Western Alliance Bancorp (WAL) 2016 Q2 法說會逐字稿

Good day, everyone. Welcome to the earnings call for Western Alliance Bancorporation for the second quarter 2016. Our speaker today is Dale Gibbons, Chief Financial Officer. You may also view the presentation today via webcast through the Company's website at www.WesternAllianceBancorp.com. The call will be recorded and made available for replay after 2:00 PM Eastern time July 22, 2016 through Monday, August 22, 2016 at 9:00 AM Eastern by dialing 877-344-7529 and entering passcode 10089319.

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 fact. 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 Security 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 Dale Gibbons. Please go ahead.

Thank you. Welcome to Western Alliance's second-earnings call of 2016. Before we get started I wanted to advise you that Robert is unable to join us today, as he is with his son who is in the hospital at this time. However, we both appreciate the opportunity to speak with you each quarter and he looks forward to participating again at our next conference call. I'm going to review the quarterly results and then we will open it up for questions from the group.

Net income for the second quarter was $61.6 million, or $0.60 per share. This included $0.02 per share in acquisition and restructuring expenses. That compared to $61.3 million, or $0.60 in the first quarter. Excluding acquisition costs, EPS is up 24% from $0.50 a year ago to the current quarter of $0.62.

The interest margin expanded 5 five basis points from the first quarter to 4.63%, and is up 22 basis points from a year ago. It was driven in part by higher yields on the acquired hotel franchise loan portfolio. Our efficiency ratio improved to a record 43% during the quarter as revenue growth significantly exceeded expense increases.

Organic loan growth of $380 million during the quarter augmented the hotel franchise loan portfolio purchase of $1.26 billion, which brought total loans to $12.9 billion. Organic deposit growth was $1.12 billion during the quarter and nearly $2.2 billion on a year-to-date basis. The level of NPAs fell by more than one-third in the past year from 88 basis points of total loans at June 30,2015 to 54 basis points at the end of last month, while loan recoveries slightly exceeded loan losses.

During the quarter we issued $175 million of 40-year term debt and completed the issuance of common stock under at-the-market equity offering that was authorized two years ago. This resulted in a total increase in qualifying capital of over $300 million for the second quarter. This kept our tangible common equity ratio flat from the first quarter at 9.1% and took our total capital ratio up from 12.3% to 12.9%, this despite a $1.5 billion increase in total assets. The capital increased pushed our tangible book value per share up 8% on a linked-quarter basis to $14.25.

Net interest income for the first quarter increased $18 million on a linked-quarter basis to $164 million, and is up $55 million, or 51% over the prior year. Operating noninterest income fell $3.5 million during the quarter to $8.6 million, primarily from a reduction in gain on sale of loans. Operating expense increased $2 million during the quarter to $77.8 million due to higher data processing costs associated with the acquired hotel franchise loan book. Operating pre-provision net revenue was $95.4 million, up 15% from the first quarter. $2.5 million was again provided for loan losses, while we had net recoveries of $300,000, as most credit metrics held flat during the quarter.

Acquisition and restructuring costs were $3.7 million, which was a combination of contract termination expenses for upcoming conversion related to Bridge as well as closing and elevated servicing costs from the hotel franchise loan book that is still being serviced by GE. Income taxes increased $6.8 million to $26.3 million, as all of the increase in pretax income was from 100% taxable sources And we no longer had the $3.9 million benefit in the first quarter from the additional tax deduction of vesting restricted share awards that had depreciated between the grant date and the vesting date.

The diluted share count declined by 1 million and reflects the completion of our at-the-market equity offering, as we sold 1.5 million shares during the quarter, as well as the annual effect from the first vesting of employee RSAs during the first quarter. From the second quarter I expect diluted share count to decline by another 900,000 shares during -- in the third quarter and then stabilize.

Our securities portfolio increased $163 million during the quarter to just under $2.3 billion yielding 2.95%, which was 7 basis points lower than in the first quarter as our strong liquidity was invested in lower yielding GSE paper reflecting the lower rate environment. Loan yields rose 12 basis points to 5.43% as the hotel franchise portfolio yielded 5.2% before the accretion of discounts.

Interest-bearing deposit costs rose 4 basis points to 35 basis points as we accelerated our deposit growth to fund continued loan growth. Including non-interest-bearing deposits, our funding cost was 23 basis points during the second quarter. Year-to-date deposit growth of $2.2 billion drove the $2.4 billion jump in earning assets since the end of last year to $15.7 billion. This growth not only funded the hotel loan purchase and our organic growth, but resulted in $700 million in cash at June 30, a substantial portion of which will be invested in future loan growth or securities. We had no FHLB nor fed funds borrowings at quarter end.

The net interest margin rose 5 basis points during the quarter to 4.63% and benefited from an increase in accretion on purchase loans of $2.9 million during the quarter to $8.2 million from the discount of the hotel loan purchase. Without this accretion the loan yield would have essentially held flat from the first quarter at 4.41%.

Moving to the graph on the right, scheduled accretion from loans for the third quarter is $5.1 million and then declining to $4.3 million during the second quarter of next year. However for most periods, realized accretion is likely to be higher than scheduled due to prepayment activity and refinancings in advance of contractual assurity, which will accelerate the recognition of remaining discounts.

For the second quarter revenue was up $14.5 million and expenses increased $2 million resulting in an efficiency ratio at the margin of only 14% and taking our average efficiency ratio down to 43%. During the quarter we opened a new office in San Francisco and increased staff by 51, 21 of which were from GE as well as 12 business development officers.

The consistency we've had in generating positive operating leverage is evident by the ratio of our operating pre-provision net revenue as a percentage of assets which rose 10 basis points from the first quarter to 2.37%. ROA fell 15 basis point to 1.55% due to acquisition and restructuring expenses as well as an increase in the income tax rate.

Cash and investments fell slightly during the quarter as funds were deployed to close the loan purchase. However, as I mentioned, cash remains high at $700 million at June 30, at least half of which is deployable into higher yielding assets in the future. The borrowings line includes the issuance of $175 million in capital qualifying debt.

Our second record quarter of deposit growth took total assets to $16.7 billion and deposits to $14.2 billion. Tangible book value per share is up $3 during the past year, or 26%, and is increasing at nearly the fastest rate in the industry. Loans were up $1.64 billion for the quarter, primarily from non-owner occupied commercial real estate which is now 94% -- which is how 94% of the hotel franchise loans are categorized, the balance of which fell into construction.

At June 30 the regulatory concentration test for construction and land loans as a percentage of total capital was 68%, while the test of construction loans and non-owner occupied commercial real estate loans outstanding to total capital was 259%. Loan growth was particularly strong in Arizona, technology and innovation and the mortgage warehouse divisions during the quarter.

These pie charts highlight the increase in our geographic diversification over the past 10 years. During the last decade total loans have grown $10 billion and while they are up in Nevada on a dollar basis, the proportion of loans in that state has shrunk from 68% in 2006 to 15% today as we have substantially diversified our geographic base.

In 2006 our California franchise did not extend beyond San Diego. However with last year's Bridge Bank merger as well as organic growth in the Bay Area and Los Angeles, the proportion of loans in the State rose from 14% to 39%. The introduction of the other category primarily results from the success of our national business lines. Outside of our three state primary market, which is what the other category is comprised of, no state has more than 3% of total loans.

Relative to product diversification over the past decade, it also shows the derisking of the credit portfolio. Shown in blue, construction loans have fallen from 27.7% of the portfolio in 2006 to 10.4% at June 30. Meanwhile C&I loans have grown from 20% to 33% of the loan book over the past decade. Public finance loans, which we didn't have 10 years ago and many of which trace to investment grade, now comprise 11.5% of our portfolio and have essentially offset the decline in residential real estate, which has fallen from 12.6% in 2006 to 2.3% in 2016.

Organic deposit growth surpassed $1 billion for the second consecutive quarter and enabled the bank to absorb the GE loan purchase without stressing liquidity. More than half of this growth has been in non-interest-bearing demand accounts, with especially strong increases in Arizona, Southern California, homeowners association services, and technology.

Asset quality has remained strong, with NPAs to total assets, and total adversely graded total assets nearly flat from last quarter and down from year end. On a dollar basis, the entire $52 million increase in adversely graded assets during the quarter, which rose to $364 million at June 30, 2016, is attributable to the hotel franchise which had $27 million in special mention loans and another $27 million in classified accruing loans at quarter end, a total of $54 million of the $52 million change. None of the loans are nonperforming. These amounts are net of $32 million in purchase credit impaired discounts on these credits that were established when the loans were acquired.

This page shows the allocation of the discount on the hotel loan purchase. Of the $67 million, total $43 million was attributed to non-purchased credit impaired loans and $17 million to PCI credits. An additional $7 million was allocated to reserve for unfunded loan commitments, primarily construction.

Unless these reserves are eventually used to cover credit losses, these marks will be accrued to interest income over the weighted average remaining term of the loans, which is about four years. The goodwill from the transaction was negligible at about $200,000. We expect this portfolio to be integrated onto our servicing platform by the end of this quarter.

Gross loan charge-offs of $1.5 million during the quarter were entirely offset by gross recoveries of $1.8 million, resulting in a net recovery of $300,000, or 1 basis point of total loans. The loan provision for the quarter was $2.5 million in order to provide for the loan growth that occurred. The allowance for loans as a percentage of total loans was 95 basis points at quarter end, as the reserve climbed from $119 million to $122 million.

Due to the credit portion of the discount on the hotel loan purchase, total credit discounts on acquired loans nearly quadrupled from $16 million at March 31 to $62 million at June 30. When these discounts are added to the ALLL, the combined reserve to total loans rose from 1.21% in the first quarter to 1.42% at the end of the last quarter.

The tangible common equity ratio and Tier 1 leverage ratios were essentially flat at 9.1% and 9.8% from the prior quarter, as earnings and the proceeds from our ATM equity offering balanced the increase in the size of the balance sheet. Common equity Tier 1 declined from 9.9% in the first quarter to 9.6%, as the hotel portfolio was entirely 100% risk-weighted loans. Augmented by the sub-debt issuance, the total capital ratio climbed from 12.3% to 12.9% during the quarter. Return on tangible common equity remains strong at 17%, as tangible book value per share continued to rise.

For our outlook for the third quarter, our loan and deposit pipelines remain strong and we expect we will continue low double digit, or annualized organic loan growth and deposit growth. For loan growth it may be more skewed to C&I type credit in the future, as we will not exceed the 100%/300% real estate concentration guidelines promulgated by regulatory agencies.

Total loans at quarter end exceeded the average loan balance during the quarter by $590 million should be supportive of the margin this quarter. In addition we have excess liquidity, which made be deployed into securities, and should be sufficient to offset the higher cost of the debt issuance completed in June. However, with the lower yield curve, securities reinvestment rates and rates on loan originations lag the returns on the existing book, and may weigh on the margin over time even though net interest income should continue to climb.

The operating efficiency ratio should be fairly flat in the near term as there is no significant catalyst for efficiency improvement until after the systems conversion in October. Certain elevated costs associated with GE servicing the hotel loan portfolio are already included in the acquisition expense line and will not improve our efficiency ratio after that conversion has occurred in September, although our total reported expenses will decline as acquisition restructuring costs fall.

We don't see any significant changes to credit metrics on the horizon, but expect to slip back into a modest net charge-off position going forward as we were in the first quarter. At this time, we'd like to open it up for questions.

(Operator Instructions)

Casey Haire, Jefferies.

Hey, Dale. How are you doing?

Good, Casey.

First question, just want to touch on the loan growth and the CRE concentration. Is that an internal mandate by you guys, or is that regulatory pressure saying that you cannot go above it? Just some color there.

Maybe perhaps a little bit of both. We haven't been above it in quite some time. We were above it back before the financial crisis. And we are not going above it again. That said, there has been a lot of discussion, as you know, with a number of other financial institutions about regulatory concern on commercial real estate exposure.

We have bolstered our qualifying capital. We think our numbers are prudent where they are. And there's a little bit of room, obviously, to those ceilings. But we're not going to be exceeding them.

Okay, understood. And on the capital front, could you just give us some updated thoughts on where you want to live on capital ratios, both the TCE and the total capital ratio? I was a little surprised to see you guys be so aggressive with the at-the-market offering, just given where the stock -- just given where valuation metrics have been.

Obviously we concur with that assessment in terms of our stock being cheaper. Average sales price on the ATM during the quarter was $36.68, a little bit higher than we are now. We do not intend to re-up our ATM in the future. But at the same time, given our strong level of balance sheet growth, which is really driven by deposits more than loans, we thought it was a prudent to kind of get it done. It had been two years since it had originally been authorized, that we proceed.

We look at our capital where it is today. We're comfortable with it. We think we are in the right ballpark where we need to be. So I don't expect us to be doing anything kind of on the capital front prospectively. Because we had this large increase in balance sheet growth in the first half, and I think that's going to temper down to the low double digit range during the back half of 2016.

Okay. So we're not looking at a heavier capital ratio policy going forward?

No.

Okay. Last question. On the tax rate came in a little high. I know you guys have used advantage strategies effectively in the past. Is that an opportunity here to lower from this 30% level?

I believe so. Right now I would guide you to the 30% number, but with GE in particular, the hotel franchise book, we have had a significant shift of the proportion of our revenue that comes from taxable sources versus tax exempt. That is primarily what has driven that number higher. We think we have room to push it back towards more tax exempt prospectively. It's probably going to take us a couple of quarters to figure out the best way to do that and to execute.

I would guide you to the 30% number. But we have internal expectations that we'll be able to move that number back down. It won't go down to the level that it was before. The mix is different. We have more state tax liability. We're not going to be down to the 25% level, I don't think, again.

Okay, understood. Thank you.

Thank you.

Joe Morford, RBC Capital Markets.

Thanks. Good morning, Dale.

Good morning, Joe.

I just wanted to kind of clarify your comments about the expenses. And just how we should we think about the run rate going forward. Are there more GE-related costs to be onboarded, or alternatively once the loans are integrated at quarter end are there some savings to be had there? And then how does the systems conversion overall in October play into this run rate?

I think we've been stating that our expenses kind of have a natural growth in them to reflect what is going on basically, and that is [in] compensation of about 1% per quarter. And I think that basically holds.

So with regard to GE, we do not have additional expenses that are coming with regard to GE. But as we convert away from GE servicing to internal servicing the portfolio where you're going to see most of the decline take place is on the acquisition expense line rather than above in our operating expenses. There may be a little bit of room in additional operating expense reductions to get to our operating efficiency ratio, but that is why I said I think the efficiency ratio is not going to move much into the third quarter from the 43% it is at now.

However, as the conversion get completed you will see that $3.7 million, which was a combination of both GE servicing cost, GE transaction cost, legal fees and things like this and the determination costs related to the reverse conversion we have going off the bar system onto Bridge's basic platform in October.

When you see that take place, there will be an expense savings above the line, basically. And that we should have most of the quarter of the fourth quarter. So we will see that pickup in 4Q and then in the first quarter of next year. And that should, I believe essentially temper what would be an otherwise this 1% raise.

I'm never looking for our expenses to actually fall. But as we get these efficiencies, and that should drive the efficiency ratio perhaps better, we would look for the 1% growth that we typically see to pause. And so maybe we're flat from the third quarter into the fourth quarter, something like that.

Okay. As you get Q4/Q1 you could potentially see a little improvement in the efficiency ratio, it sounds like, too.

I believe so. Q1 is a little challenged always because it's the 1st of the year. But aside from seasonal factors, yes, I would agree.

Right, okay. The other question was, since you have been able to grow deposit at such a strong clip with -- at a fairly modest increase in funding costs, are there thoughts to continue to be more aggressive on deposit gathering over the next few quarters? And what kind of loan to deposit ratio are you currently targeting?

Right now we're basically at 90%. We're comfortable in the -- at this level, or even in the low 90%s, could be a bit higher than this. We still believe we have some deposit momentum coming. I think I've been surprised in terms of how well we've done on the funding side. That just gives opportunity for more credit.

So again, finding underwriting good credit opportunities, we have the funding to be able to do that. We've got a credit line with the Federal Home Loan Bank. It's about $2 billion today. It should be increasing into probably north of $2.5 billion in the next 60 days or so, that is untapped.

So we think we've got a lot of liquidity, both on balance sheet as well as other options. And essentially have runway to grow with appropriate credit opportunities. We think our future's pretty bright in terms of what we can do with the balance sheet.

Great. That's really helpful. Thanks, Dale.

Thank you.

Brad Milsaps, Sandler O'Neill.

Hey, Dale.

Hi, Brad.

I know it's not a big number for you guys, but just fee income. Can you touch on that a little bit this quarter? I think you had some pretty bigger loan sale gains last quarter. I'm just curious, anything else you might be doing there that might drive that a little bit higher over, say, the next 12, 18 months.

The first quarter was elevated above what I would call a run rate number. And the second quarter I'd say is probably below a run rate number. We had a $2.5 million loan sale gain in the first quarter. That flipped to a $500,000 loss. I would say losses on loan sales are not typical for us. It should have some kind of more modest level of gain. I think it is a little understated for that regard.

As we -- we are going to a process right now. This is kind of pre-conversion. We've standardized our product array. We've standardized a lot more of our pricing. That's should give us, I'm going to say, a fairly modest lift in our pricing posture going forward. And I think it gives us more opportunity to do more with that prospectively.

When we acquired the Bridge transaction, before that we were burning about 5% of revenue from non-interest-bearing sources, which is quite low relative to industry versus Bridge, which was about 3 times that proportion. I think that we're moving more in that direction. And we'll probably end up somewhere in the middle.

So there's more opportunity in front of us. I think we can do better than where we were in Q2. But it's not going to be -- we're not going to be on a steep climb here. But there's more things that we're looking at.

In that vein, how are you guys thinking about M&A, whether it be other asset purchases, potentially a fee income business or whole banks? Just any color there would be helpful.

We are always looking around. We're maintain conversations with a lot of different types of situations. And that continues. As you know, M&A, you either have everything almost or you have nothing. It's obviously very binary in terms of a transaction.

We don't have anything right now. But we think we've executed well on the prior deals that we've done. We think Bridge was very accretive. We think that out of the first quarter it certainly looks that way with the hotel franchise book, the other two deals that we did kind of post-crisis.

Western Liberty and Centennial were both acquisitions below book value. We think we've had a good run with it. We think it's been beneficial to shareholders. And we're looking for things in the future as well.

I would say that our own valuation kind of holds us back, particularly if it's going to be kind of an equity transaction. We think we trade fairly cheaply on a price to earnings basis, and even at a greater discount on a PEG ratio. We're pretty jealous about holding onto these shares before we giving them out. Everything would be tempered in terms of what we're trading for what we're going to be getting. But we think M&A can be complementary to both our risk profile and to shareholder value.

Great. Thanks, Dale.

Thanks.

John Moran, Macquarie.

Hey, how is it going Dale?

Good, John.

Good. I just want to circle back on, I think it was Joe's question, on OpEx. Why don't you guys flip the switch in your over onto Bridge? I think in the past you'd said that could be a couple million dollars. And if I think about that translating into an efficiency ratio target, it's like 100, 150 basis points that we could see shaved off 4Q into 1Q, if I'm reading you right. Is that still the right, in terms of sizing it, what the opportunity could be there?

Yes, I think so. Now, the one problem about going from 4Q to 1Q, and I mentioned this a little bit when Joe was on the phone, but is there is a seasonal factor here because you go from 92 days in the quarter down to 90. You have a pickup in FICA costs and things like this. Everyone steps into it. So the first quarter is always kind of challenging on an efficiency ratio proposal. But adjusting for that, no. I think that we have an opportunity to continue to improve our operating leverage. And frankly, that is a key goal.

We're always looking at, what is the plan here? How do we continue to move? Even if it is not dramatic, but how do we continue to move revenue at a faster pace than costs? That is the easiest way to create shareholder value. And getting behind that curve is one of the most difficult things to change. And we're pretty determined not to do that.

I do see that we can move this lower. I don't know how much lower we can go from the 43% level, but we improved a little more in 2Q than I had dialed in. So as a result, I think I want to temper that in terms of give it a little bit of a pause going into the third quarter.

Okay, got you. And then just kind of shifting gears over to the sub-debt issuance. I think you guys may have spelled out that there was swap on a part of that. I was just wondering if you could walk through the mechanics on that and kind of what the whole quarter impact might look like?

We issued 40-year because we didn't want to have a liquidity question with it. 40-year non-call 5 sub-debt at the parent level. And the note rate is 6.25%. So we swapped it short. We swapped it to LIBOR, so it'll be variable with LIBOR with us. We still remain asset sensitive, even with that swapped shorter, which we think is fine as we don't see rates rising, certainly at any significant pace kind of for the foreseeable future.

Net of the swap, basically rebate back to us on the interest cost, it is a little under 4%. I'm going to call it 4% in terms of what the net cost is to us on a pretax basis. That was done in mid-June. If you just take how many days in June we had that debt out versus the quarter, the average balance was about $30 million. That means were going to pick up on an average basis about $145 million at 4% in the third quarter over the second.

We have $700 million in investable assets in cash right now that are only earning 50 basis points. If we could just take half of that number and make something 2% or a little north of 2%, which we can get in securities today, that will completely ameliorate the cost of -- the servicing cost moving into the third quarter from the second quarter. I don't see the additional cost there really affecting EPS from where we are today, even though there is a little bit of a pickup on that category alone since we didn't have it outstanding for the entire second quarter.

Okay, got it. That is helpful. I think that covers it for me. Thanks.

Thanks, John.

Gary Tenner, DA Davidson.

Thanks. Morning, Dale.

Good morning, Gary.

Wanted to ask, you made a comment regarding some success in sort of the tech and innovation business as part of your loan growth this quarter. Can you talk about venture capital lending, how much you are seeing there? Maybe similar question, if there was outsize success on the deposit gathering front from the Bridge franchise?

We have had success with -- on the deposit side. I will take the last question first. In fact, some of our largest accounts are where Bridge has provided really exceptional service to some of these entities in Silicon Valley and they are rewarded for it by having very high levels of non-interest-bearing DDA. So in total we're running about 36% non-interest-bearing.

When we acquired Bridge they were about 70% DDA. So they have a good model for that. They continue to execute on that program. And that works well for them.

In terms of the credit side, we have had additional opportunities in development there. There has been, I would say, a general slowdown and pullback. You see this in some of the valuations that have taken place.

Some of the unicorns that apparently lost their horn, or have their market caps are now under $1 billion on valuation. So that has resulted in a retrenchment and a revaluation of sorts in that space. That has slowed down new venture lending and it basically has slowed down, we think, the opportunity there a little bit.

But at the same time, one of the reasons why they wanted to merge with us was more capital behind them. They can ride with clients larger than they could have in the past because of being able to have a larger hold positions. Their loan growth is up substantially kind of from where they were, even though the market really hasn't reflected that. They have kind of gained share.

They've been a bit more cautious in terms of what's transpired, not only in the technology space but I would say in Northern California generally, which we consider to be perhaps a bit toppy. You can see this on some of the commercial real estate and residential real estate valuations as well in terms of what's transpired in San Jose and San Francisco.

Thanks for the color. Thank you.

Brian Klock, KBW.

Good morning, Dale.

Good morning, Brian.

Just wanted to extend our best wishes to Robert and his son for him to be well soon. Make sure you can pass that along to Robert and his family.

Thank you. We will.

Really just want to follow up on the margin side. And I think what is interesting is obviously you guys did benefit from the accretable yield, but as you mentioned, you've got a bunch of excess liquidity in the average loan growth that can kind of catch up into the next quarter. So knowing as you answered John's question, it feels like you can offset the sub-debt cost that it's going to be in the full quarter.

So should we expect if you can hit that -- your loan growth targets that the margin could be slightly up? Or do you think that there could be some margin pressure that is rolling over from the securities portfolio and maybe we are just flat quarter over quarter? Or how should we think about the NIM in the quarter?

I am more flattish, because basically for the reasons you said. I think you have potentially have some offsetting items. I think the biggest piece of momentum you have that would push it higher is we closed the GE deal. And as I mentioned, those loans yielded about 5.2% on April 20. That is the biggest reason why we have almost a $600 million difference between our ending loan balance at June 30 and our average balance for the quarter. That would be momentum to move that margin higher.

On our securities book you can see we have had some challenge, certainly replacing yield on the securities book. Now late, past few days rates have come up a little bit but they are still kind of below they were the last time we were investing. So we've been a little slow in, how much do we want to put out right here or are we going to see the bond market continue to back up a little bit and maybe give us a little better opportunity. That is what gives me pause on forecasting through and saying we should have continued loan growth.

I don't see our deposit cost increasing any higher. We did have a step up. I don't think it was dramatic to be able to help jumpstart the strong growth that we have had over the first half of this year. I don't see us needing to do that to maintain some decent momentum on deposits, although it certainly will be slower than what we've just experienced.

Okay. Appreciate that. To follow-up. Think about the investment securities portfolio. You had a pretty low relative yield on that securities book, I guess maybe you can remind us what the duration is on that portfolio, or what your thoughts are with the reinvesting. Are you just going to try to maintain that balance where it is? Or obviously not a whole lot less opportunities with the yields here. But maybe if you could just talk about what your thoughts are with the securities book.

The duration on the book is about 3.5 years. We are pretty comfortable with where that is. We have kind of hovered right at 3-ish. If we have these kind of reinvestment challenges going forward, that will come down over the course of, say, the next 3 or 4 years. I'm not sure that is necessarily going to take place.

We're comfortable with the profile and the level that we have in the portfolio today in terms of the liquidity it provides, particularly consider we have this credit line with the Federal Home Loan Bank, which as you know a lot of other institutions tap as almost a part of their ongoing funding. And we have nothing outstanding on that. So we think we are pretty good in terms of the liquidity options. But net kind of goes back to the loan to deposit ratio, kind of where we are were in the 90%, 95% range.

I think there is opportunity to some degree to do something. We have been a little sluggish because we do not necessarily want to commit a lot of assets at this pricing, particularly if there's maybe loan opportunity also. All these things kind of temper into that in terms of why our margin might not be rising, even though there could be a little momentum behind it, at least for another quarter.

Thanks. I appreciate that. And again, when you've got a loan pipeline like you guys with those yields, I would rather see you fund it with that securities portfolio [of cash flow]. Thank you for your time. Thanks for taking my questions.

Thanks, Brian.

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

Thanks again for joining us today. And again, Robert wishes he could be with us and will be with us in October. Have a good day.

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