Jul 27, 2015
Executives
Robert Sarver - Chairman and Chief Executive Officer Dale Gibbons - Chief Financial Officer
Analysts
Joe Morford - RBC Capital Markets Brad Milsaps - Sandler O'Neill John Moran - Macquarie Capital Casey Haire - Jefferies Gary Tenner - D.A. Davidson Brian Klock - Keefe, Bruyette & Woods
Operator
Good day, everyone. Welcome to the Earnings Call for Western Alliance Bancorporation for the Second Quarter 2015.
Our speakers today are Robert Sarver, Chairman and CEO; and Dale Gibbons, Chief Financial Officer. All participants will be in listen-only mode.
[Operator Instructions] You may also view the presentation today via webcast through the company's web site at www.westernalliancebankcorp.com. The call will be recorded and made available for replay after 2:00 PM Eastern Time on July 27, 2015 through Thursday August 27, 2015 at 9 AM Eastern Time by dialing 1877-344-7529 and entering passcode 10068074.
The discussion during this call may contain forward-looking statements that relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. The forward-looking statements contained herein reflect our current views about future events and financial performance, and are subject to risks, uncertainties, assumptions and changes in circumstances, that may cause our actual results to differ significantly from historical results and those expressed in any forward-looking statement.
Some factors that could cause actual results to differ materially from historical or expected results, include those listed in the filings with the Securities and Exchange Commission, except as required by law, the company does not undertake any obligation to update any forward-looking statements. Now, for the opening remarks, I would like to turn the call over to Robert Sarver.
Please go ahead.
Robert Sarver
Thank you. Good morning everybody.
Welcome to the Western Alliance second quarter earnings call. First, I’ll summarize some of our high level performance for the quarter, the effect of the merger with Bridge Capital Holdings, and then Dale will discuss our results in a little more detail.
After that, we’ll offer you an update to our outlook and then open the lines for your questions. We closed the Bridge transaction on June 30.
Consequently, all the balance sheet data, non-performing asset information, and capital ratios are reflected in the consolidated entity. However, except for merger charge, none of the income statement information where the revenue, expense, or performance ratios includes any operating performance from Bridge.
At June 30, Bridge increased our loans by $1.45 billion, deposits by $1.74 billion, equity by $435 million of which $275 million ended up in goodwill, and total assets by $2.22 billion. Net income for the second quarter was $34.7 million or $0.39 a share.
However, this included a $7.8 million charge for employment contracts, severance, and some legal fees from the merger; a $7.7 million charge for increase in the liability for our outstanding trust preferred securities as we had a new valuation mark from the issuance of $150 million of subordinated debt during the quarter; and net gains from the disposition of repossessed assets of $1.2 million. Net of tax, these non-recurring charges reduced earnings by $0.10 a share giving us operating earnings performance of $0.49.
Our top line revenue growth was very strong at a 15% increase from the second quarter of 2014 to $114.4 million, and again this includes nothing from Bridge. Meanwhile, the increase in expenses was held to a third of that at 5% taking our efficiency ratio down again to a record 44.6% and increasing our pretax pre-provision income year-over-year by 26%.
The strong operating leverage of Western Alliance is the hallmark of our franchise and something we concentrate on throughout the year. Excluding Bridge, loans were up $515 million year-to-date and $95 million for the second quarter.
Second quarter growth is net of $46 million in loan sales and $100 million in other reductions in which we exited existing relationships because pricing had tightened and we see better lending opportunities. Year-to-date, organic deposit growth was $734 million driven by a record first quarter performance, and the second quarter was flat.
During the second quarter, we continued to prove our mix as we moved to $150 million from CDs into low cost transaction accounts, primarily DDA. Consistent with our earnings performance, tangible book value increased $0.53 a share during the quarter to $11.25.
Non-performing assets declined to 88 basis points of total assets at quarter-end from 123 basis points a year ago, while we marked our sixth consecutive quarter of net loan recoveries. Capital remained strong with the tangible capital equity ratio climbing to 8.7%, the highest level since the company was founded 20 years ago.
Despite the strong capital, our operating return on tangible equity remained above 17%, and our operating return on assets was 1.56%. Net interest income for Q2 increased $5.6 million sequentially, and 15.8% over the prior year to $108.7 million driven by an increase in average loans, the day count, and disposition accretion on acquired loans.
Non-interest income rose modestly, resulting in total revenue of just over $114 million. As I mentioned earlier, our expense control remained strong with an increase of only $2.6 million during the past year to $54.6 million, which was less than 20% of the $15 million increase in revenue over the same period.
Despite our loan growth, no loan loss provision was required as asset quality continued to improve, and our string of net loan recoveries continue. Disposition on gains of real estate were $1.2 million as the sales proceeds exceeded their appraised value by over 10%.
Writing up the value of our trust preferred debt we issued resulted in a non-cash charge of $7.7 million for the quarter. This charge was determined by comparing the rate on our newly issued subordinated debt of LIBOR plus 3.2% to the discount rate we used in the first quarter for our trust preferred of LIBOR plus 5.96%.
We undertake this valuation process because no market values are available as our trust preferred debt does not trade independently such that it’s included in various CDO pools. However, we believe the trust preferred should trade wide of the subordinated debt since it has a longer maturity, it’s junior in claim to the subordinated debt holders and is issued out of the parent instead of the assured depository.
Comparing various yield curves, we determined the spread should be 4.69% over LIBOR. Discounting at this spread instead of 5.96% increased the liability for this unpaid debt by the charge incurred.
The merger charge entirely results from change in control severance expense and legal from the Bridge transaction and is consistent with the pro forma performance we modeled. Pre-tax income was $45.3 million, producing $34.5 million in income available to common shareholders.
The diluted share count of 88.7 million was not affected by the 13.1 million shares we issued to close the Bridge deal and resulted in GAAP EPS of $0.39. Net of the debt valuation of merger charges and the OREO gain, we considered operated operating earnings per share to be $0.49.
Dale.
Dale Gibbons
The cash position was very high at quarter end as certain positions were liquidated in advance of the merger and will drop substantially in the current period. The securities portfolio balance was flat, while the yield slipped to 3.06%.
Loan yields edged up aided by an additional day and an increase in disposition accretion on impaired loans, while interest-bearing funding cost was stable at just over 30 basis points. The higher loan yield drove the margin increase 6 basis points to 4.41%.
Net of disposition accretion the margin was up 2 basis points to 433. Both the adjusted and on adjusted margins have been essentially flat during the past year.
With taxable equivalent revenue rising $6 million during the quarter to 122, while operating expenses rose just 400,000, the efficiency ratio fell to 44.6%, nearly 5 point lower than the 49.3% in the same quarter last year. Western Alliance FTE employees before Bridge were 1155 June 30, which was up 24 from March 31.
While Bridge added 256 FTE bringing the total to 1411. Our improved efficiency cost pre-pre-ROA declined to 2.14%, which was the post-prize this high.
ROA was 1.24% weighed down by the merger and debt evaluation charges Robert mentioned. On an operating basis ROA was 1.5 cents.
Reflecting the Bridge transaction, total assets declined to $13.5 billion. Bridge loans were booked net of a $25 million in credit and rate discounts with an average life or 4.25 years.
The increase in allowance for credit losses is solely from net recoveries during the quarter as no reserve was booked for Bridge and no provision for loan losses was taken. Other right assets include $260 million in additional goodwill and $15 million in core deposit intangible assets with a 10 year life from the Bridge merger.
Shareholders’ equity rose $460 million during the quarter from the share issuance for Bridge, as low as second quarter earnings. Tangible common equity rose $189 million to $1.14 billion and 11 [ph] in the quarter on a per share basis.
Excluding Bridge, loans increased $95 million for the quarter and $550 million for the first half of 2015. Organic loan growth was $100 million in California, $50 million in Arizona, while Nevada fell $42 million.
In aggregate, loans in the central business lines were flat with increases in public finance and mortgage warehouse offset by declines in equipment and corporate finance. With the addition of Bridge’s $1.1 billion in CNI loans, this segment of the portfolio now exceeds owner occupied and investor commercial real estate for the first time.
Excluding Bridge, deposits were flat for the quarter and up $734 million for the first half. As I mentioned in the first quarter earnings call, our record first-quarter growth included a run up in certain title company accounts in March.
The decline in those accounts in the second quarter had the effect of pulling forward our second quarter growth into the first quarter. However, we did have a mixed improvement for the second quarter as DDA increased $79 million, which was offset by a reduction in CDs.
CDs now comprise only 15% of deposits, compared to 20% both last quarter and last year. Company originated organic adversely graded assets consisting of other real estate, non-performing loans, other classified loans, and special mention loans declined slightly to $255 million as credits continue to move through the collection process.
For the acquired segment, the Bridge transaction increased adversely graded loans by $59 million with the remainder being residual amounts in the Western Liberty and Centennial acquisitions that were done years earlier. The $96 million total is net of $26 million in credit and rate discounts.
Three quarters of the $59 million of non-performing loans that were showing in June 30 were current with regard to contractual interest and principal payments at June 30. Gross loan charge-offs were $2 million for the quarter during the quarter, only 9 basis points of total loans annualized.
Offsetting these losses were recoveries of $5 million resulting in net recoveries of 13 basis points, which was our sixth consecutive quarter of net recoveries and drove the reason why no provision was required. The ratio of the allowance to total loans fell from 1.11%, since in accordance with GAAP Bridge loans were booked without a reserve, but the end paid principal to balance was discounted by $25 million.
These two computations adjust our allowance for loan and leased losses to how it may have been presented if acquired loans were not discounted and a reserve was used instead as it is for non-acquired loans. In the first analysis, the allowance of $115 million is divided by loans held for investment of $10.3 billion, which derived the reported allowance ratio of $1.11 billion.
Pulling out, total discount discounted acquired loans of $1.7 million results in loans of the reserve is supposed to support of $8.6 million and leave the ratio of 1.34%. Alternatively, the second computation leaves the acquired loans in, but adds the total loans and the allowance to $25 million credit discount that has been taken.
Now with an adjusted allowance of $140 million and loans of $10.3 billion, the ratio would be $1.35 billion. We believe this ratio is more indicative of the reserves available for inherent losses in the loan portfolio than the 1.11 reported.
This ratio has not been adjusted for an additional $22 million in rate discounts on the acquired loans. Capital ratios continue to climb with strong earnings performance outpacing balance sheet growth.
The Bridge merger with its roughly 90% 10% stock and cash consideration mix was essentially capital neutral. The $150 million subordinated debt issued by the bank qualifies as Tier 2 capital for both the bank and consolidated company and was what drove the total capital ratio of about 12% in the second quarter.
Robert Sarver
In terms of our outlook for the rest of 2015, Bridge has strong momentum moving into the third quarter with solid business development pipelines. I've been out and had a chance to meet with pretty much all of the employees other than that to remote offices and feel good about where we are in terms of growing their business.
For the quarter it grew its loans and deposits each about $100 million, compared to the second quarter and they appear on track for similar performance again as part of the Western Alliance team. We have two new lines of businesses, we are exploring in the middle of underwriting and really analyzing and I think we're probably going to go forward on these; one is a business line where we actually bank venture capital VC companies, this will be more of a heavy deposit.
Opportunity was some credit, as some of these companies take loans to secure it with obligations from their investors to fund capital contributions. In addition, and as you know we have a large business and health care; we bank lot of physicians and hospitals.
We are in the process of underwriting the newline of business with Bridge to be banking earlier stage healthcare companies. There’s a lot of opportunities; this is a very growing space.
Bridge already has offices in a couple of the best markets, which includes Boston and of course we have a big presence in San Diego, which is also an area that has a lot of these companies. Bridge’s efficiency ratio was 61% in the second quarter.
We’re quite confident that we can achieve our targeted efficiency ratio improvement of 15%. These gains will be realized over the next six quarters culminating in system conversion near the end of 2016.
Irrespective of the efficiency improvement, EPS will improve by about $0.01 per quarter from the accretion of loan marks being excess of amortized core deposit intangible assets. However, this gain will be partially offset with a commencement of compliance of the Durbin Amendment and the FDIC large bank pricing schedule for deposit insurance or institutions with average assets in excess of $10 billion during the past year, these changes began on July 1 for us.
Organic loan growth during the quarter was tempered by $46 million of loan sales, lower yield in credits as well as our access from approximately $100 million of similar price relationships, most of these are larger accounts that tend to grow and some of the big banks come in and offer significantly lower pricing on these credits. This was undertaken to provide inventory space for higher yielding loans as our pipelines remain strong.
We expect growth to accelerate from the second quarter. We will affirm our guidance again for the year in excess of $1 billion in organic growth in loans and deposits.
This should be augmented by Bridge. So we will exceed that as their pipelines are robust as well.
Our expectations for deposit growth mirrored that of the loan growth. As we told you, we recorded $700 million in growth in the first quarter, couple of hundred million of that was just short-term right at the end of the quarter.
And so, as that went out, we replaced that during the second quarter. Bridge earned an interest margin of 4.87% million in the second quarter on $1.8 billion in earning assets, which exceeds our 4.41% margin for the second quarter.
However, the immediate margin benefit from this transaction is going to be probably differed to the fourth quarter due to our higher interest cost from our issuance of $150 million of subordinated debt in late June. The margin should improve in the fourth quarter after we pay-off the final $58 million of those god-awful 10% notes that we originated 5 years ago that mature in September and are not going to be replaced.
Our efficiency ratio will rise in the third quarter from a record 44.6% as we integrate Bridge and begin to recognize integration efficiency gains. We expect the ratio to remain well below 50%.
And after initial jump, it will continue its gradual downward slope. We’ve had a record run of improving asset quality, consecutive periods in that recoveries and while this trend must end sometime.
Having again reviewed the strong quality of Bridge’s portfolio as well as our own, we do not see any adverse changes in the near-term horizon, as collateral valuations continue to recover and the economic conditions in the markets we are in continue to strengthen. At this time, we would like to open it up for questions.
Operator
[Operator Instructions] And our first question will come from Joe Morford of RBC Capital Markets.
Joe Morford
Thanks. Good morning, everyone.
Robert Sarver
Hey, I got a question for you – you were in the question queue before we even started the damn presentation.
Joe Morford
Well, it’s a style then and logged when I dialled in.
Robert Sarver
How do you know we weren’t going to answer your question before we had a chance to answer it?
Joe Morford
I’d come up with a different question.
Robert Sarver
Okay. Well, that’s resourceful.
What have you got?
Joe Morford
I’m curious a little more on your loan sale activity and just these relationships exists, which portfolios are these coming from, the types of credits, and do you see much more of that to do, or have you pretty much wrap that up and just kind of curious about just pay down activity in general?
Robert Sarver
Yeah, we are actually getting pretty good at syndicating credit. We just syndicated $105 million credit to a customer of ours that’s in the hospital business, actually long-term acute care business.
And so, we are doing two things. One, we are now able to take larger credits and syndicating them ourselves.
And two, in a couple of areas where we originate some larger credits like the municipal finance business, we are beginning to sell down some of those credits and skim – get a skim on the yield, the rate, and the fees, to keep our interest margin up high. That’s number one.
Number two, we have customers that they get bigger and other banks go after them. They were offered opportunities to get lower rates, so we were in a credit this quarter.
We have won four banks and a credit and a large Las Vegas-based company, non-gaming company, that we had $40 million out in a credit facility at LIBOR plus, I think, 2.75% with some fees, and one of the large money center banks came in and said they’d change it to LIBOR plus 1.75%, and we said sorry, but no thanks. We don’t make enough money at that.
You guys do, it’s perfect for you, but not for us and we exited that relationship. We had two of those.
So, fortunately, we have a pretty good pipeline, and we have a lot of different products and so we are just not going to bank credits and businesses where we don’t get the appropriate risk-based return, and we exit some of those.
Joe Morford
Okay. That makes sense, Sarver.
I guess the...
Robert Sarver
We also had a real big first quarter. Sometimes it happens.
Joe Morford
Yeah.
Robert Sarver
Your officers are dealing with their pipelines, and if there is a huge focus and a bunch of stuff get closed at the end of the quarter then it kind of sets them back for the next quarter. So the first quarter was a little bit – I think, we drew $1.2 billion in combined loans and deposits and that kind of set us back in the second quarter.
Joe Morford
Okay. Dale, I was curious to what’s – currently what’s your – the incremental step-up expected in the expense run rate in the third quarter for Bridge?
It sounds like the timings for the savings are going to be in the next six quarters, but the conversions now – not till the end of 2016, is that what you are saying?
Dale Gibbons
Yeah, we are – we are going to get savings coming along all the time, and the costs are going to in part reflect that. It’s a little bit of a barbell on the merger chart.
So, kind of right away as you just saw, we will see some tail event for the next few quarters, and then when we finally do the final conversion that will be the biggest piece. So we should continue to show improvement.
I’m looking for the efficiency ratio to get a – if you take the weighted average of the two to begin with and then you can – I think we can continue to kind of bleed that down a little bit. And then I don’t have an exact day for you in terms of when we are going to get kind of the final nut, which could be on the conversion, but that is going to be a year out.
So, their expenses have been running by $16 million a quarter. It’s what they were in Q2, and so I would look for a dramatic improvement in that, although we expect that we are going to get to kind of the 15% or in other words $10 million over time and you will start to see that immediately, but with some tail later on.
Joe Morford
Great. Thanks very much.
Operator
And the next question comes from Brad Milsaps with Sandler O'Neill.
Robert Sarver
Bradley.
Brad Milsaps
Hey, good morning.
Robert Sarver
How you doing?
Brad Milsaps
I’m doing well. Dale, just on the margin, I appreciate the guidance there.
I know you’ve got a lot of moving parts this quarter with the sub-debt, the payoff of the notes, and then with Bridge coming in. So, if I understand correctly, you kind of expect flattish and then it would start to move up from there given the influence of their balance sheet?
Dale Gibbons
Yeah, yeah, their balance sheet should add to the margin. We still have pricing pressure as everyone does and as Robert kind of alluded to in terms of the exit for some of these transactions, our margin have been fairly stable for quite some time.
And so, I think you still have that pressure coming in, but this particular core, we are going to gain from Bridge like you mentioned and then we have the higher debt thing. That’s pretty much neutral out of the gate and then – but then as we pay off that debt, I’m looking for things to improve a little bit kind of in the fourth quarter and then after that it will depend up on again new organic activities that the company undertakes.
Brad Milsaps
And in terms of the accretion, on a quarterly basis, I think you said $25 million in March, would you expect those to kind of come through similar to what we have seen or would any of that be offset by provisioning as those notes renew? How should we think about that?
Dale Gibbons
Yeah, it’s $25 million. If you did straight lines and not quite straight lines, but that would be about $6 million a year in additional interest income.
The reserve, we would like to see how that goes. I think the reserve was adequate certainly today in my view about 1.34%, 1.35%.
As you know, the new loans that come in, there could be provisioning elements to that. I don’t see anything that’s going to drive us to a notable provision level in the – kind of in the near-term, but that could happen based upon where we are.
So I think the provision could be – could be a little bit lower than maybe what the Street generally has been projecting is what we’ve seen for the past few quarters as well. So – but that $25 million really is their loan loss reserve.
so, you know, I mean, they are not going to have no losses. So you kind of -- to a certain degree, you’ve got to figure over the next five years that that’s just an accounting move taken out of a loan loss reserve and stick it in another bucket.
Maybe in the short run, we can count some of that earnings, but I don’t really look at it as earnings. It’s just…
Dale Gibbons
Certainly as those loans roll over and you generate new loans and then…
Robert Sarver
Yeah.
Dale Gibbons
[Indiscernible].
Robert Sarver
It happened to the old pool in accounting. Made it simpler, you just stuck the reserve on.
Dale Gibbons
We were going to do it that way. I think it’s a lot more clear.
Brad Milsaps
Pooling would be good for M&A. And then finally, Robert, just - any new hires in the quarter?
I think you made six in the first quarter, you made sure maybe the last quarter the pace might be little slower with all the Bridge people coming, but just curious on organic new hires?
Robert Sarver
Yeah. We had a few new hires but they had a few new hires too, so I think our big focus right now is to make sure that not only we keeping other good people which we have so far but really trying to even up, augment some of the staff and get them to take advantage of some of the opportunities with us.
But overall, if you exclude the Bridge people, we brought in another half a dozen new lending relationship people to the company.
Brad Milsaps
Great. Thank you.
Operator
And next, we have a question from John Moran of Macquarie Capital.
John Moran
Hi guys.
Robert Sarver
Hi, John.
John Moran
How is it going? Dale, maybe a quick question just on the asset sensitivity and I know that you guys have been shifting a little bit more asset sensitive naturally anyway but then Bridge had just a great deposit base.
Do you have a quick look or on kind of how that changes now that that one is closed?
Dale Gibbons
Yeah. It’s pretty much going to be kind of the way that average look of the few institutions together.
So we’ve been migrating to asset sensitivity. We are slowing that down now.
We don’t think we need to be more asset sensitive certainly than we are. And so some of the things that we have done whereby we have about 600 million of swaps to increase the sensitivity on our loans, we are no longer pursuing those.
So it’s going to temper the improvement in asset sensitivity that we otherwise have been generating the past couple of years. Bridge is much more asset sensitive than us, so like you mentioned, in terms of their DDA composition of their deposits certainly moves them to that level as well as C&I loans generally tend to be variable rate as oppose to CRE.
So if you weight the average together say 6 to 1 in terms of balance sheet, that would tend to skew us to being of a bit more asset sensitive. But as I mentioned, we are doing things to mitigate further migration in that direction.
John Moran
Okay, got it. Thanks.
And then just I guess on the – another one on Bridge, I think originally the guidance that you guys have put out there was $3 a share on the incremental shares that would be issued and I assume that now that it’s closed and you’ve really had a chance to kick the tires, there is nothing in there that changes that kind of look on – I think it was by ’17 right?
Robert Sarver
Yeah. Now, we are confident in terms of where we are and our integration plan, and the results that we are seeing.
Bridge is showing good momentum in the second quarter and looks good for the third quarter as well. So we standby really of the estimates that we had in terms of incremental EPS on shares as well as efficiencies that we can realize from them.
Dale Gibbons
Yeah. The cost save numbers we came in at, we are already over 50% executed on those and it’s pretty much just as we thought when we did the underwriting of the deal.
John Moran
Sounds good. And the last one from me was just in Nevada, it looks like just sort of year-to-date it’s growing pretty well, a little bit of a step backwards, this quarter I guess two steps forward, one back, if you could give us any update on what you see going on in that market and what you think the contribution there might be for the rest of the year?
Robert Sarver
Yeah. That one credit I told you like the big one, the $40 million we got out for pricing that was in Las Vegas.
So they get hit with that one big credit, but overall I think they’re going to show growth for the year at a lag Arizona and California a bit, but they’re going to show some positive growth for the year.
John Moran
Sounds good. Thanks very much guys.
Robert Sarver
Thank you.
Operator
And the next question is from Casey Haire of Jefferies.
Casey Haire
Hi. Good morning guys.
Robert Sarver
Hi.
Casey Haire
I wanted to follow-up on the cost save schedule for Bridge and if I understand it correctly you're saying the conversion comes on, you’re going to convert the systems in late 2016, just curious why that seems like an awfully long time now from now, I'm just curious what's driving that, is that conservative and if I understood it correctly, a lot of the cost saves are going to come following that conversion.
Robert Sarver
Not really, we've got – what’s going to happen is, really most of the cost saves are going to happen before the conversion and so we've - just like simple numbers we identified $10 million in cost saves and we've already got over half of that already either executed or the employees have been noticed and that kind of stuff. So really about 80% of those cost saves are coming without that, what we’re finding is, we’re evaluating all the different systems at WAL and Bridges and we’re in the process of determining which systems we're going to be using going forward together, but the good news on that is some of the numbers we’re seeing on bidding that out is, I mean we may be looking a lot more in cost saves because some of these proposals are coming in a lot lower than what both companies are paying together right now; and we didn’t really think about that when we came up with a cost save.
So, within 12 months we’ll hit that $10 million in cost save number, but - I mean the cost saves are kind of important but the reality is there’s still lot more to make on the revenue side, so there is just more upside in terms of the revenue piece.
Casey Haire
Okay understood and just following up on the margin question, just trying to quantify it, if I were to pro forma the balance sheets with the margin, I would end up at around a little less 4.5, does that sound about right for you guys in terms of where you are thinking the margin will end up in the fourth quarter?
Dale Gibbons
Well certainly we will have more information in terms of origination activity, but yes you weight the two margins together it adds about 6 basis points to kind of where we were. You know, we think overall our margin has been pretty stable, we've done some things in terms of kind of moving assets around and backing out of some of the lower yields [indiscernible] wrong on the margin for three years.
Robert Sarver
That would be the number and how you would compute debt.
Casey Haire
Okay. And then just on the deal front you guys got this deal underway or closing in pretty short order, just curious how are activities levels now, are you guys out there and looking, or what…?
Robert Sarver
Yes we are. We do a lot of meetings one-on-one to kind of get to know management it's like Bridge, I mean we're meeting with them the year before we put a deal together, just really understand the cultural aspects and talk to business plans and so we've got a number of meetings that we've had and continue to have with other banks and my guess is within the next six months we’ll be announcing another deal, but there is nothing signed or agreed to.
We’re not at that stage with anybody, but we have a number of ions on the fire, but just make sure we take our time and do it right and make sure we get the Bridge deal squared away and really on track and going to the right direction and then we’ll probably add another one.
Casey Haire
Okay great. Just last one more tax rate, little late this quarter, what's a good go forward rate?
Dale Gibbons
Well the tax rate was late because of the charges that we took and the incremental marginal tax rate is lower than the average tax rate of - our average tax rate is around 26%, 27%. So Bridges tax rate has been about 43% and again I would say if you kind of weighed them together it pulls that tax rate up.
Over time and we think, beginning say in the, certainly in the fourth quarter if not maybe a little trickle into the third, we think we can get that combined rate down. We’re not going to be able to get into as low as we were on our own as Bridges revenue comes predominantly from high tax rate dates, you know California certainly and Massachusetts, but we think there is opportunity there to move the combined tax rate from what you will see in 3Q lower over the next say six quarters.
Casey Haire
Okay great thanks for the questions.
Operator
And next we have a question from Gary Tenner of D.A. Davidson.
Gary Tenner
Thanks good morning.
Dale Gibbons
Hi Gary.
Gary Tenner
Just a question, you had mentioned the new launch of business you are looking at and you mentioned the venture capital business, which I assume you're talking about capital call line types of business…
Dale Gibbons
Right.
Gary Tenner
I’m wondering is that suggesting as well that you maybe more active going forward on early stage in lending what Bridge has historically done.
Robert Sarver
Hey, that’s a good question.
Gary Tenner
[Indiscernible].
Robert Sarver
Yeah, you are kind of up to speed on that, a little, yeah. I mean for one, it just kind of a natural evolution, so a lot of the business Bridge gets does come from DCs but really a lot that they’ve focused on is connections through management and people that actually run the company because they do a little later stage and say Silicon Valley.
But I think we are going to kind of move a little bit in that direction, not a lot but a little bit and so you’re correct in terms of your thinking.
Gary Tenner
Okay. Thanks for that.
And just following up to that – actually just in terms of headcount or ads for that business, do you need to bring in people that are more specially focused on early stage or venture capital?
Robert Sarver
Yeah, you do. I mean the key with all of these specialty areas, we’ve put a good business plan together.
We look at it from a compliance standpoint, from a risk management standpoint, we have a whole process that takes six months to a year to underwrite a line of business but at the end of the day it’s the people you hire to run it. Because all of these specialty types of businesses can do really well and can do really bad, and the big difference is the people, and so yeah, you do, for sure.
Gary Tenner
Okay, great. And then, Dale, you had mentioned, that excess cash balances would come down I guess a fair bit in the third quarter, is that closer to where they were maybe at the end of March or are you going to invest the whole swap of it?
Dale Gibbons
No, it’s not the whole thing but I’m going to say at least say $400 million lower.
Gary Tenner
$400 million lower than the period [ph] on balance.
Dale Gibbons
Yeah.
Gary Tenner
Okay, great. Thanks very much.
Operator
And next we have a question from Brian Klock of Keefe, Bruyette & Woods.
Brian Klock
Hi, good morning guys.
Robert Sarver
You’re the caboose today.
Brian Klock
I’m not as fast as Joe on the [indiscernible]. So I’ll be happy to take save the best the last I guess Robert.
Robert Sarver
Yeah, exactly.
Brian Klock
There you go. So on the commercial side, I just was wondering on the central business line segment, was there any impact from the warehouse lending, was that the reason why there was a little bit of a softness in the commercial loans in the second quarter besides the loan sale activity you talked about.
Robert Sarver
The warehouse business was up pretty good.
Brian Klock
Okay.
Robert Sarver
They had a good quarter. By the way, what we are adding to that, when you see our reporting from Bridge would be the energy infrastructure lending they do and the technology lending.
So those two types of lending as well as related deposits will be in our centrally managed business line book going forward.
Brian Klock
Okay, great. So going into the quarter, if we adjust for some of those activity you talked about with some of the - exiting some of those relationships, if we normalize for those numbers, do you think then if we look at the C&I portfolio ex-Bridge do you think the third quarter is going to be better than that second quarter growth because I guess that first quarter was just a very strong quarter, so to think about that pipeline is pretty good going into the third quarter.
Robert Sarver
Yeah, I agree. Yeah, I think so.
If you take our $1 billion a year which averages out to $250 million organic net growth for the quarter and you add another $50 million to $100 million a quarter for Bridge, you put it together it’s $350 million a quarter now. So that’s the number to use.
Dale Gibbons
Yeah, Brian. In terms of some of the dispositions, I mean they were in corporate finance and equipment finance, those are the central business lines that were lower in 2Q.
Brian Klock
Great. Thank you.
And just one last question, thinking about – I think if I remember correctly when you guys gave guidance for the one-time merger cost I think the pretax number was at $19 million, so with $7 million to $8 million this quarter, should we expect those to be closer to the conversion in the first quarter of ’16 then?
Dale Gibbons
Yeah. So the $19 million – so we took $7 million here, there was about $6 million that showed up on Bridge’s books which you don’t see, okay.
It just comes through in terms of the combined tangible common equity that came over from the share issuance that we did. So there is about a third left that that’s out there to be realized and you’re going to see a little bit of a tail for the next several quarters, but nothing that substantial, and then a few million out there when the conversion is completed and the back half is succeeded.
Brian Klock
Great. Thanks for your time guys.
Robert Sarver
Thanks.
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
Not really much to add, just kind of the same old plan, let’s just grow our revenue at a significantly higher pace than our expenses and that’s a mandate for everybody who runs the business line in our company. I do think next quarter’s conference call will be a little more interesting because we will have a full quarter of Bridge’s operations and some of these things we are working on, we’ll be able to give you a little more guidance on.
And so we are entering into an exciting time for the company and I think it’s a good opportunity for us to move up to the next level and really take advantage of some of these great opportunities and also leverage on some of the great people we just added to the company. So, thank you for taking the time to listen-in to us and we will be in touch with you next quarter.
Operator
The conference is now concluded. Thank you for attending today's presentation.
You may now disconnect.