Q4 '18 level of 4.59%, as it will come down modestly from the first quarter due to the mix shift from lower construction and higher residential loans. Should the margin drift marginally below our Q4 benchmark as we accelerate our exposure to residential loans, there should be some offset from lower provisioning requirements for this asset class.

Coupled with our balance sheet growth, net interest income growth should continue to be double-digits. Our operating efficiency should be stable on a year-over-year basis as we continue to produce an additional $2.50 of revenue for each $1 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 of performance while achieving our earnings per share goals.

Asset quality remains strong and stable as the economy continues to motor along. Moving into residential real estate should reduce credit risk volatility through the business cycle.

To summarize the first quarter, we grew loans, had exceptional deposit growth, increased our NIM, achieved our 2.5-to-1 revenue-to-expense growth target, maintained stable asset quality, continued to opportunistically repurchase shares, grew year-over-year net income by nearly 20%, EPS by 21% and positioned the Company to carry forward its momentum into the following quarters.

At this time, Robert, Dale and I are happy to take your questions.

Questions and Answers:

Operator --

We will now begin the question-and-answer session. (Operator Instructions) And our first question will come from Brett Rabatin of Piper Jaffray.

Brett D. Rabatin -- Piper Jaffray Companies -- Analyst

Hey, guys. Good morning.

Kenneth A. Vecchione -- Chief Executive Officer

Good morning.

Brett D. Rabatin -- Piper Jaffray Companies -- Analyst

First, I guess, congrats on the ranking, that's nice. Wanted just to get some color if I could, I know, Ken you have been asking for business and trying to get more deposits from some of your clients. Can you talk maybe a little bit about the deposit flows in 1Q? It's a bit of an anomaly for you guys to have such strong deposit growth vis-a-vis the industry in what's typically a more seasonal quarter?

Kenneth A. Vecchione -- Chief Executive Officer

Yeah, a couple of things on that. One, our HOA business just killed it, went up $356 million in deposits. This was the best quarter they've ever had in the 10 years that we've been running this business. So that's benefit one. Point one I guess is, none of our deposit initiatives contributed meaningfully to this deposit growth number, all right. So we're still expecting some benefit 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 borrow 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 talking to our customers. It's nothing more than we are a pay-for-performance culture and everyone performed very well this quarter.

Dale M. Gibbons -- Chief Financial Officer

Brett, I might also add, we had some deposits that came in in the first quarter that we thought, and they targeted to come in the fourth quarter, so there is always a little push out from Q4.

Brett D. Rabatin -- Piper Jaffray Companies -- Analyst

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 does the current rate environment impact what you might be doing in terms of origination?

Kenneth A. Vecchione -- Chief Executive Officer

No. There are two paths to growing the residential book. One is our forward flow agreements, where we get better pricing than if we were to buy in bulk. So we flip flop between the two. We're trying to continuously grow the forward flow, have that be a bigger proportion as we go forward of our residential growth, and then, again, we'll look and try to pick off portfolios if they meet our pricing hurdles.

Brett D. Rabatin -- Piper Jaffray Companies -- Analyst

And are your pricing hurdles changed any or -- I'm sorry, go ahead.

Kenneth A. Vecchione -- Chief Executive Officer

Yeah. So we were -- they've come down a little bit. So we were -- in the fourth quarter, we were picking up stuff in kind of the higher 4s. That number is more toward the mid-4s 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.

Brett D. Rabatin -- Piper Jaffray Companies -- Analyst

Okay. Great. I appreciate the color.

Operator --

And our next question will come from Casey Haire of Jefferies.

Casey Haire -- Jefferies -- Analyst

Thanks. Good morning, guys. Just wanted to follow up, I guess, on the NIM, on the deposit side of things. Obviously, a very strong quarter for your deposit growth, but in terms of the interest bearing side, what kind of deposit cost do you expect going forward just given the competitive environment? Has it cooled off, or just some color on the deposit cost side?

Dale M. Gibbons -- Chief Financial Officer

Yeah. 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 is still a little bit of pressure in funding costs that will probably payout in Q2 and maybe a little bit in Q3, but probably for Q2 for sure. It would be more muted relative to what we saw in the first quarter, but I think that there is still a little bit of modest pressure.

Casey Haire -- Jefferies -- Analyst

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?

Dale M. Gibbons -- Chief Financial Officer

Yeah. The reinvestment rate is in 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 1 point higher than what we're getting if we do -- went into via RMBS or something like that. So, you might see that continue a little bit and that gives us kind of a yield pickup relative the securities book, even though we are getting a yield decline from construction to residential.

Casey Haire -- Jefferies -- Analyst

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 booked exceed or go below?

Dale M. Gibbons -- Chief Financial Officer

It could drop significantly from here. I mean it could drop -- I I'm not projecting it's going to drop this much, but I think it's expected to bleed off a few hundred million.

Casey Haire -- Jefferies -- Analyst

Okay. And just lastly, 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 (inaudible) 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?

Kenneth A. Vecchione -- Chief Executive Officer

I think we'd like to work both the numerator and the denominator in that equation. So of course as we grow loans, it 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.

Casey Haire -- Jefferies -- Analyst

Okay. Great. And just last one, housekeeping. The tax rate for the balance of the year?

Dale M. Gibbons -- Chief Financial Officer

Yeah. So, we benefited a little bit in the first quarter 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.

Casey Haire -- Jefferies -- Analyst

Great. Thank you.

Dale M. Gibbons -- Chief Financial Officer

Thanks.

Operator --

Next, we'll have a question from Michael Young of SunTrust.

Michael Masters Young -- SunTrust Robinson Humphrey Inc -- Analyst

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 mid this year?

Kenneth A. Vecchione -- Chief Executive Officer

Yeah. They're contributing to overall growth and what I'm trying to do is to stop weaning ourselves away from commenting specifically on the loan verticals. So the people are being hired more or less for both verticals and it's just now a part of our overall loan growth and what we do.

Michael Masters Young -- SunTrust Robinson Humphrey Inc -- Analyst

Okay. And then, I guess switching gears maybe just to capital, obviously, the share buybacks and good to see some activity on, stocks up a good bit today. Just how are you thinking maybe about managing capital vis-a-vis organic growth versus share buyback through the rest of this year and maybe even your longer-term strategy there?

Robert Gary Sarver -- Executive Chairman

Yeah. It's Roberts Sarver. We've been opportunistic in terms of buying our shares back, when we think the markets -- 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, in last 15 years, our first priority has been strong organic growth, because that enters (ph) 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 is some level in which it's probably a little bit too high and we're kind of getting close to that.

Kenneth A. Vecchione -- Chief Executive Officer

I'll also say that two-thirds of the capital generation is being soaked up by loan growth.

Michael Masters Young -- SunTrust Robinson Humphrey Inc -- Analyst

Okay. Great. Thanks.

Operator --

The next question comes from Brad Milsaps of Sandler O'Neill.

Bradley Jason Milsaps -- Sandler O'Neill Partners -- Analyst

Hey. Good morning, guys.

Kenneth A. Vecchione -- Chief Executive Officer

Good morning.

Bradley Jason Milsaps -- Sandler O'Neill Partners -- Analyst

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 mid-year 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 to -- you think you'll be able to maybe control deposit costs little bit better? Just kind of curious any additional color there around your assumptions?

Dale M. Gibbons -- Chief Financial Officer

Yeah. So our core margin was 4.59% in the fourth quarter. It was up a bit in the first quarter. We believe -- I think, a 4.59% core margin estimate for the end of this year is pretty reasonable. And with all of 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 how we're going to be growing our deposits. So, yes, I mean I could see it weaning off a little bit from here, but it's not significant and really holding with where we were a year ago.

Kenneth A. Vecchione -- Chief Executive Officer

Our NIM and our core NIM, I will say, has been remarkably stable. So our NIM over the last nine quarters has been between 4.61% and for 4.71%, and our core NIM has been between 4.54% and 4.66%. So we've been holding rather steady NIM over the last, I will say, nine quarters or so -- seven to nine quarters.

Robert Gary Sarver -- Executive Chairman

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.

Bradley Jason Milsaps -- Sandler O'Neill Partners -- Analyst

It'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 any other steps you might be taking? I know swaps probably don't make sense maybe at the moment, but I know you'd have about $7 billion of loan floors that are I think around 4.7%. Are you guys aggressively adding more of those, or anything else to do to reduce some of the asset sensitivity as we stabilize here?

Dale M. Gibbons -- Chief Financial Officer

Yeah. Over 90% of our loans are made with floors, which I think will help in a decline. Right now, we're projecting that rates are flat throughout 2019, and I don't know if I can see further than that. But we haven't done any over 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.

Bradley Jason Milsaps -- Sandler O'Neill Partners -- Analyst

Great. Thank you.

Dale M. Gibbons -- Chief Financial Officer

Thanks.

Operator --

The next question comes from Aaron Saganovich (ph) of Citi.

Aaron Saganovich -- Citi -- Analyst

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 I guess your ability to add those if you see a right opportunity?

Dale M. Gibbons -- Chief Financial Officer

Sure. I mean we would 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, what about when the swaps comes up? So I'd rather get there more structurally, but we'll do whatever makes sense.

Aaron Saganovich -- Citi -- Analyst

And it's a common discussion we've had among each other talking about that for many banks. But anyways, the C&I loans were down modestly quarter-to-quarter, is there anything in particular that was driving that? And what's your outlook for C&I loan growth going forward?

Kenneth A. Vecchione -- Chief Executive Officer

There's nothing that was driving it. 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.

Aaron Saganovich -- Citi -- Analyst

Okay. Thank you.

Operator --

And the next question comes from Chris McGratty of KBW.

Christopher Edward McGratty -- Keefe, Bruyette, & Woods Inc -- Analyst

Good afternoon. Thanks for the question. Going back to Capital, Robert or Dale, or any of you, the capital targets, you're building capital 50 basis points 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.

Robert Gary Sarver -- Executive Chairman

Somewhere between 9 and 10.

Christopher Edward McGratty -- Keefe, Bruyette, & Woods Inc -- Analyst

Untangible?

Dale M. Gibbons -- Chief Financial Officer

Yeah. Non-CC.

Christopher Edward McGratty -- Keefe, Bruyette, & Woods Inc -- Analyst

Okay. And so based on kind of the $600 million a quarter growth and all you've laid out for guidance, I mean you're going to be probably a 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 comment there? Thanks.

Robert Gary Sarver -- Executive Chairman

Yeah. I mean, as I said for a long time, we try to be opportunistic and for the last couple of quarters our best use of capital and our best M&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 months, 24 months and see where we are at and go according to that. So we've tried to reinvest in our own Company. We felt recently that buying our own stock back is better than a dividend, but I wouldn't preclude that in the long-term depending on where we see other opportunities from an inorganic standpoint.

Christopher Edward McGratty -- Keefe, Bruyette, & Woods Inc -- Analyst

And maybe quick follow-up on that Robert, activity flow in deals, how would you describe where we're at in the spring of 2019 deal flow?

Robert Gary Sarver -- Executive Chairman

I would say, at this point, if I look back over the last six months and right now. I'd say, it's pretty quiet on the Western front. And as I said a little bit earlier, just looking at deals and looking at deals that came across our desk. Our best opportunity was our own stock. I'm not quite sure why we trade at the levels we do, but we feel it's a disconnect, and that's why we bought our shares back.

Christopher Edward McGratty -- Keefe, Bruyette, & Woods Inc -- Analyst

Great. Thanks.

Operator --

The next question comes from Timur Braziler of Wells Fargo.

Timur Felixovich Braziler -- Wells Fargo Securities LLC -- Analyst

Hi. Good morning. Maybe just following up on the growth in HSA this quarter. I know in the past that's been a goal to grow that business. How much of the new growth is new and what's the trajectory there going forward?

Kenneth A. Vecchione -- Chief Executive Officer

Well, usually -- you mean HOA right?

Timur Felixovich Braziler -- Wells Fargo Securities LLC -- Analyst

I am sorry. Yes HOA.

Robert Gary Sarver -- Executive Chairman

Yeah. A lot of that growth was new. I mean we spend basically nine 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.

Timur Felixovich Braziler -- Wells Fargo Securities LLC -- Analyst

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 has been a lot of new competition. I guess what's the commentary from you guys at Bridge and what's your outlook on lending in that space?

Kenneth A. Vecchione -- Chief Executive Officer

So, we're seeing a very active pipeline there. And as I said in 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 VC fundraising year last year and of course, you can see some of the stuff that's coming to market and the valuations, so the M&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 will get it on the deposit side, we have plenty of places to place it.

Timur Felixovich Braziler -- Wells Fargo Securities LLC -- Analyst

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?

Dale M. Gibbons -- Chief Financial Officer

It also includes the residential real estate, that's -- 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 billion we've gained in the past year in residential, shows up in that business line.

Timur Felixovich Braziler -- Wells Fargo Securities LLC -- Analyst

Okay. Understood. And then one more if I could. Any color you can provide on the linked quarter increase in commercial non-performers and was that in any way correlated with the commentary around construction growth and looking to get that down to 10% of the total concentration?

Kenneth A. Vecchione -- Chief Executive Officer

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 is a story here on our book. Basically, the things that we see are self-inflicted wounds by our customers, they sometimes either try to grow too quickly, they don't control their costs, their systems to capture revenue and expenses or antiquated or sometimes they have partner disputes, or also in the case of Bridge, were waiting for cash to come in from the Industrial group and sometimes, that's a little bit slow. There's always a chicken gain 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 balance and you could see some movement on these numbers.

Timur Felixovich Braziler -- Wells Fargo Securities LLC -- Analyst

Good color. Thank you.

Kenneth A. Vecchione -- Chief Executive Officer

You're welcome.

Operator --

Our next question comes from Brock Vandervliet of UBS.

Brock Vandervliet -- UBS -- Analyst

Good morning.

Kenneth A. Vecchione -- Chief Executive Officer

Hey, Brock.

Brock Vandervliet -- UBS -- Analyst

Hey. Just a little more color on the resi loans that you're sourcing. So those are from your partners -- the partner banks that you're financing. Are most of those jumbos or agency conforming, what's kind of the composition?

Dale M. Gibbons -- Chief Financial Officer

They're not -- 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 FICOs are about 760. So -- but what they are is, the preponderance of them are not conforming for one reason or another. So maybe they are jumbo maybe, maybe they are second homes or something like this, but we are getting we think a little bit better yields, but really not undertaking any more additional credit risk than what we would with something that had a lower balance or something like that. In fact, the LTVs are such that we think we've got pretty good protection.

Kenneth A. Vecchione -- Chief Executive Officer

I would just add one thing, the LTVs are about 67% and the DTI is about 36%, but we reunderwrite every single loan and that's very important.

Brock Vandervliet -- UBS -- Analyst

Got it. And just shifting gears to C&I, should we expect growth through remainder of the year in low-double digit category or some other level there?

Kenneth A. Vecchione -- Chief Executive Officer

I think that's a reasonable. Low double digits.

Brock Vandervliet -- UBS -- Analyst

Okay. Great. Thank you.

Kenneth A. Vecchione -- Chief Executive Officer

You're welcome.

Operator --

And the next question comes from Jon Arfstrom of RBC Capital Markets.

Jon Glenn Arfstrom -- RBC Capital Markets LLC -- Analyst

Thanks. Good morning.

Kenneth A. Vecchione -- Chief Executive Officer

Good morning.

Jon Glenn Arfstrom -- RBC Capital Markets LLC -- Analyst

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?

Dale M. Gibbons -- Chief Financial Officer

Yeah. 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 to $1 billion in the past year. If we grew it $1.5 billion a year, just to put something out, this could go on for another four years. So I don't know how long it is, but as far as we can see, we have confidence in terms of where we're looking for -- where the economy is and things like this to trend. So I think our -- 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 out. We are not seeing that now, right now we're seeing good opportunities across all of our loan categories. But we certainly want to put some on here. It's a way to, again, as Chris commented earlier, take some of the asset sensitivity off the balance sheet. And prepare us with that -- I don't know that if the next rate change is up or down, but this will put us in a fairly stable situation in terms of we have marginal margin impact based upon what the FOMC might do.

Jon Glenn Arfstrom -- RBC Capital Markets LLC -- Analyst

Okay. All right. That's helpful, Dale. We haven't heard the term payoffs at 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?

Kenneth A. Vecchione -- Chief Executive Officer

Payoffs are just a normal course of business here. I don't think they're coming in any faster than they have in the previous quarters and we are 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 the lowest 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.

Jon Glenn Arfstrom -- RBC Capital Markets LLC -- Analyst

Okay. Good. Thank you for that. 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's part of the plan and curious if you're still optimistic in terms of your initial expectations for some of the new verticals?

Kenneth A. Vecchione -- Chief Executive Officer

Yeah. We are and we're growing it slowly or we are making sure -- one of the fun 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 fall. So yeah, I mean there was some contribution to the deposit growth, not much, but there was some. And we do our -- we are fairly constructive about it going forward. I mean we do think these two initiatives will carry us toward the back half of this year and then into 2020.

Jon Glenn Arfstrom -- RBC Capital Markets LLC -- Analyst

Okay. All right. Thank you.

Kenneth A. Vecchione -- Chief Executive Officer

You're welcome.

Operator --

The next question comes from Tyler Stafford of Stephens.

Tyler Stafford -- Stephens -- Analyst

Hey. Thanks for taking the questions. Just a couple follow-ups for me. Dale, you mentioned a few times lower credit costs given the resi growth. So I was just wondering if you can give some color on where you see the GAAP reserve ratios settling out by year-end? And then, any preliminary thoughts to CECL as of yet when the calendar turns over?

Dale M. Gibbons -- Chief Financial Officer

Yeah. 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 had for the past couple of years, a few basis points a quarter. Looking at CECL, we've got -- I think everyone's have been making disclosures, probably more details in their second quarter Qs. We don't expect to be out sized in terms of whatever charge we might be taking. As others have stated, the sector that gets hit the hardest on CECL is consumer, particularly kind of long life, high loss consumer, which the 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 second quarter numbers.

Tyler Stafford -- Stephens -- Analyst

Okay. Great. And then just last from 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?

Kenneth A. Vecchione -- Chief Executive Officer

That's what we're showing, Tyler, yeah.

Tyler Stafford -- Stephens -- Analyst

Great. Thanks.

Operator --

And next, we have a question from John Chiaverini of Wedbush Securities.

John Chiaverini -- Wedbush Securities -- Analyst

Hi. Thanks. 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?

Kenneth A. Vecchione -- Chief Executive Officer

Well, (Technical Difficulty) what's interesting about this business is, it's much about customer service and technology. And if you have that right, there is a trade-off than 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.

Robert Gary Sarver -- Executive Chairman

When we went into business 10 years ago, I remember the total market for this business was about $40 billion to $50 billion.

Kenneth A. Vecchione -- Chief Executive Officer

And I just got to say because I know a lot of our people are listening, we did cross over $3 billion in the HOA deposits and when you think about that from a standing start of 0 -- with one person 10 years ago, we're very proud of that track record and the accomplishment of that group.

John Chiaverini -- Wedbush Securities -- Analyst

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 fourth quarter into the first quarter it looked like the deposits declined modestly. What drove that decline, was it seasonality or anything else?

Kenneth A. Vecchione -- Chief Executive Officer

I don't think you can put much analysis against just two quarters side-by-side. I'll just tell you that there is 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 one quarter or not. It's very hard to control that, and to project that out.

Dale M. Gibbons -- Chief Financial Officer

Yeah. There wasn't anything in their seasonality or in their pipelines that leads us to believe there's any change in terms of the momentum they have.

John Chiaverini -- Wedbush Securities -- Analyst

Got it. And then, the last one from me, when you mentioned earlier in the call about how deposit growth should keep pace with loan growth. The new initiatives that you've been talking about, is that inclusive in that guidance or would that be additive, where you could actually see deposit growth be faster than loan growth, if those initiatives have better results?

Kenneth A. Vecchione -- Chief Executive Officer

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.

John Chiaverini -- Wedbush Securities -- Analyst

All right. Thanks very much.

Kenneth A. Vecchione -- Chief Executive Officer

Okay. You're welcome.

Operator --

This concludes our question-and-answer session. I would like to turn the conference back over to Ken Vecchione for any closing remarks.

Kenneth A. Vecchione -- Chief Executive Officer

Thank you all for joining us and we look forward to talking to you on our next quarter earnings call. Thanks again.

Operator --

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

Duration: 50 minutes

Call participants:

Operator --

Kenneth A. Vecchione -- Chief Executive Officer

Dale M. Gibbons -- Chief Financial Officer

Brett D. Rabatin -- Piper Jaffray Companies -- Analyst

Casey Haire -- Jefferies -- Analyst

Michael Masters Young -- SunTrust Robinson Humphrey Inc -- Analyst

Robert Gary Sarver -- Executive Chairman

Bradley Jason Milsaps -- Sandler O'Neill Partners -- Analyst

Aaron Saganovich -- Citi -- Analyst

Christopher Edward McGratty -- Keefe, Bruyette, & Woods Inc -- Analyst

Timur Felixovich Braziler -- Wells Fargo Securities LLC -- Analyst

Brock Vandervliet -- UBS -- Analyst

Jon Glenn Arfstrom -- RBC Capital Markets LLC -- Analyst

Tyler Stafford -- Stephens -- Analyst

John Chiaverini -- Wedbush Securities -- Analyst

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