Jul 20, 2012
Operator
Good day, everyone. Welcome to the Earnings Call for Western Alliance Bancorporation for the Second Quarter 2012.
[Operator Instructions] Our speakers today are Robert Sarver, Chairman and CEO; Ken Vecchione, President and COO; and 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 p.m. Eastern Time, July 20, through September 4, 2012, by dialing 1 (877) 344-7529, pass code 10016260.
Operator
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 factors listed in the initial public offering registration statement as filed with the Securities and Exchange Commission. Except as required by law, the company does not undertake any obligation to update any forward-looking statements.
Operator
Now for the opening remarks, I would like to turn the call over to Robert Sarver. Please go ahead.
Robert Sarver
Thank you. Thanks for joining us this morning.
We're pleased to announce our second quarter results for 2012. I'm going to call on Ken and Dale to walk you through those results, and then we'll have a question-and-answer, which I'll be available to answer any questions you have and I'll follow up with some concluding remarks.
Kenneth Vecchione
Let me add my welcome as well. After the close of business yesterday, we released our second quarter earnings for the quarter.
WAL earned $14 million or $0.15 per share. Net income increased nearly 24% compared to the first quarter and increased 126% compared to prior year.
EPS of $0.15 grew 25% versus prior quarter and increased 3x versus the prior year. Growth in earnings was supported by strong loan growth, up $239 million and deposit growth up $102 million.
Year-to-date, loan growth has risen by 8% or $385 million and deposit growth has grown $343 million or 6%.
Kenneth Vecchione
While net interest margin declined 7 basis points from the first quarter to 4.46%, WAL did post its 11th consecutive quarter of increasing net interest income. Net interest income was $70.8 million, rose $749,000 from Q1.
Expenses remained relatively flat from prior quarter. And pretax, precredit income grew to $32.1 million, or 5%, on an annualized basis.
This was our 12th consecutive quarter of increasing pretax precredit income.
Kenneth Vecchione
This quarter, we experienced rather mild REO valuation declines and loss on sales. REO losses were less than $1 million.
This quarter, we had some properties that saw their values increase. Asset quality continues to dampen our performance.
The provision expense of $13.3 million has not declined for 3 quarters. Bank of Nevada's asset quality still remains problematic.
We continue to work through our fair share of classified loans. We charged off $13.9 million this quarter, which is consistent with the last 4 quarters' performance.
Our charge-off rate did decline to 111 basis points of average total loans, down from 118 from the first quarter and 126 basis points from the second quarter of 2011.
Kenneth Vecchione
This quarter's loan growth included $22 million of net purchased loan growth. Year-to-date, loan growth is $385 million and year-over-year growth is $753 million, which is 17% higher than our second quarter of 2011.
We've made progress increasing our C&I portfolio from 23% to 31% of loans, while decreasing construction and land, and residential and consumer loans from 9% and 12% to 7% and 9%, respectively, compared to the second quarter of 2011.
Kenneth Vecchione
SBLF growth is now $190 million above the baseline, and going forward from the third quarter, our quarterly SBLF dividend payment will now be only $353,000 or less than $0.005 per share. In the fourth quarter of 2011, SBLF dividend payments accounted for a $0.02 drag on EPS.
Kenneth Vecchione
In addition to derisking our portfolio, we continue to improve the asset quality of our portfolio. This quarter, we booked net $69 million of 2- and 3-graded loans, and today, 25% of our loan portfolio is graded 3 or better.
This quarter, we booked 8 loans with commitments above $15 million that were graded 4 or higher. By comparison, last year, only 19% of our loan portfolio was graded 3 or better.
Kenneth Vecchione
Deposits grew $102 million this quarter. Today, noninterest-bearing DDAs represent 31% of deposits, up from 27% 1 year ago.
Year-over-year deposit growth has increased $413 million or 7.4%, while our deposit expense has shrunk by $3.4 million or 45%. This chart provides some context around our deposit and loan growth.
WAL has grown the size of our assets by $4.5 billion from our IPO. Loan growth during this time has exhibited a 20% compounded average growth rate, while deposits have grown 15.5%.
Kenneth Vecchione
I would like to walk through the performance of each bank and then Dale will walk you through the corp's performance in several minutes. Torrey Pines are in $5.1 million this quarter and represents the fourth consecutive quarter of ROA above 1%.
With the flat net interest margin, stable operating expenses, pre-preincome was $11.4 million, translating into a pre-preROA of 253 basis points.
Kenneth Vecchione
Regarding the economy, our CEO, Gary Cady, notes that there's been no material change in the economic activity during the prior 6 months. Companies are not hiring, but they also are not laying off their employees.
Our loan growth is generated from market share takeaways. Pricing pressure does continue, but no more so than 6 months ago.
Construction activity is getting a little better in northern California, and San Diego's seen some improvement as well. Overall, the unemployment rate in San Diego County is 8.8%, down from 9% at year end and 9.8% 1 year ago.
Foreclosures in the first quarter of 2012 in San Diego County have decreased 28% compared to prior year, and tourism and visitor spending is increasing.
Kenneth Vecchione
Western Alliance Bank has demonstrated rising net interest income, muted expense growth and pretax precredit growth of $1 million, thus producing a pre-preincome of $14 million, along with 241 basis points ROA. Net income for the quarter was $7.8 million.
Kenneth Vecchione
In Arizona, and similar to other parts of the country, there is cash sitting on the sidelines, although we are beginning to see stronger multifamily industrial activity. The unemployment rate has trended down to 8.2% from 9% at the end of 2011, and economic forecast predict the creation of 80,000 to 100,000 jobs 1 year out.
Western Alliance has been hitting it hard and running against the trend in the state. Recently, results for the 12 district for Q1 indicate average year-over-year loan growth was a negative 60 basis points.
Western Alliance Bank by contrast grew 27% on a year-over-year basis. Success in Arizona is due to our business team, but also we have seen a decrease in local competition.
Big bank competition remains constant, however. Overall, the indicators for the economy are improving.
Personal income, wages and employment are all growing.
Kenneth Vecchione
Bank of Nevada earned $3.8 million and recorded its sixth consecutive quarter of profitability amidst a still-challenging asset quality environment. Pretax precredit income declined to $13.7 million as a slight decrease in revenue and slightly higher operating expenses accounted for the quarter-to-quarter decline.
Pretax precredit ROA still remains a healthy 192 basis points.
Kenneth Vecchione
In Las Vegas, the economy is getting better, although it can be somewhat uneven at times. Recently, there have been more home starts, unemployment is trending down and traffic through the airport has increased.
However, business owners remain still in a wait-and-see mode. There has been some national builders that are beginning to buy property in Las Vegas, and that's an encouraging sign.
Housing inventory has declined under 1 year inclusive of shadow inventory.
Kenneth Vecchione
At Bank of Nevada, the challenge remains on the asset quality side. Improving economic performance on the strip has yet to fully manifest itself in the Las Vegas community.
Therefore, our borrowers, some who have struggled to keep their loans current for the last several years, will continue to struggle until economic activity resumes in the Las Vegas community. Some national banks have withdrawn from the market, thus affording us the opportunity to loan money to bankable credits.
Kenneth Vecchione
At this point, I'm going to turn the presentation over to Dale.
Dale Gibbons
Thanks, Ken. To recap, for the second quarter, our net interest income was $70.8 million, which was 11.9% above that of 2Q of '11.
As Ken also mentioned, interest income was higher and interest expense was lower on both a linked quarter, as well as a year-over-year basis. Noninterest income was essentially flat in the first quarter, down from 1 year ago, however, as it included a nonrecurring gain on bank owned life insurance.
Dale Gibbons
Total revenue was a record $76.6 million, up over 9% from $70.1 million in the second quarter of last year. Operating expense increased to 4.8% to $44.5 million in the second quarter from the same quarter 1 year ago and was up slightly from the first quarter as modestly lower compensation costs were offset by elevated legal, professional and data processing expenses.
With revenue growth nearly double the growth rate in operating expense, pretax preprovision income was up 16% to $32.1 million, which was a new high. The credit loss provision was $13.3 million compared to net charge-offs of $13.9 million, resulting in an ending allowance to total loans of 1.89%.
As Ken mentioned, loss and repossessed assets fell to just under $1 million, which was the smallest charge we've experienced in over 2 years.
Dale Gibbons
A gain in our trust preferred valuation, coupled with securities gains, resulted in pretax income of $19.4 million and net of taxes and discontinued operations, $14 million, $0.15 a share, 3x where we were in the second quarter of 2011.
Dale Gibbons
As we've projected on our last call, our interest margin declined 7 basis points to 4.46% lower as loan yields were -- lower loan yields were partially offset by lower funding costs. Our efficiency ratio improved modestly to 56.4% while a pre-prereturn on assets continues to hover in the 180s.
Our ROA was 80 basis points in the second quarter. Approximately 25% of our provision expense was incurred to cover loan growth, which cut our ROA by about 12 basis points.
The 7-basis-point decline in the margin was driven by loan yields, following 18 basis points to 5.5% as shown on the graph on the lower left. However, the reduction in the margin was mitigated due to an improved asset mix as loans now comprise over 70% of assets and as well as from the lower funding costs dropping to 43 basis points and modestly higher securities yields.
Dale Gibbons
In aggregate, probable assets declined slightly to $410 million at June 30 from $416 million at the end of the first quarter. they're down 21% from $516 million 1 year ago.
Dale Gibbons
Within the problem asset category, watch loans fell by $41 million, the classified accruing loans increased by $38 million, almost all of which was in Nevada. Of the $105 million in nonaccruing loans, as of June 30, $54 million are current with regard to contractual principal and interest payments.
Dale Gibbons
Other real estate declined from $81 million to $76 million during the quarter. This included $7 million of sales at 98% of carrying value.
Loss on sales and valuation was $1 million during the quarter, and at 6/30 repossessed land is held at 16% of originally appraised value and improved property at less than -- sold at 39%.
Dale Gibbons
Using our semiannual OREO appraisal schedule, 30% of our other real estate is up for reappraisal during this quarter. Our capital levels at each affiliate and consolidated remain strong and are well above the current requirements to be considered well capitalized, as well as those of Basel III going into effect at 2013.
As our return on assets has increased, our internal capital generation has fully supported that of our growing balance sheet. Current liquidity remains strong as cash and securities increased from $56 million at the end of March to $65 million at June 30.
Dale Gibbons
Our loan and deposit pipelines remain strong. As we expect, loan growth excess of $100 million to -- per quarter to continue.
Our net interest margin -- for the third quarter, we expect our net interest margin to continue to slip at a pace similar to the 7 basis points that we had in the second quarter as our average loan yield on new loans is about 60 basis points lower than the yield on the loans paying down. However, considering our balance sheet growth, we still expect our net interest income to continue to climb as it did in 2Q.
Dale Gibbons
In addition, as a result of achieving over 10% Small Business Lending Fund growth from the baseline, preferred dividends service should fall from $1.3 million in the second quarter to $350,000 this quarter. Operating expense should be fairly stable through year end, which, when combined with our rising revenue, should result in continued efficiency ratio improvement.
Our asset quality in Arizona -- in California remains strong. But it's still choppy in Nevada as OREO appraisals firm significantly during the quarter as Ken discussed, the classified asset migration increased.
We've had early success at our Beverly Hills office that opened in April, and in June 30, it had $8 million in deposits and $30 million in loans. In August of 2010, we opened our Los Angeles office, which now has $185 million in deposits and $153 million in loans.
We continue to look for other opportunities in retail expansion.
Dale Gibbons
And at this time, we'd like to open it up for questions.
Operator
[Operator Instructions] And the first question comes from Joe Morford of RBC Capital Markets.
Joe Morford
I've got a few questions on credit. I guess first for the OREO appraisal spends, can you talk about what the gross write-downs were in the quarter?
And just in general, should we -- are we at a point where we should start to see less volatility in this line item? And then related to this, when should we start to see some of the other credit-related workout costs start to come down like the legal fees and the repossessed, other repossessed asset expense?
Robert Sarver
Yes, the actual appraisals we got on the REO was about a breakeven, but we had a write-up, a little over $1 million that we couldn't take because while the property was written down quite a bit from when we made the loan, the -- you can only write the property back up to the level that it was taken in when it came in as REO. So at this point, I think going forward, the REO number should not be material.
I think the valuations are flat to maybe even improving a little bit in terms of where we have everything marked. In terms of the credit costs, yes, we still -- we're still running probably about $1.5 million a quarter in collection costs.
That excludes even people and salaries, just external collection costs and REO costs. And the number, when you -- when we look at and try to forecast the number of REO properties that are kind of coming in versus what's selling, I think you're going to see that number start to gradually decline over the next 3 or 4 quarters of those costs.
So we should be picking up a little benefit there.
Joe Morford
I guess lastly, just follow-up to -- despite the steady improvement in credit, the charge-off level itself is still relatively elevated, up over 1% of average loans. When do you think we'll start to see that fall back to more normalized levels?
Robert Sarver
I think we have -- well, first of all, I'll say, we're not really getting new problem credits. It's just that some of the problem credits we have are still working their way through the system and some of them are turning out where we have some losses to recognize.
But I think we're going to see a step-down in terms of loan losses, and that step-down's either going to be next quarter or the fourth quarter.
Operator
And our next question is from Casey Haire of Jefferies.
Casey Haire
Just a couple of follow-ups on credit. Can you give us a little bit of color on the Nevada credits that pushed the classifieds higher?
And then also the $92 million that's still on the watch list, just your outlook there and how much of that is from Nevada?
Robert Sarver
Yes, the one thing I'll say about the loans that moved, the bulk of those loans are current. And we just finished with a pretty tough exam process and we had a handful of loans that moved from watch to sub that I think the collection outcome is going to be pretty good.
And as I said, the -- for the most part, the payments are current. So I wouldn't read too much into that.
Casey Haire
Okay. And the $92 million on the watch list, how much of that is Nevada?
And how comfortable are you with that kind of...
Robert Sarver
About half of that is Nevada.
Dale Gibbons
Yes, $55 million.
Casey Haire
Okay. And then just switching to, I guess, to capital, loan pipeline sounds pretty good.
You guys are growing risk-weighted assets at a decent clip here. But the capital generation is not as fast, Tier 1 coming down a little bit.
How comfortable are you -- how low can you run that ratio? And would you slow down loan growth to prevent an offensive-minded capital raise?
Robert Sarver
We don't plan on an offensive-minded capital raise, unless it's in conjunction with a screaming deal. So I -- hopefully, that answers your question.
And on the credit stuff, I keep a pretty good handle on that. I was just in Vegas yesterday at the special assets meeting, and credit doesn't have me real concerned right now.
Whether the cost in charge-offs start coming down significantly in a quarter or 2 quarters or 3 quarters, it's coming. So I guess that from that standpoint, I'm just not -- that's not a hot button for me right now.
Dale Gibbons
Yes, 75% of our provision expense was incurred to cover the legacy book and 25% kind of going forward. And what we're seeing is, again, as we've talked about it in the past, loans originated during what we call kind of the bubble year.
It is where those losses are still coming from. And our asset quality performance, since that time, since that kind of the mid-2000s, has been, I think, been very strong.
And so as we continue to see that fall off, it was a little bit higher this quarter, as you saw in the migration, in terms of kind of the classified assets. But again, all but $2 million of that was in Nevada, that number is getting smaller.
We feel pretty good that kind of going forward, that our provision costs can fall off as our NPAs decline, and consequently, our internal capital generation can support our growing balance sheet.
Casey Haire
Okay, great. And then just last one for me on the margin, the NIM down 7 bps.
How much more flexibility do you guys have on the deposit side, with loan yields coming down pretty -- at a pretty decent clip here?
Dale Gibbons
Well, we saw a little bit of improvement this last quarter, and frankly, and I think there's a little bit more room, but that is a declining benefit that we're going to be able to see. I mean, our cost of funding earning assets was 43 basis points.
I think we can continue to see that ebb. But that is a little bit of pressure, but again, how we think we're mitigating that is really on the net interest income line as opposed to necessarily the margin as we think our margin is going to continue to slope downward here, but not more rapidly than kind of what we've seen.
Operator
And the next question is from Brad Milsaps of Sandler O'Neill.
Brad Milsaps
Dale, maybe just back to the -- I think sort of the loan yield data you mentioned. I want to make sure I heard you correctly that new loan generation coming on the books at roughly 60 basis points lower than where the current load yield would be for the second quarter, is that correct?
Dale Gibbons
Lower than where the loans are paying off. Yes, so -- yes, so the replacement loans are 60 basis points lower.
Now the reason why the margin fell faster than that is because we had net loan growth as well. So -- but our margin wouldn't be -- wouldn't have declined as quickly if our loan balances were stable, but we're putting on loans at 60 basis points lower than the loans being paid off, and that's pulled it down.
Brad Milsaps
Okay, okay. But that wouldn't imply necessarily high 4%.
Is that -- I mean it sounds like you're going up market and getting...
Dale Gibbons
No, no, no. No, absolutely.
Actually, they're over 5%.
Brad Milsaps
Okay, okay. So new loans would be coming on the books at over 5%?
Dale Gibbons
Yes, they are. They're over 5%.
And the other thing to point out as well is, and we've talked about this a little bit on our first quarter call, but during the first quarter, and in fact, kind of late into the first quarter compared to the second, we put on a fair amount of qualifying SBLF loans to get our dividend rate down to 1%, which happens effective July 1. And so that reflected kind of an increase in the decline in the yield of loan portfolio, which, as we talked about, dropped 18 basis points during 2Q.
Brad Milsaps
Do you think you guys -- this is for Robert or Dale, do you think you're able to get -- maintain that above 5% because it's just a lack of competition, particularly in some of your markets? Or you just hear things about sub-4% fancying out there, even lower, so just kind of curious kind of what you guys are seeing.
Dale Gibbons
Well, it's partly a mix thing. I mean...
Robert Sarver
We don't do much sub-4%. I mean, what you got is, there are certain types of loans that are a little more like commodity.
That's like a fully stabilized commercial real estate, an owner-occupied building. We're not competing as much in the commodity-based pricing.
And the stuff we have, even on the owner-occupied side, is a little more relationship-driven with other credit products, so we don't really see ourselves having to drop to the rates of some of the larger banks in order to keep and grow new customers, commercial customers.
Brad Milsaps
Okay. Yes, I was just curious because you guys go upmarket, and you talked about doing a higher-quality credit, typically that demands a lower rate.
So that's a good color. And then secondly, just on the provision, I know you talked about last quarter some of the provision was driven by an exam of the Nevada bank.
There were several credits that went on nonaccrual that maybe shouldn't have been, but the regulators felt that that's where they needed to be. And then you mentioned this quarter something else about an -- maybe it was another bank, but just kind of curious kind of what -- maybe between the 2 quarters what the differences in the provision would've been, kind of with the exam and then whatever occurred this quarter that drove it higher or kept it in line...
Robert Sarver
Well, I mean, I don't -- it's kind of hard to tell. I mean -- listen, at the end of the day, some of these credit calls as to whether you got to watch credit or subcredit are a little bit close calls.
And some of the stuff that went on nonaccrual, all I can say is there's some fairly positive events with a few of the larger ones that within the next 6 months, they'll be back on accrual.
Operator
And our next question comes from Brett Rabatin of Sterne Agee.
Brett Rabatin
I was just hoping to get some additional color maybe on the C&I loan growth you had this quarter, obviously, pretty strong. Was it industry-related to anything in particular, was it pretty broad-based?
Can you give me some flavor around the C&I loan growth?
Robert Sarver
No, it was pretty broad-based. The number of customers we have is continuing to grow and I would say broad-based in terms of type of customer, but more so -- the origin of the credits are primarily in the Phoenix and San Diego marketplace.
Brett Rabatin
Any shared national credit-type properties or -- any type of share credits?
Robert Sarver
Yes, we said we had about $22 million of net purchase loan growth, and some of those are shared national credits, yes.
Brett Rabatin
Okay. And then I didn't see the PowerPoint on the website.
I didn't know if you had the TDR number handy there.
Dale Gibbons
It should have been on there. It's $115 million.
Operator
The next question is from Terry McEvoy of Oppenheimer.
Terry McEvoy
Question, the new capital rules, does that change your strategy at all in terms of growing loans? I mean, you're already running off residential mortgage, which will help risk-weighted assets, but you're also adding construction loans, and that's been something you've talked about in recent quarters.
How do you feel about continuing to grow in light of what that would do to risk-weighted assets and pro forma capital?
Dale Gibbons
Brian, could you hit me with that -- could you hit me with that, again, Terry?
Terry McEvoy
Sure, yes. As you look at the new capital rules, there is a higher risk weighting for residential mortgage and construction and development.
How does that change your strategy in terms of growing construction loans, which we've seen in recent quarters? Would you see yourself being less enthusiastic about adding those loans because of the capital implications?
Dale Gibbons
Well, no, I wouldn't. I mean we're really focused on in terms of what we can do for risk-adjusted return.
And I still think that really controlling ratio, although the risk-based capital, put it aside a little bit, is going to be a tangible common equity ratio as in the leverage ratio that are used by the regulators, as well as by the Street. So we're looking to make good loans to provide a good reasonable return.
I know they stepped up the risk-based capital weightings a bit for those types of loans, but I don't expect that to really kind of affect our underwriting.
Robert Sarver
At least in the short term, because I think what we'll see is and what we're seeing now is, we can make some construction loans on really good projects with a lot of equity and well-priced, and so it makes sense. But a year from now or 2 years from now, it may be that the bigger banks jump back in that market and drive that pricing down so that when you compare the pricing and some more relaxed structure along with these increased capital, it may not be as attractive to us at that point.
But today, it is.
Terry McEvoy
Understood. And then just the other question, any update on new hires throughout the quarter and pipeline of new lending teams?
Robert Sarver
Yes, looked at that actually just yesterday. From a year-over-year basis, we've hired 24 net new additions in terms of business development officers, and from first quarter of '12 to second quarter of '12, we hired 4.
So you see like about a 45-person increase of the total FTE of the company. 24 of that -- and that's a year-over-year basis, 24 of that came from business development officers.
Another 12-ish, maybe 15 people were people that also support the business development officers. So our overall growth in FTE has been really concentrated on the front end of the business in terms of bringing in new business.
Operator
And the next question is from Brian Klock of Keefe, Bruyette, & Woods.
Brian Klock
Maybe just a -- maybe a follow-up on Terry's question about the new business development officers. I think you guys just recently hired a C&I lender in Phoenix from a large bank.
I mean, is that pipeline -- has that business development officer been able to bring in any new loan growth yet or is that something that's -- something of a pipeline that you can still capitalize going forward?
Robert Sarver
Yes, I'm not certain who you're referring to, and even if you -- even if I knew, I wasn't going to -- wouldn't directly address it. But I'll say that we have brought in actually 2 people from another, I'll say, larger bank than us, and they have already put forth through credit committee, I will say, 3 credits ranging probably from $16 million to $50 million and we have approved them and we're in the process of hopefully closing them as we go forward.
So yes, they did come over with a book of business and we've parceled through some of that and we've taken what we think are the better credits.
Brian Klock
And it seems like when we came out to visit you guys in May, I mean the Phoenix economy is booming and you guys still continue to get, I guess, more than your share of market share growth there. So it seems like even if you get away from the construction industry, which is rebounding in the housing market, there's still a lot of opportunity, it seems like, in Arizona.
Robert Sarver
Yes, definitely.
Brian Klock
Okay. And maybe just a real quick question, I guess Basel III, and you guys did give a Tier 1 common pro forma in the slide deck that would, I guess, incorporate the NPR.
This is actually today, it's 7.5% Tier 1 common, but as you bring down the NPAs and internally generate capital going forward, obviously, that ratio should move up, I guess, as we go forward.
Dale Gibbons
Yes, absolutely. I mean, we're looking at our internal capital generation to -- frankly, to accelerate, and it's been on that path for the past several quarters.
We think that we can continue to support our balance sheet growth with internal capital generation.
Brian Klock
Okay. Then it seems like right now, pretty stable credit and improving, and as you get -- like you said, as you get those NPAs worked down, not only is it going to help on the provisioning, which helps the internal capital generation, but also should help on the risk-weighted asset under that NPR.
Is that fair?
Robert Sarver
Yes.
Operator
And next, we have a follow-up question from Casey Haire of Jefferies.
Casey Haire
I just wanted to touch base on the pretax preprovision to average assets ratio has kind of stalled out here at 1:8 over the last couple of quarters. Can you just give us some updated thoughts as to how you're thinking about that going forward?
Dale Gibbons
Well, as we talked about -- at the beginning of the first quarter, we had some -- we had a little bit of a higher expense load and you see that again in Q2 primarily in kind of legal and professional. We're not expecting those levels of expenses to continue at this rate.
Hence, my guidance that we think our expenses are going to be comparatively flat through the end of this year. Meanwhile, we should be looking at additional revenue growth.
We're expecting our balance sheet to continue. Continued loan growth, we're going to -- we think we're going to see that.
And in addition to that, the day -- the calendar works for us now, too. I mean, the back half of the year is actually a few days longer than the first half of the year and almost all of our income is day-based and so we're looking for more income coming in from that as well.
So we think that our net interest income is going to continue to climb. Our expenses are going to be comparatively flat and our pre-preincome will continue to rise.
And I think you'd see some kind of a modest ratio of improvement as well. We have a goal there to get to that above 2%, and then we'd like to kind of step it up a bit higher than that also.
But I don't think we're stalled out at 1 80 [ph].
Casey Haire
Okay, great. And then just one follow-up.
The tax rate came in a little late. How should we think about that going forward?
Dale Gibbons
Yes, that's -- probably around 30%. We have stepped up our holdings of tax-exempt investments, and incidentally, we're really focused on revenue so we don't get caught up in a lot of the general obligation issues that are appearing from time to time.
So -- but at the same time, that number is probably going to rise our incremental tax rates from where we are.
Operator
And this concludes our question-and-answer session. I would like to turn the conference back over to Robert Sarver for any closing remarks.
Robert Sarver
Sure. Yes, thanks.
So in summary, again, organic growth continues to be kind of our main priority. I will say, though, we're looking at some select acquisition opportunities now that are getting a little more attractive.
And so I think you may see something there from us in the next couple of quarters. In addition, a lot of our growth has been driven, I think, from our brand.
Our local brand identity is getting pretty strong. Ken talked about consistency of earnings.
We've also had consistency for a number of quarters in these economies of providing reasonable credit to customers and relationship banking and good service and so is our brand is looking pretty good. Our loan to deposit pipelines are both over $0.5 billion throughout the company.
And our challenge is now to begin to pick up some of those operating efficiencies, whether it's with continued elevated insurance costs, FDIC insurance costs. We have some opportunity there in Nevada or credit collection costs, REO costs, there is another $5 million to $10 million of expenses there that we need to wring out that aren't producing any income and we need to do that over the next 3 to 4 quarters.
Robert Sarver
But overall, we're still pretty optimistic. I will say the national economy looks like it's slowing.
Locally, we're seeing a pickup in housing and a pickup in tourism. But overall, the national economy is -- looks like it's slowing a little bit, so we're trying to remain fairly cautious on the loan side in terms of credit structure and make sure that we're not sacrificing there.
Robert Sarver
So with that, I think the question's pretty much answered all the key areas for the quarter for us. I'd say it was a good quarter for us.
It wasn't a great quarter, but it was a good quarter and it's continued progress. Thank you.
Operator
Thank you. The conference is now concluded.
Thank you for attending today's presentation. You may now disconnect.