Jul 21, 2017
Operator
Good day, everyone. Welcome to the Earnings Call for Western Alliance Bancorporation for the Second Quarter 2017.
Our speakers today are Robert Sarver, Chairman and CEO; and Dale Gibbons, Chief Financial Officer. You may also view the presentation today via the webcast through the company’s website at www.westernalliancebancorporation.com.
The call will be recorded and made available for replay after 2 PM Eastern Time, July 21, 2017, through Monday, August 21, 2017 at 9:00 AM Eastern Time, by dialing 1-877-344-7529 and entering passcode 10109628. 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, sir.
Robert Sarver
Thank you. Good morning, everybody.
Welcome to Western Alliance’s Second Quarter Earnings Call. Dale and I are going to walk you through the slide deck that’s been posted on the website, and then we’ll open the lines for your questions.
Before we get started with the presentation, I’d like to take the opportunity to welcome Ken Vecchione to Western Alliance. Ken rejoined the bank as our President.
Many of you recall Ken served as our Chief Operating Officer and President from 2010 to 2013 and he continued to be a member of our Board of Directors. We’re pleased to have his leadership in the organization.
Ken’s vision helped us establish our national business lines as well as put together the architecture around our enhanced risk management within the company. I spoke on the last call about needing to focus more of my attention on continuing to grow our earnings, bringing in business and bringing Ken to the team along with Jim Haught, who joined us in April as Chief Operating Officer will allow myself and Dale spend more time identifying ways to continue to improve our financial performance as well as manage our risk portfolio.
This was our 28th consecutive quarter of record operating earnings as our strong balance sheet growth continue while we maintained our interest margin and asset quality, held expenses flat and again grew our tangible book value. Net income for the second quarter was $80 million or $0.76 per share.
That’s up 23% from $0.62 of operating EPS in the second quarter of last year, which was before $0.02 in acquisition charges. Our strong core deposit growth reduced our loan-to-deposit ratio, increased our cash position, which resulted in a 3 basis point reduction in the net interest margin as a percentage.
Last quarter we discussed that we made some investments in our infrastructure that ticked our expense run rate up, and we expected expenses to be flat in the second quarter as they were. Our flat expenses, coupled with 14 million increased in revenue, brought our operating efficiency ratio to 41.2%, improved from 44.4% on a linked-quarter basis and from 43% in the second quarter of last year.
Balance sheet growth was solid, again, with $327 million in loan growth during the quarter and $1.1 billion from the prior year. While we had $675 million in deposit growth, which was entirely non-interest bearing accounts, deposits are up $1.8 billion in the last 12 months.
Asset quality was also strong with non-performing assets following 40% from a year ago to just 0.32% of total assets, and we flip back into a net loan recovery position with $1.1 million for the second quarter. We’ve provided $3 million during the quarter into the reserve for continued loan growth.
With our return on tangible equity, again in excess of our balance sheet growth, our tangible common equity ratio rose to 9.5% at June 30th and our tangible book value per share rose at a 21% annualized rate during the quarter to $16.71. Net interest income rose $13.4 million for the quarter to $192.7 million, driven by $540 million in average loan growth in realizing the full effect of the FOMC rate increase in March and is up 18% from a year ago.
Higher deposit service charges were the primary driver of the 6% increase in operating non-interest income on a linked quarter basis to $10.5 million. As I said, operating expense was flat from the first quarter to $88 million.
Operating leverage improved over the last year’s revenue rose 18%, and expenses were up 13%, resulting in an increase in pre-provision net revenue of 22%. The provision for loan losses was $3 million for the quarter and benefited from net recoveries and lower levels of non-performing loans.
After modest losses incurred in disposing of $16 million in repossessed real estate, pretax income was $111.9 million. The tax rate rose to 28.5% as the cyclical excess tax benefit on share-based payment awards that was recognized in the first quarter of this year does not repeat in the current quarter, resulting in $80 million of net income, which is up 30% from a year ago.
Diluted share were stable from year end at a $105 million, as per share earnings climb 27% to $0.76. I’ll now turn it over to Dale for some further details on our performance and then I’ll talk a little bit about our outlook.
Dale Gibbons
Net interest drivers, loan yields rose 13 basis points during the quarter. It’s just over half of our portfolio’s variable rate and benefited from the increase in prime as the target fed funds rate was raised by the FOMC.
The investment portfolio yield declined 3.05% during the quarter as the balance grew by $414 million. The average yield on securities purchases during the quarter was 2.8% as the yield curve flattened.
Reflecting the rising rate environment, the cost of interest-bearing deposits rose 5 basis points during the quarter, although our total cost of liability funding increased by only one basis point, 0.35%, as it benefited from our strong non-interest-bearing deposit growth. Given the strong deposit growth, we held no FHLB or fed funds borrowed positions at quarter end.
The increase in average loans of $540 million and securities of $365 million during the quarter drove net interest income to a $193 million. The average balance of non-interest-bearing deposits rose over $1 billion during the quarter; however, 40% of this increase was held in cash yielding just over 1%.
Adding this $400 million at a 1% spread reduced the margin otherwise by 9 basis points. However, this was largely offset by higher loan yields from the rate increases in March and June resulting in the actual margin only decreasing by 2 basis points from Q1.
Purchase loan accounting accretion rose from $6.4 million in the first quarter to $7.1 million in the second quarter and had a $17 basis point effect in total on the margin. The graph on the right shows that we expect currently stable accretion from purchase accounting marks in the next few quarters.
Actual accretion, however, has been higher than what is shown here due to loan pre-payment activity, which accelerates discount recognition. Although unlike the increase we had in the second quarter, it should be on a gradual downward trend.
Strong revenue growth during the quarter, coupled with flat expenses, drove the efficiency ratio to a record low of 41.2% compared to 43% in the second quarter of ‘16. As we stated on our last quarterly call, seasonally, the first quarter is the most challenging from an efficiency perspective.
We achieved this record efficiency while continuing to invest in the company’s people, infrastructure and compliance to the risk management programs. The compensation proportion of our expense rose from 57% to 59% during the past year, a trend which we expect to continue as incentive cost closely track balanced sheet growth and financial performance.
Our pre-provision net revenue of 2.46% and 1.71% return on assets also mark new highs for the company and its consistently been in the top docile compared to peers. As deposit growth again exceeded loan growth during the quarter, our securities and cash position climbed $374 million during the period.
Total assets rose to $18.8 billion and shareholders equity to over $2 billion. The loan-to-deposit ratio was 87% compared to 91% one year ago.
Loan growth of $327 million during the quarter was led by a $128 million in mortgage warehouse as growth rebounded from a decline in the first quarter. Regionally, loans grew $50 million in Arizona, $42 million in Northern California, $32 million in Southern Cal, while declining $40 million in Nevada.
During the quarter we continued our program with resi loan purchases as an alternative to larger growth in mortgage-backed securities resulting in a increase of $30 million in residential and consumer loans. As short rates rose but the yield curve flatten during the quarter, the weighted loan origination rate was the same as that paid down on loans during the period.
Growth in non-interest bearing deposits comprised more than 100% of the $675 million total deposit increase we had during the quarter as money market balances decline. The continued success in deposit gathering for non-interest bearing DDAs has increased the proportion of the portfolio to over 42% compared to 37% a year ago and was the major factor as to why our total liability funding costs rose only 1 basis point from Q1.
Among the business, segments Arizona led deposit growth of $524 million, followed by $130 million in technology and innovation, $87 million in Northern California and $74 million in our Homeowners Association services. Total adversely graded assets declined $19 million to $368 million as NPAs fell 23% to $61 million or 0.32% of total assets.
These figures are net of $24 million of purchase accounting discounts to unpaid principal balance on the purchased credit impaired notes. On a ratio basis, adversely graded assets and NPAs have improved from 2.24% to 2.06% on assets over the past year.
Gross credit losses of $2.8 million during the quarter were more than offset by $4 million of recoveries of prior charge-offs, primarily in Nevada, resulting in net recoveries of $1.2 million or 3 basis points of total loans. Year-to-date, net loan losses are only a $140,000.
Provision expense of $3 million declined during the quarter -- declined from the first quarter, in part due to net recovery performance. The allowance for loan and lease losses rose to a $132 million, up $10 million from a year ago.
This reserve is 1.08% of non-acquired loans as acquired loans are booked at a discount to the unpaid principal balance and hence have no reserve but acquisition. The allowance for loan losses is enough to cover over 10 years of gross loan losses at our current run rate, which is well above the four-year duration of the portfolio.
For acquired loans, on a lower graph, credit discounts totaled $37.8 million at June 30, which was 2.19% of the $1.7 billion purchased loan portfolio. Capital growth again exceeded balance sheet expansion, resulting in our ratios continuing to climb over the past year.
The decrease in the leverage ratio during the quarter results from it being the only ratio that is computed using average instead of ending assets. Average assets rose $1.3 billion over the first quarter as non-interest bearing deposits grew.
By comparison, ending assets were up $722 million for the period. We expect the leverage ratio to increase this quarter as average total asset growth was likely to be significantly lower.
Tangible book value per the share rose $0.85 in the quarter. It is $16.71, and it was 17% in the past two year, while return on tangible common equity rose to over 18%.
Robert Sarver
Thanks, Dale. In terms of looking at our outlook for the rest of the year, for the most part, it's kind of samo-samo.
In terms of our financial position, our second quarter performance reconfirmed our outlook for low double-digit organic balance sheet growth for the rest of the year. Loan pipelines remained strong.
Geographic divisions are healthy and growing, as well as our national business lines. We expect to see growth in all categories of our loan and deposit book for the remainder of the year.
Given our projected loan deposit growth and asset-sensitive balance sheet, we’re well positioned for continued revenue increases. We expect yields on our loan portfolio to climb in the third quarter as the prime rate increase in mid-June is yet to be fully reflected in revenues.
However, this improvement will be partially offset since acquired loan accretion is likely to fall from elevated level in the second quarter as the acquired portfolio continues to pay down. Our cost of interest bearing deposits rose 5 basis points during the quarter, which should represent a deposit betas of 20% relative to the 25 basis point increase in the target fed funds rate.
If rate increases continue, we expect deposit beta to eventually time towards our 45% target. From the second quarter, we expect our expense growth rate to average approximately two-thirds of the revenue growth rate, which should lead to further improvement in our efficiency ratio over time.
As you know, we have a disciplined credit culture. Our asset quality metrics remained very strong.
We don’t currently except any significant credit events that would change our stable performance in this area. However, the regulatory agencies have combined to recently provide new guidance on the rating of pre-profit technology companies.
This change will not affect the accrual status or inherent risk of our tech lending portfolio from what it is today, but it will result in some higher levels of reported special mention credits. Bridge Bank’s technology loans have had an average loss rate of 13 basis points for the last five years.
I’ve personally had a chance to see this portfolio up close over the last 18 months as we’ve gone through a little bit of a cycle in the valuations of technology companies. In summary, the new regulatory guidelines are as follows.
If the credit – if a pre-profit credit has less than a six-month RML, remaining months liquidity, that loan must be graded special mentioned or worse, unless it has a signed firm term sheet. A lot of the credits in this space go below six months.
Companies are in the process of underwriting new investments into the company, and these companies are pretty successful. Listed ones in our portfolio have been very successful raising additional capital and continuing to fund company.
But at a six month level, they need to go into special mention. And so I think, over the next six months, you’ll see that number jump a little bit.
I don’t think it’ll be too significant, but it could be somewhere in maybe $50 million range. Our level of special mention credits in general compared to peers is very low.
So I expect to see some of those credits move into that and then also move out very quickly. But that is the change coming.
Consistent with our historical metrics over the past several years, we expect our levels of non-performing assets and net charge-off ratio to remain very low for the rest of the year. So with that, I would be happy to answer any questions overall, as you can see just another solid quarter for a solid bank.
Thanks.
Operator
Thank you. [Operator Instructions] And our first question will come from Brad Milsaps of Sandler O'Neill.
Peter Ruiz
Hey, guys. This is actually Peter Ruiz on for Brad today.
Just wanted to first touch on maybe looking at -- loan growth obviously has been nice and deposit growth has been even better, and I appreciate your updated guidance on continuing to see low double-digit asset growth. But is it safe to assume that maybe deposit growth continues to outpace loan growth here in the near term?
Are there any special things going on there that you're seeing in terms of loan growth? Obviously, there is nothing wrong with a low double digit pace there, just wondering if there are any sort of special situations.
Robert Sarver
No, I think the deposit growth probably will outpace the loan growth and -- what you see with us is we're a little more aggressive in terms of organic growth and a economy that’s maybe not quite as profit and a little more conservative maybe as the economy gets a little more profit in some days we do business with. So we’re just, first and foremost, we’re concerned with asset quality improved lending and that means we grow a little bit less than we did.
For the first five years coming out of the recovery, that’s probably a smart thing.
Peter Ruiz
And maybe just could you maybe -- looking at your credit, obviously had the drop there in special mentions, but classified kind of ticked up. Can you talk about maybe any changes or any progress related to those construction projects you mentioned last quarter and sort of any moments in those buckets?
Robert Sarver
Yes, I’ve talked about a couple of those last quarter, so one of them was a special mention credit that had some cost over-ranch but mainly some long delays in development. It was in Los Angeles residential, and that all kind of got solved and money got put in and lots of finished and all that.
So that came off the list. We do have a hotel under construction that suffered some rain delays and pretty significant cost over-ranch which our borrower fund, which is good, and that hotel is substandard.
It is supposed to open in the next three to four weeks. Fortunately, our loan-to-value ratio is going to be under 50% in the hotels in a fantastic market.
So once it opens, it gets a little history under its bell and will be upgraded. So I think that will probably come off the list either in the third or fourth quarter.
That’s our second largest sub. And then our largest sub which we talked about is a company that was sold to one of the larger market cap companies in the country, and that loans comes due in the fourth quarter and it will – we feel pretty confident it’ll just be paid off when it comes due.
So between those two, that represents a little over $40 million on the substandard level, and I think those will be up, both be up by year end and that’ll pop that number back down. Unless something new comes up, we don’t see right now, but good.
Operator
The next question will come from Timur Braziler of Wells Fargo. Timur, your line is open.
Are you muted by chance?
Timur Braziler
Good morning. Sorry about that.
First question is regarding some of the commentary towards the end of the call on the Bridge loans and the new regulatory guidance there. I guess, what’s the balance of the loans that are currently below 6 months are remaining liquidity?
And if they do move to substandard, is that going to potentially drive any kind of reserve impact and elevated provisioning? Or is that not the case?
Robert Sarver
No, I don’t think that’s the case. In terms of our portfolio of Bridge, the niche bridge is in companies that have a product, they are selling a product, and about two-thirds of our business is secured with receivables and cash, some with formal receivable lines, some with informal receivable lines.
What we see is going to happen is we’ll have more credits moving in and out of special mention. I don’t think it will effect, I don’t see it affecting the substandard category is a non-accrual category.
I think its really just going to be more of a special mention credit category because Bridge has been – and our customers have been pretty accurate and pretty effective at these new rounds and obviously that’s why the portfolio over the last 14 years have performed so well. So I don’t think it’s going to affect the eventual substandard bucket or non-accrual bucket or loss bucket, but you’re going to see more movement in the special mention bucket.
And in terms of the portfolio, the Bridge portfolio in total, on the tax side, it’s about $700 million, and of that, the companies that are in a pre-profit stage of that $700 million is probably somewhere around the 400 million to 500 million. And today the number of those credits that are under a six-month RML would be – I am going to say maybe somewhere around a 100 million bucks.
But some of those do have signed term sheets, so its not an all black and white. I think that number of maybe up to $50 million in terms of potential increase since special mention is probably a reasonable estimate at this point.
But it doesn’t mean that those credits are going to continue to flow down the line in the substandard or the non-accrual, and therefore affecting the level of reserve. So I don’t really see it affecting our loan loss reserve levels at all.
Timur Braziler
Okay, great. That’s very appreciated.
Thank you. Next maybe on the margin.
There was a cash position at the end of the quarter and with the expectation for deposit growth to remain as strong as it has been outpacing loan growth. Is it June hike going to be enough to maybe see some margin expansion in the coming quarter, or is that cash position going to continue to be headwind?
Dale Gibbons
No, that cash position has been run down now to kind of it’s pre-level $400 million. We expect the margin to rise this quarter.
Timur Braziler
Okay, great. And then one last one from me on expenses.
Has the regulatory conversation kind of come to ahead and the regulators have signed off on what was necessary to be done in the first quarter? Or is this something that you guys have put in the work but are still waiting kind of regulatory sign-off or the regulatory green light on anything coming down the pike in the remainder of the year?
Robert Sarver
Yeah, I mean the regulators don’t dictate who we hire and what our overhead levels are. I mean, they are really a function of the bank and the growth of bank and plus how we manage our risk profile.
So they have no sign-up on anything as it relates to our overheads. So I'm not quite sure we're going with that.
But as it relates to some of the infrastructure we expanded, we’ve pretty much done that. What we've added coming on obviously is Ken, couple other key positions, but I don’t – at the end of the day I really don’t see us operating materially different than we have for the last eight years and we just grow our revenue faster than our expense and somehow we seem to manage to do that every quarter.
So I don’t see that changing.
Operator
And next we have a question from Brett Rabatin of Piper Jaffray.
Brett Rabatin
Just a clarification on the margin and the excess liquidity. So it sounds like the cap position has drawn down and so the margin what would be 9 or 10 basis points higher absent in 2Q.
You got the June rate high. Does the cash position go down due to investment in securities, loan growth?
Can you give us any more help on just how you’re managing the balance sheet after an early strong deposit growth quarter?
Robert Sarver
You saw we had a very large increase in average DDA. That was more than the quarterly increase in DDA.
So we have uploaded balance for part of the quarter, and that was invested, were held at the federal reserve account yield just over 1%. That has gone away.
And as a result, just taking that away will blew some margin by itself. And then in addition to that, you have the points you brought up, Brett, in term of we’ve got a five-sixth of the increase from FOMC in June is still in front of us in 3Q.
Brett Rabatin
Okay. And then just a clarification on you talked about expenses somewhat in the two-thirds.
You used to always talk about $1 revenue or $2 revenue for every dollar of expense, and now it sounds like that a little bit different. Is that due to anything in particular?
And can you talk maybe more about some medium-term expense growth outlook as you think about things we're investing on.
Robert Sarver
I think it's mainly due to the fact that our risk appetite on the credit side, our loan book is not going to be going at 20% originally. We don’t think it’s a right time in the market to do that, and we don’t see the right risk-adjust returns to do that.
Brett Rabatin
And then if I can sneak in one last one on CRE, are you guys a little more cautious on CRE? Just thinking about the growth you had in the quarter, or you not seeing as good opportunities?
What's the thought on CREs from here.
Robert Sarver
No, I think on the CRE side, we’re always trying to be proactive, not reactive. And a big part of our book is on the residential side, refinanced lots and production housing to some of the top builders with on-balance sheet projects, and that market looks pretty good, I mean it’s a steady increase.
The levels of homebuilding is still well below historical levels. It’s not even close to where it was before, the last recession.
And we think that’s a really good space to play it in terms of the commercial side of things, where we have not been a big retail lender. I've never really been a big fan of taking long-term retail credit risk.
We play mainly in office, medical and commercial office space and industrial. On the apartment side, we really have reframed from doing much apartment lending over the last five years.
We’re just getting into it a little bit. As the market has kind of shut that space down, we’re finding some select opportunities in some of the markets that haven’t been overbuilt; and we’re in a position now to get 40% to 50% cash equity in projects and good pricing.
So we try to manage our real estate book in a very savvy manner, and I think it had about a 30 year history of doing that.
Brett Rabatin
Okay, great. I appreciate all the color.
Operator
The next question comes from Chris McGrathy of KBW.
Chris McGrathy
Hey, good afternoon, thanks for taking the question. I’m wondering if you could speak to credit spreads in the C&I portfolio.
Obviously the growth in your C&I books has been very strong year-to-date and I think the deposit growth is pretty correlated. Wondering if you’re seeing more, you’re willing to compete more aggressively on price to get the deposit in the door seemingly that factor that most banks would like to have the deposit growth.
Thanks.
Robert Sarver
Are you talking about to compete more in price on the loan side or deposit side? I didn’t quite get you.
Chris McGrathy
No, I’m sorry, the loan side.
Robert Sarver
No. We’re are pretty disciplined on the pricing, and we’re focused on relationships we can really add value that’s one of the reasons you’ve seen more growth in some of our national business lines, because there’s less competition, less banks that have the people, the sophistication and expertise in those specific areas.
So we want customers here because: number one, we think we can add value to the relationship; and they’re willing to pay for that value.
Chris McGrathy
That’s great. Dale, if I could on the margin, I think in the prior comments you’ve mentioned each quarter hike is about 6 basis points to the margin.
Is the margin, and are your loan yields responding? Now that we’re a few hikes in, are they responding the way that you thought they were?
Is that kind of still a fair guideline going forward?
Dale Gibbons
Yeah, it is a fair guideline. There has been one development [though] has taken away a little bit from what otherwise would have been a stronger increase and one that has been at the opposite.
So our deposit beta has been well below 45%, which means that we should be even above the 6 basis points for 25, because we’re not going to raise our cost as much. However, at the same time what is we’ve seen the yield curve has come back down.
In the commercial and real estate market, really prices off of the 3 to 10 year yield curve, which has dropped significantly from at the end of last year and particularly the first quarter. So that has taken away a little bit of what would have been even a stronger performance, but that has basically been offset by the slower deposit betas.
Chris McGrathy
Great. And if I could sneak one in on M&A, obviously you are accumulating capital really nice way, I’m wondering if there is any change in what you’re seeing or maybe any closer to finding an acquisition?
Thanks.
Robert Sarver
No, not really. I’d say about the same as last quarter.
I mean we’re in the market looking at a number of opportunities, but nothing in the eminent future. One of the challenges, people always say, “Well, you traded a high multiple book and it’s in that,” well, we also grow our earnings assets in about every bank in the country.
And so we just got to be cautious on how we give those shares out. That adds a little bit of a challenge.
Chris McGrathy
Thank you very much.
Operator
The next question will come from Jon Arfstrom with RBC Capital.
Jon Arfstrom
Good morning. Question on deposit growth.
You have another good quarter, but Arizona was particularly strong, is there anything notable there driving that growth?
Robert Sarver
No, I mean, we continue to execute in terms of bringing in relationships in the commercial side that we take their operating accounts as well and we're having, I’d say, increased success in that category. I wouldn’t get too hung up on the Arizona piece.
I think we're kind to seeing that everywhere. I do realize that’s where we posted some of those items, but…
Dale Gibbons
I think, if you look at more spanks, a lot of growth tends to come from headquarters. So we have lot of senior executives here and just naturally a lot of the larger relationships are coming from this area.
Jon Arfstrom
Just a few good quarters in a row and I just it was a sizeable increase. On the loan growth, you called out the warehouse coming back a bit, anything else to call out on the loan growth that was unusual, or would you view this is a pretty typical quarter.
Robert Sarver
Pretty difficult, nothing unusual.
Jon Arfstrom
And, Dale, do you thing the warehouse size can hang around at this level for the next quarter or so?
Dale Gibbons
Yes, I think you can? I mean, the reason why warehouse came down in Q1, and it wasn’t just us, it was even more pronouns at some other institutions is because the rates rose until the refi business really contracted.
With rates coming back down, you're seeing refi activity pick up again. So unless we see a significant rate rise on the term structure, I think you're likely to see warehouse perform -- continue to perform well.
Jon Arfstrom
Okay, good. Robert, just one for you.
You mentioned this earlier, but with Jim and Ken in place, are you already changing your day-to-day activities? And if so, what's different?
Robert Sarver
Yes, I’m – well, I would say this. With Jim in place, Jim's taking a fair amount of the load off of with me and Dale on some of the administrative sides in terms of operation, technology.
Ken is in the process of kind of going on the road and visiting all our offices and all our people. And over the next 90 days or so, he will be taking some of my direct reports.
I got like '17 right now, I want to take that down about 6 or 7 and really free up more times of my desk that to get out and try to generate revenue, which is probably what I’m better at anyway.
Operator
The next question comes from Casey Haire of Jefferies.
Casey Haire
I wanted a follow up on the efficiency, obviously very good improvement this quarter with the liquidity drag. Just what in sort of -- and it sounds like there is more on the comp.
What is sort of the optimal efficiency ratio for what’s a pretty diversified business, how low can we go from here?
Robert Sarver
I don’t know. I mean, to be honest, I don’t really pay much attention to it as a percentage.
I mean, it stands out being pretty low because you compare to peers, but our business model is totally different than peers. So to me it's about operating leverage and growing earnings per share, and I won't really target a number or range.
Casey Haire
Okay, great. And on the deal front, we’ve seen some activity this week, some commercial finance companies selling without the -- rather deposit funding and strong growth, they are partnering up with banks.
I'm just curious are you seeing those opportunities? And if so, why -- what's…
Robert Sarver
Yes, we are, and I think those are good opportunities. In general, those are good opportunities, and we are, and we look at all of them but maybe underwrite them different than other people, or what have you, and some are more appealing than others.
But I do think that that is an area that intrigues us and consider nicely if it’s the right situation.
Casey Haire
Okay, great. And just last one from me.
On the non-interest bearing deposit growth, apologies if I missed this. But in terms of characterizing it, is it mostly – is it broad across the footprint?
Or is it mostly coming from bridge. Just some color on where these non-interest bearing deposit flows are coming from?
Robert Sarver
I mean, Bridge has had a lot of success here, but I wouldn’t certainly not -- most of the growth is not from them. I’d say it’s fairly broad in terms of kind of where we’re seeing improvement.
Casey Haire
Okay, great. Thank you.
Operator
The next question is from Gary Tenner of DA Davidson.
Gary Tenner
Thanks, good morning. I had a question about the national business lines.
Your quarter-to-quarter, year-over-year, they’ve been called 75% to 80% of your loan growth and are now 45% or so total loans. Can you talk about kind of the comfort level in terms of how large that gets relative to the core commercial bank?
Robert Sarver
To me, it is our core commercial bank. I mean, we’re not just the Arizona, California Nevada regional bank.
I mean we are a national bank, and these national business lines we have to meet are core to our business and we’re going to continue to expand them as we can do it in a prudent manner with good risk-adjusted returns. So I know sometimes you guys like to separate all that out.
But I don’t -- for me it’s not really much of a difference. I mean, if I get a operating company that have in Boston in Boston or operating company backed in Phoenix, it doesn’t really make a difference to me.
Gary Tenner
So there is no reason to think that over time, the existing products, or if you add some other line there, that wouldn’t become bigger than regional banks.
Robert Sarver
It may or may not, I don’t know. It will depend where we see those opportunities to be.
Gary Tenner
Okay. And within that just on the hotel finance, the hotel franchise finance, those balances were down about 5% so far this year.
When you bought the portfolio last year, you talked about it being an ongoing business. Are you -- is there something you’re saying in that segment that is having you pull back on new business or is it?
Robert Sarver
Yeah, we said, when we bought it, we keep the portfolio pretty stable on a macro level. I think, in terms of commercial real estate, that’s one of the product types that you’ve seen significant appreciation in over the last six or seven years.
And so our level of underwriting today is commensurate with where we see that risk. And I see that portfolio somewhere between 8 to 10% of our outstanding loan book, but its not a book that we’re looking to push aggressively under some of the credit terms that maybe some of the others players are willing to expect.
Gary Tenner
Okay, thanks for the color.
Operator
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
Yeah. No, Thanks for joining us, and just another good quarter.
I think, as we continue to be consistent in how we approach our business and operated high level, so we look forward to talking to you next quarter. Thank you.
Operator
The conference is now concluded. Thank you for attending today's presentation.
You may now disconnect.