Western Alliance Bancorp (WAL) 2018 Q3 法說會逐字稿

Good day, everyone, and welcome to the earnings call for Western Alliance Bancorporation for the Third Quarter 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.westernalliancebancorp.com. The call will be recorded and made available for replay after 2 p.m. Eastern time on October 19, 2018 through November 19, 2018 at 9 a.m. Eastern time by dialing 1 (877) 344-7529 and entering passcode 10124472.

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

I would now like to turn the call over to Ken Vecchione. Please go ahead.

Good afternoon, everyone, and welcome to Western Alliance's third quarter earnings call. Joining me on the call today are Dale Gibbons and Robert Sarver. Dale and I are going to walk through the slide deck that's been posted on the website, and then we'll open the line for your questions.

Western Alliance again delivered consistent results for the quarter with higher organic loan and deposit balances, stable margins and efficiency ratio while maintaining asset quality. The bank also reinvested a onetime tax benefit by investing in its future performance by selling low-yielding securities and reinvesting for shorter durations and higher yields. We also funded the company's foundation which will reduce expenses in the future.

For the quarter, on an annualized basis, Western Alliance increased net tangible book value over 18%, total revenue by 15% and earnings by 30%, achieving a 207 basis point return on assets, 20.6% return on average tangible equity while maintaining asset quality standards, which continues to be the focus of the company. As the economic expansion continues, our focus on credit quality will become even more important. Yesterday, we reported record earnings for the third quarter of $111 million and EPS of $1.05. Both are up more than 30% from the same period last year. This was our 33rd consecutive quarter of record net income.

At September 30, total loans were $16.7 billion, up $595 million from the prior quarter and up $1.6 billion for the year. Year-over-year, loans grew $2.2 billion or 15.2%. Deposits rose $821 million to $18.9 billion from Q2. Year-over-year, deposits rose $2 billion or 12%. The interest margin improved 2 basis points to 4.72% compared to just 4.70% in the prior quarter despite the lower benefit from accretion on acquired loans. Adversely graded assets continue their loan decline as NPAs to total assets stand at only 0.25%. Expense management kept the efficiency ratio essentially flat at 41.5%.

Quarterly earnings added $100 million to equity, increasing the tangible common equity ratio to 10% as total assets rose $808 million, providing the company the ability to continue to support organic growth.

Before turning the presentation over to Dale, I would like to put our financial results into context. Industry loan growth is becoming challenging amid tougher pricing competition and elevated paydowns. Western Alliance grew through these issues in the quarter, but there are real concerns we will face going forward.

At this time, I'll turn it over to Dale.

Thanks, Ken. At the end of 2017, the company undertook several tax-saving strategies that accelerated deductions and deferred revenue until this year. This resulted in $108 million tax loss for 2017 that we expected to carry forward. However, being able to carry this loss back instead result in a onetime tax benefit of $15 million as we are able to deduct the loss at 35% tax rate years rather than 21% to carryforward. This benefit was recognized in the third quarter.

The company utilized most of this benefit as we funded our foundation by $7.6 million, which should eliminate the need for funding in 2019 and some years beyond. We sold approximately $110 million of securities at a $7.2 million loss and reinvested the proceeds at higher yields and shorter durations. We also incurred $1.2 million loss from mark-to-market changes in securities held at fair value, largely from the runoff rates in September. These treasury actions will produce higher net interest income in future periods. We also had a $1.2 million nonrecurring charge for our 401(k) plan.

The tax savings on the $17.2 million of adjustments was $3.6 million, which, when added to the $15 million in tax savings from the last carryback, totals to $18.7 million shown in the middle column of adjustments for income tax. The net effect of all these items increased net income by $1.5 million or 1% per share during the quarter.

Looking at the as-adjusted column, operating pre-provision net revenue for the third quarter was $141.9 million. Pretax income was $136 million. Income tax expense would have been $26.2 million on the $136 million of pretax income, which would have brought net income to $110 million and EPS of $1.04.

Net interest income rose $9.9 million for the second quarter to $234 million driven by $621 million increase in average loan growth. Net interest income rose 16% from the year-ago period.

Operating noninterest income was down $1.2 million from the second quarter to $12.9 million, largely due to a decrease in warrant income, which was elevated in the second quarter.

Total revenue was up $8.7 million to $246.9 million, which was nearly 15% annualized growth from the second quarter.

Operating expense rose $2.3 million or 9% on an annualized basis from the second quarter of $205 million, largely due to an increase in incentive compensation costs. With revenue growth of 15% compared to expenses rising 9%, the company achieved its 3:2 target revenue to expense growth rate. On a dollar basis, the revenue rise of $8.7 million was 3.7x the $2.3 million expense increase.

The provision for credit losses was $6 million for the quarter as asset quality remained steady. We achieved nearly a $600 million in quality loan growth and incurred $3.1 million in net loan losses.

The effective tax rate on a normalized basis was essentially flat at 19.3%. Diluted share count was also basically unchanged at 105.4 million, resulting in normalized EPS of $1.04.

In the next 3 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 had the tax change been in effect in the prior year.

Investment yield remained stable during the quarter at 3.24%, but it's consistently climbed from the 2.92% yield in the third quarter of 2017. The investment yield in the second quarter has also benefited from some semiannual dividend payments that occur in Q2 and Q4, which increased the yield during that quarter by about 3 basis points.

Loan yields have climbed over the past year after adjusting for the effect of the tax cut rising 33 basis points from 5.57% in the third quarter of '17 to 5.90% in the most recent period. As a percentage of the increase in the target fed funds over the past year of 100 basis points, the adjusted trailing 4-quarter loan beta was 33%. On a linked-quarter basis, yields rosed 9%, resulting in a loan beta of 36%.

Interest-bearing deposit cost rose 15 basis points in 3Q as 60% beta as the company continues to respond to competitive pricing pressure with sufficient strength to continue its healthy organic growth and sustain it core deposit funding profile. From the third quarter of 2017, interest-bearing deposit cost rose 48 basis points or 48% beta.

While all of the company's funding sources are considered, including -- when all of the company's funding sources are considered, including non-interest-bearing deposits and borrowings, total funding cost increased 6 basis points for the quarter and 29 basis points over the past year to 0.67%, resulting in a linked-quarter funding cost beta of 24% and a 1-year trailing funding cost beta of 29%. Over both last quarter and last year, the bank's loan beta has exceeded its funding cost beta. The company believes this metric provides a more complete picture of WAL's funding price sensitivity to rising rates and betas that only comprise a portion of the bank's funding structure and acknowledges the bank's 42% non-interest-bearing deposit composition.

The interest margin increased 2 basis points during the quarter to 4.72%, primarily driven by the benefit of higher rates on our asset-sensitive balance sheet. From a year earlier and after adjusting for the prior margin by the effective lower taxable-equivalent benefit, the margin climbed 19 basis points from 4.53%, which is fairly consistent with our estimate of 5 to 6 basis points of margin improvement or 25 basis points increase in the fed funds rate by the FOMC.

The reduction in acquired loan accretion held back the increase in the margin by 4 basis points in the last quarter and by 11 basis points over the past year. Forecasted accretion will fall to $2 million in future periods if all discounted acquired loans paid adjust their contractual principal commitments. However, because of loan prepayment activity, actual accretion will likely exceed this estimate.

The efficiency ratio decreased to 41.5% from 42.1% on a linked-quarter basis and is up slightly from 41% a year ago after adjusting for the tax change. The $2.3 million increase in operating expense from the first quarter was driven by -- from the second quarter was driven by increased incentive compensation costs. Year-over-year revenue growth of $35.2 million was 2.2x the $16 million increase in operating expenses.

Our pre-provision net revenue ROA was 2.64%, and our return on assets was 2.07%. These metrics have consistently been in the top decile compared to peers.

Continued loan growth and deposit growth took total assets to $22.2 billion at period end. Our consistent balance sheet momentum continued during the quarter as the 15% annualized loan growth of $595 million was very close to the 16% annual loan growth we reported for the past 3 years.

Similarly, annualized third quarter deposit growth of 18% from the $820 million increase closely compares to our 3-year compounded deposit growth rate of 16%, the same as we had in loans.

Deposit growth of $821 million exceeded our $595 million in loan growth by $226 million and enabled us to reduce our FHLB borrowings to 0 at September 30 and lowered our loan-to-deposit ratio from 89.2% to 88.5%.

Our loan growth of $595 million was driven by residential growth, up $296 million; and C&I, up $209 million; and construction, up $129 million. Year-over-year loan growth was spread across all loan types with the largest growth also in residential C&I and construction. Loan growth for the quarter was split between geographic regions and the NBLs with approximately 43% of the growth in geographic regions and 56% in National Business Lines.

Deposit growth of $821 million was spread among all markets and business lines. Deposit growth during the quarter was driven by an increase of $590 million in savings and money market accounts, enabling us to eliminate our short-term borrowings which carry a higher funding cost. Year-over-year deposits grew across all deposit types with the largest increase also in savings and money market to $759 million.

Total adversely graded assets declined by $10 million during the quarter to $358 million as an increase in classified accruing loans was offset by a decrease in special mention. Nonperforming assets, comprised of loans on nonaccrual and repossessed real estate, decreased to $57 million or only 0.25% to total assets.

Gross credit losses of $4.8 million during the quarter were partially offset by $1.7 million in recoveries, resulting in net losses of $3.1 million or 8 basis points of total loans annualized.

The credit loss provision of $6 million compared to $5 million in the prior quarter as the reserve increased to support higher loan balances. The allowance for loan and lease losses rose to $150 million, up $14 million from a year ago. This reserve was 0.97% of non-acquired loans at September 30 as acquired loans are booked at a discount to the NPA principal balance, and hence, have no reserve at acquisition.

For acquired loans, credit discounts totaled $17 million at quarter end, which were 1.4% to the $1.2 billion purchase loan portfolio, primarily from Bridge Bank and Hotel Franchise Finance transactions.

Our strong capital growth for the quarter exceeded our balance sheet growth and drove each capital ratio higher from the second quarter. Tangible book value per share rose $0.92 in the quarter to $20.70 and is up 18% to the past year. At 10%, our tangible common equity ratio is in the top quartile of the peer group, while return on tangible common equity again exceeded 20%.

I'll turn the call back to Ken.

Thanks, Dale. After a strong third quarter, we expect balance sheet growth to moderate in the fourth quarter. Competitive pricing pressure on both sides of the balance sheet may mute our margin expansion in 2019. However, we expect our fourth quarter margin to increase similar to our prior guidance, in part, benefiting from the securities reinvestment strategy Dale just mentioned.

We have held our 3:2 operating leverage growth rate for the third quarter of 2018, absorbing a $700,000 increase in non-interest-bearing deposit costs and funding of new balance sheet initiatives that have yet to generate revenue. Primarily as a result of these charges, we do not expect to see efficiency improvements continuing at the historical pace and expect to migrate our target 3:2 revenue growth rate to expense growth rate target to one in dollars with a revenue increase to be 2.5x the amount of the increase in operating expenses, in other words, a 40% marginal efficiency ratio. The modest loan losses we incurred in 2018 have been related to borrow-specific circumstances and not systemic issues in any of our business lines. We do not have any information that leads us to change this viewpoint, and the outlook for asset quality remains stable.

At this time, Rob and Dale and myself are happy to take your questions.

(Operator Instructions) Our first question comes from Casey Haire of Jefferies.

Wanted to start off, I guess, in the securities book, actually. The -- sounds like you guys did some restructuring in the quarter and are going to come out a little bit stronger in the fourth quarter. If possible, could you give us what the spot rate is on that securities book today versus the 3.25% in the third quarter?

Yes. It's up 6 basis points from this transaction.

Okay, got you. All right. Okay. And then the revenue development initiatives that you guys -- so there's -- if I'm understanding you correctly, there's nothing on the top line from these initiatives currently. When might we expect to start to see them show up in the P&L?

Okay. So all businesses are progressing but not yet producing meaningful results. So remember, we have 2 deposit businesses, 2 loan businesses. On what I call deposit business number 1, it's now up and running, and new deposits are expected sometime in Q4, okay. But we still have some more organizational and team build-out that will be completed in the quarters to come. Deposit business 2, we're not expected to be operational until sometime in the middle to late Q3 of 2019, and then we would expect deposits coming in at the end of 2019. On our loan businesses, we have 2 we mentioned. On the first one, the team is in place. We have loan commitments, and loan growth will follow in Q4 going forward. And on the second loan business, the team build-out continues. We did book some small loan volume this quarter, but we really expect to grow it, as we've always said, in 2019.

Okay, fair enough. And then I guess, just switching to -- actually, I'll just leave it there.

Our next question comes from Michael Young of SunTrust.

Just to follow up on Casey's question, the new kind of guidance on revenue to expense growth or marginal efficiency ratio, is that inclusive of those businesses in your current outlook for when they'll kick up and start running? Or is that exclusive of those?

No. That's inclusive.

Got it. And just on the growth this quarter, the strong residential growth. Was that more of a portfolio acquisition? Or is that something that you're shifting focus towards going forward with some of the more competitive pricing in some of the other areas?

So let me just kind of take a half step back and give you a viewpoint into what we're doing here. We buy residential loans from our warehouse lending customers after we fully underwrite them, so we have access to their branch networks without the build-out expense, without having marketing expenses and without having compliance expenses. And if we don't like the loans, we're not obligated to buy them. So this approach, in general, helps us improve our operating leverage, and we get to cherry-pick the best of the residential loans that we like. Having said that, there were also laws of purchase in this quarter. But generally, as you see residential loans grow in the future, it's going to be because of this strategy that we're putting -- that we have put in place.

Okay. And you just feel better about the pricing dynamics and risk reward in that vertical now than some of the other areas?

Yes, we do. And these are variable rate loans, 1, 3, 5 years, and we're going to watch this stuff closely. We all -- depending on our interest rate viewpoint, we'll either push into it or pull back as we need to.

We think we're getting into this at a better time. I mean, for those that have been in the residential real estate lending portfolio for -- sector for years, they put on loans at 3%. Part of the reason why our margin exceeds that is because our mix of resi real estate is only about 1/10 of what the average bank is our size, so you're going to see that proportion growing over time.

Our next question comes from Brett Rabatin of Piper Jaffray.

Wanted to ask, I guess, first and thinking about the Central Business Lines, the growth was pretty concentrated in the other segment. I was hoping maybe you could talk about that a little bit. And then I was kind of surprised to see a little bit of a decrease in the tech side of that platform. I was just curious if you could talk about those 2 things.

So the tech side, we do some equity financing in the tech side. And so those loans come in. They come out. They have a little bit more volatility to them. So that's probably the tech side. I mean, I will say just in general, tech and innovation, very busy, very busy on the deposit side, having one of their best fundraising years since dot-com era, okay. So we're pulling in a lot of deposits on that side. But loans could go up and down depending on takeouts, and we're seeing a lot of strategic takeouts of our portfolios. So that's what I sort of meant overall where we have things to grow through. And while we had a great quarter, we're just a little cautious about Q4's total growth. Does that answer your question there, Brett?

Yes. And then I guess the other part was just the other businesses. What was the concentration there?

So in terms of overall growth, like our C&I went up about $209 million. Residential, we went up, talked about that. Construction and land went up about $129 million. So CRE investor and owner-occupied came down slightly. We're seeing payoffs there, mostly because people are taking -- being taken out of their properties. So...

Yes. Within the sector reporting, the segment reporting, it's mostly in our mortgage warehouse operation.

Okay, okay. And then just wanted to ask, you talked about real concerns on competitive pressures and some moderating growth. As we're thinking about -- maybe it's too early to talk about '19 full year, but you guys have been a stellar growth bank. Would it still make sense to think about '19 as double digit or would that moderate?

No, no, no. I think -- no. I think we still have good front -- balance sheet growth opportunities in front of us. I think we've been executing that throughout 2018. We -- some of these new business lines are going to come into play next year as well. I don't believe that the rate of improvement we've seen on our efficiency ratio is going to continue at the same pace it's been in the past. Now this -- in 2018, it was a little bit of a flat year on total efficiency because we had some of these changes, whereby we reinvested part of the tax benefits into employees. But that's -- we don't expect that to continue. But at the same time, we don't necessarily see that there's going to be as many rate increases going forward, and so I think we're going to be well set for double-digit improvement in earnings per share next year as well.

Yes. And let me just add to that. I want to make sure my comments are taken in a very balanced way, okay. We're going to have loan growth. We're going to have deposit growth. Our -- we'll probably hit -- we're not changing consensus for the full year, so none of that is changing. We're just trying to tell you we're trying to be cognizant of the world that's out there, okay. By the way, we have a lot of these same problems going into Q3. And quite frankly, the summary I had said to my team here today earlier was loan growth, good; deposit growth, even better. And that's what we're shooting for, for Q4 as well. So I just want to make sure there is balance here in what we're seeing and you understand what we're trying to do.

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

Ken, I was curious. I think we may have touched on this in previous calls but just wanted to get an update on the construction book. You guys have had a fair amount of growth this year. Can you help us or remind us kind of how that dominates between kind of residential, commercial? Any other way you might slice and dice it. Just want to kind of get a sense of kind of everything you've got in there at this point.

Yes. I think that's a fair question. And given some of the reported results in the industry, I'm going to make this a little bit broader for a moment because I think this is on investors' minds. So let me just kind of note several things for you, and we start with the following: just in our special mention and sub books, we only have about $8 million of construction and land loans, all right. That's one. Two, there are no substandard or special mention multifamily loans, okay. We only have like one loan, which is investor real estate industrial building that is in special mention, and that's for under $1 million. Closed-end family loans totaled about $11 million in sub and special mention. Our rural land exposure for the entire book is less than 0.75% of our total loan book, all right. Back to your question, when you look at our construction land book of about $2.2 billion, there's 30% that sits in what we call lot banking, and that's with very, very strong sponsors at LTVs that do not exceed 55%, all right. And the team that we brought over a couple of years ago never had a loss, even in the downturn, all right. We also have about 30% of our CL&D (sic) [C&LD] book in single-family homes, and we watch that very closely. Absorption rates are still holding. We're not seeing any downturn there. And then the rest of the stuff is in CRE, investor and owner-occupied. And again, the economy is doing well. Generally, that market is doing well, and I'll just leave it there, but that was a little broader viewpoint brush to asset quality. I'll just add one other thing, too, that's probably just maybe important to know or just tidbits of information. One, we don't do any condo financing. So you're not going to find us doing condo financing in Miami or New York or Chicago, and we're pulling back in certain areas that we think, over time, could create a little more problem in the marketplace. So we've pulled back lending to any contractors. And those that are marginal performers in our book, we are strongly encouraging them to seek other banks. So we are trying to take -- asset quality comes before everything else in this company. And that matters to us, and we're trying to be as proactive as we can at all times.

It's Robert. I'll just add on to that. On our commercial real estate financing, we've got significant amounts of equity in our projects, and we have strong contractors, assurance bonds or guarantees to get contracts finished. So even though we've seen some issues with some cost overruns, we haven't had any problems in our book there. On the residential side, on the construction side, on the housing side, a number -- most of the markets we're in are fairly high-profile markets. The ratio of land to housing is a little higher than the national average, and we require 50% cash upfront on finished lots. And so as that gets rolled into the house construction, the houses we're financing typically are loan on the house that's being built is somewhere around a 65% loan to value. So we have a fair amount of cushion should home prices begin to soften a little bit.

That's helpful. And just to follow up on the $2.2 billion, do you guys have a sense of kind of what ultimately that kind of migrates to on your balance sheet? Or is most of that taken out by other sources?

Well, some of it gets taken out by other sources. And as a percentage of our total loans, we're going to keep it about where it is now. And over time, probably, you'll see a migration downward more than upward.

And there are some that goes permanent, but most of it gets taken out.

Okay. And then, Dale, just like a final kind of housekeeping. Does the recognition of the tax benefit, does that change sort of your ongoing tax rate as you think about 2019?

No, no. I think the 19% -- and the 19% range is kind of where we're headed.

Our next question comes from Jon Arfstrom of RBC Capital Markets.

A question for you, just on lending again. It seems like a lot of the banks are saying things that are somewhat similar to you. They're backing away a bit, but -- and then there's this nonbank narrative that keeps coming up. Just curious if you guys are seeing any change in who you're competing against? And has their behavior appetite changed at all? Is it intensifying?

Yes. That's a good question. So the answer is we are seeing more funds that we're competing against. They're coming in at lower yields and higher advance rates, and they are becoming more of a difficult competitor. We tend to price our loans -- all loans, we try to get premium pricing to the existing market that's out there, and that is creating a little bit of a headwind for us. But we're able to fare rather well because of certs, few things. When we tell you the deal is done, the deal is done. We don't re-trade, and we get it closed when you want to get it done. And those are very, very big important issues for our borrowers, and they will pay up on that. And so we've had some success with that. But, yes, we are seeing more institutional money flowing here.

The flip side of that is that a large percentage of these funds are up for sale right now. They're heading to the exit quickly.

Yes. I was just going to ask my question. What do you think changes...

Well, what changes is that, number one, when you're a lender that needs to borrow money from other people to make loans, you have your funding sources dry up quicker should the economy change a little bit. And a number of the people that start these companies, they don't want to take the risk going through another cycle. So we are getting inundated with offering books of nonbank lenders for sale, and I think that's going to create opportunity in 2 ways. One, I think there's opportunity maybe to buy some of these companies at really attractive prices because the supply-demand of them for sale is changing; and two, it's going to reinforce to borrowers that a bank is a more stable place to borrow money from. And so I think there's kind of a silver lining in that.

Yes. Okay, yes. The -- my next question for you is do higher rates create more strategic opportunities for you? And I think you just answered that question.

Yes. I think not only higher rates, too, but I think a little bump in the road does, too. I mean, you're going to see us, a tale of two cities, I guess, where you're going to see further differentiation between valuations of companies based on performance. And part of that performance is going to be taken into account, their credit performance, their margin, their liquidity. They're funding their capital position. So we're always a little bit contrarian here, and we're part of the reason we've been accumulating some capital and not so quick to pay a dividend is waiting for opportunities like this where there are some bumps in the road. The amount of opportunities we're getting shown is high, and so I think that's kind of the counter to a little bit of a rocky road out there for some of the companies as I think you're going to see a bigger differentiation. That differentiation, we've always had that differentiation in book value, but I think our differentiation and our price to earnings ratio should help us in terms of looking at some opportunities, which we'll be very selective on. But we'll, I think, have some opportunities to make some interesting acquisitions over the next couple of years.

And our next question comes from Gary Tenner of D. A. Davidson.

I think you just addressed my question with regard to capital with the questions or your answers to previous question. But as it relates to the margin and the commentary around that, you've kind of positioned the trailing information in terms of the relative beta between loans and deposits. So I mean, with what your forecast was on margin, you kind of alluded to previous guidance on margin, if I heard you correctly. Can you just kind of reiterate what those expectations were and if you think the relative loan betas can stay ahead of the deposit betas?

Yes. I'll take half and throw the other half of the question over to Dale, but we expect to see margin expansion in Q4. So I want to be clear on that, all right. And as we get closer to 2019, we'll have a better viewpoint on that, but we're just trying to balance what we see are some of the pricing pressures extending out over time, okay, with what we're trying to do on the liability side and to grow the book of business. You want to take the beta point?

Sure, yes. So when we're going to the second quarter, we highlighted that we expected that there was going to be a period of stronger betas on funding costs, and we saw that in Q2. And in our last call, we said we thought they were going to slow down in Q3, which they did. From here, I think our betas are probably going to be fairly stable at our current run rate. So what -- and what that does is it gives us an opportunity again to have margin expansion. We had a rate rise, of course, at the end of September, and that's not reflected kind of in our numbers. And then we had a couple of technical things, I would say, that should improve this as well. One of them was the securities trade that we did where we sold $110 million pickup. That's going to be about 1.5 basis points on the margin. And then we also had the -- everyone's familiar with the LIBOR deal, where LIBOR really shot up in 2Q and then eased off in Q3. I think, right now, Q4 looks like it's probably going to be more normalized. That would help. So we're fairly optimistic that we're going to see margin expansion in Q4. I don't know that we won't see that in 2019. I think we're well away. But the concern that we have is that is if there is going to be fewer changes or whatever from the FOMC or increased competition that, that may mute our margin expansion a little bit compared to what it's been and maybe the 5 to 6 basis points for 25 needs to get a haircut down. But I really -- that's just speculation.

Our next question comes from Chris McGratty of KBW.

Dale, maybe a comment on the deposit pricing, taking your counts a little bit further. You've got about 25%, 26% of your book between the tech and the HOA businesses. Interested in kind of what's been going on with your pricing in those portfolios and compared to the rest of the book.

It's fairly nominal. I mean, they have very low betas, continue to -- again, I think in those sectors, it's not deposit pricing with what those relationships are driven on. It's driven by technology on the HOA side, and it's driven by credit on the tech side.

Technology and service on the HOA side.

Okay. That's great. And then, Dale, I missed the comments, I apologize. The securities portfolio, how should we be thinking about the absolute size given what you did in the quarter and kind of the prospects for -- sounds like a little bit slower balance sheet growth.

Well, I'm not sure there's going to be slower balance sheet growth. But where we are today, we have -- our deposits have been growing faster than loans. That gives us more in the securities portfolio as it's kind of the accordion for the balance sheet. Going forward, I think that we're still going to see deposit growth probably in excess of loan growth and so that could portend for higher balances in that portfolio.

We didn't talk about it, but our loan-to-deposit ratio dropped to 88.5% from last quarter, which was 89.2%. So...

Okay. And just, Ken, while I have you, the comment about balance sheet growth, maybe I misheard you or maybe could you repeat it. The -- you're growing kind of mid-teens, low to mid-teens this year year-to-date. Is the message kind of moderation close to 10% going forward kind of overall balance sheet? Or is it kind of inside of that? So I'm just trying to make sure I got it right.

I'm not going to give guidance certainly as it runs into '19. We're not there yet. I'm just trying to say that it's going to be a little bit slower than what we did in this quarter, okay. And -- but we'll wait and see. I mean, quite frankly, I thought Q3 was going to be little bit slower, and we really hit the ball out of the park. And -- but I just want to make sure that folks on the phone know that we're balanced in what we're seeing, and so we just want to kind of tell you that. It will grow but maybe not to the tune that it has been growing, but we'll see.

Our next question comes from Timur Braziler of Wells Fargo.

First question is on the mortgage warehouse business. That's seen some pretty strong growth here over the last few quarters despite some of the more broad industry trend. Just wondering what's going on in that business. How much are you guys actively adding to that business and driving that growth? And kind of what the expectations should be for growth within that line item as application volume continues to get hit.

So warehouse lending comprises of few businesses inside of that. MSR lending, warehouse lending, note financing are all captured in that heading. We like the business. It's -- we got good opportunities. The pipeline is very active, and we still get premium pricing to the marketplace. So we're going to continue to pursue that line of business.

We have not been affected there as much us some others. Our business mix has always been skewed toward purchase money rather than resident refi, and that's given us less volatility in the past. I think that's likely to continue. To the degree you do see a reduction in terms of permanent financing demand for purchases, we have these other sectors that Ken mentioned that are also growing well. MSR is of course increasing value at higher rate levels.

Okay. So as we look at that business line, there hasn't really been too much yield concession and growing it. You've been able to kind of grow it at the yields you're looking to get out of that business.

We're not struggling with the growth in that business at all. That business is seeing some pricing pressure, but I'll tell you that we get premium pricing to what the market is at, currently at.

And if we have customers who aren't willing to pay us what we think is a good risk-adjusted return, we let them leave. And we've let a couple of those leave in that department this quarter who have gone to places with significantly lower pricing. So that's okay.

Understood. That's helpful. And then just maybe one more on the lending side. Given the kind of continuance of the increasing competition in lending from some of these nonbank and different funds, is it safe to assume that, at least in the near term, we should expect more of the loan growth to come from the national platforms? Or is the basis small enough where you guys can continue to pick up deals that you're comfortable within the local geographies?

So, yes. Let me give you more insight here. We have a very active pipeline in all the businesses in all the regions, and we are seeing good deals with strong asset quality, okay. Where we lose deals, we're losing them for pricing, right. You're not going to get us to go below sub 200, right. We believe that we should get premium -- we should premium price our loans because of what we deliver, and we get them a lot. But we lose deals because people, we think, are being too aggressive on pricing. So our pipeline is very active. I just want to make sure that's clear, all right. But we're not going to chase and be the lowest person out there delivering the lowest spread. We don't think that's good. We don't think it's good for our investors. We don't think it's good for the shareholders, just don't think it's good. So the pipeline is very active. We have a lot of great opportunities. We are following the market down grudgingly. We're doing that. But we are losing out to some people that I think are pricing too tight.

But far and away, our competition continues to be Wells Fargo, Bank of America and U.S. Bank. I mean, if you compete against -- that's who we compete against on a daily basis.

All right. Just -- sorry, one last one from me on the question that was already asked. Like given the expectation that deposit growth kind of outpaces loan growth or the hypothetical that, that scenario continues, we saw a little bit of cash flow this quarter. I know you had indicated that you could park some of those excess funds into the securities book. I'm just wondering within the securities portfolio itself, are there further opportunities for restructuring? And as you start to think about redeploying some of those funds, maybe talk through the duration of the portfolio and thoughts around kind of structure as we enter or as we're still in this rising rate environment.

Yes. I mean, a large environment of our securities investment are in mortgage-backed securities or one type or another, whether that's CMOs or PACs or TACs. And I think that's where the funds are going to be kind of going prospectively. Duration, duration has been over 4 years. We shortened it up a little bit with kind of what we have been doing in this last period. I don't want to push it too much shorter because we're still asset sensitive, and it seems like that we still have some rate increases in front of us. But at some point in time, I think maybe we'd move for a more neutral position if we thought that was prudent. But we are doing things that are maybe slowing it down a little bit like with residential loan acquisitions we've been taking in. So combination between some of those residential loan acquisitions as well as continued NBS purchases, I think, is where you're going to see the preponderance of our liquidity being deployed.

Our next question is a follow-up from Gary Tenner of D. A. Davidson.

I just wanted to revisit really quickly on the resi real estate lending. I mean, it's still -- it's just barely over 5% of your book, but it was half of your loan growth this quarter, 20% of your year-over-year loan growth. So just wondering about the kind of quarter-by-quarter decision-making process around that because it sounds like you've got really a spigot of supply that you could turn on and off and kind of put it on your balance sheet at the pace that you...

Yes. And it's also -- it's a couple of things. I mean, we've looked at it in 2 ways going back a year when we started planning what we're going to do, and that is a good alternative to our investment book of mortgage-backed securities and also a good hedge against higher competition in the C&I and commercial real estate business.

Our next question is from David Chiaverini of Wedbush.

Wanted to ask a question about you said in the prepared remarks about the efficiency ratio and how, historically, you have been growing revenue at a 3:2 ratio of the growth in expenses. And you mentioned about how, going forward, you think about it as an efficiency ratio of 40%. Now does that apply -- were you referring to the new businesses that are coming onboard? Or should we now think of the business as managing towards that 40% efficiency ratio, and that revenue growth could be similar to expense growth going forward?

Well, look. So right now, we're in this investment period of these new businesses, and we're also looking at increases in our deposit cost that we break out in our noninterest expense. That has challenged our 3:2 growth ratio. And so looking forward, we're saying, "Okay. We should be able to at least do $2.5 to $1 in terms of revenue to expense." I would hope that when these situations kick in gear that we can continue to improve our efficiency ratio and take it below 40%, but it's not going to go at this -- we're not going to be improving at the same rate we have historically. So I look at what -- our opportunities here in terms of double-digit balance sheet growth, margin expansion, a little slower improvement on efficiency ratio, and I still see that we're double digits in terms of EPS improvement.

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

Thanks, everyone. Listen, we were very pleased with our results this quarter, and we look forward to talking to you again about fourth quarter results in the near future. Thanks, everyone.

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