Apr 24, 2008
Western Alliance Bancorporation (NYSE:WAL) Q1 2008 Earnings Call Transcript April 23, 2008 12:00 pm ET
Executives
Robert Sarver – Chairman, President and CEO Dale Gibbons – EVP and CFO Hal Erskine – President, PartnersFirst
Analysts
Joe Morford – RBC Capital Markets Brent Christ – Fox-Pitt Kelton Brad Milsaps – Sandler O'Neill Brian Klock – KBW Richard Howard [ph] – Cayman Capital Partners [ph] Hugh Miller – Sidoti and Company
Operator
Good day everyone. Welcome to the earnings call for Western Alliance Bancorporation for the first quarter 2008.
Our speakers today are Robert Sarver, Chairman, President and Chief Executive Officer; Dale Gibbons, Chief Financial Officer, and PartnersFirst President, Hal Erskine. Today's call is being recorded and will be available for replay after 2 o'clock p.m.
Eastern Time today until 9 p.m. May 1st by dialing 1-877-344-7529 using the pass code 418352.
The discussion during this call may contain forward-looking statements that relate to expectations, believes, 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 financial performance and are subject to risks assumptions and changes in circumstances that may cause our actual results to differ significantly from historical results and those expressed in any forward-looking statements.
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 instructions) Now, for the opening remarks, I will now like to turn the call over to management. Please go ahead.
Robert Sarver
Thank you. It's Robert Sarver speaking.
I'd like to start off by kind of looking at a high level view of where we are today and kind of where we are headed in the near term, talk about some of our strengths and positive trends and also talk about some of our challenges. After that, I am going to turn the call over to Dale to get into some more financial analysis of the quarter and then after that Hal Erskine, President of PartnersFirst will give you an update on where we are with our Affinity credit card business.
In terms of some of the issues facing us and some of the challenges, number one, clearly the markets of Nevada, Arizona and California have been hit the hardest by the housing crisis and overall downturn in the economy. Not only have we had to significantly increase loan loss reserves, but spreads in much of our securities portfolios has widened significantly leading to some realized and unrealized losses.
Our strategy on dealing with impaired credits will continue to be to identify them quickly, reserve them appropriately, and resolve them very aggressively. We are not looking to build a portfolio of OREO and prolong the recognition of our credit issues.
Second challenge we have would be around capital ratios which are getting a little tight. Our total risk-based capital of 10.1%, we expect to address the subordinated debt issue in this quarter.
Our tier 1 capital leverage ratio of 7.4% is sufficient and our tangible equity ratio of 5.1%, while below our target, reflects a full write down to market value of all our trust preferred securities, none of which are currently in default. If you add that back, our unrecognized loss on these securities, our tangible common equity ratio would be at about 6%.
In terms of some of the positive trends and strengths of the organization, I'd point to asset quality and our strong regulatory relation. Our non-performing assets to total assets was only 32 basis points at the end of the quarter, a level that is about one fourth of what our peers and was actually declined from year end.
We sold all of our OREO that we had at the end of the year at a modest gain. Our current OREO portfolio consists of two properties.
One is a residential development that is on the books for $5 million, which is currently under a letter of intent for sale. The second is a 19 hole – excuse me, 19 lot golf course project in Reno, Nevada, that is on the books for $1.8 million.
I anticipate just like in last quarter that both these properties will be sold off our books by the end of the quarter without any further write down. Net charge offs for the quarter were 6.5 million.
Half of that amount came from a write down on the first OREO property we took in and the other half consists of various commercial and real estate loans mostly 300,000 and less that have been negatively impacted by the slowed economy equivalent primarily in the state of Nevada. We did see an increase in past due loans at quarter end.
However, as of today, 40% of those loans are now current. A couple of examples of the two largest would be a $5 million loan we have secured by first deed of trust on a church in Reno.
We do have a strong guarantor on that credit and that loan is currently current. We made an advance of approximately 50% of cost when that church was built.
Second loan, which I think underscores some of our solid credit underwriting was a $6.5 million loan secured with commercial land in Las Vegas. This loan has a strong guarantor on it and just recently we received a 1.2 million pay down of principal on this loan and we extended it.
I believe our asset quality will continue to outperform our peers based on solid underwriting of our credit folks and the fact that we did begin to prepare for this cycle a year ahead of our peers. While I don't have a crystal ball, I do not perceive a major uptick in non-performing assets in the next quarter.
Revenue growth and our net interest margin, both of which increased modestly. Our margins increased 4 basis points in spite of a declining rate environment.
This is a result of a relatively neutral asset liability position we have combined with our ability now to lend money at better spread. Both those led to a stable net interest margin.
It is a good time to be a lender right now as a bank, good opportunities at better spread. Third item I want to talk about, we are making some headway in being more efficient.
Compared to nine months ago, if you exclude PartnersFirst, we operate four more banking offices with 5% less FTEs. We have more work to do there but we continue to focus on growing our business bringing in new relationship managers to Western Alliance while at the same time processing our work more efficiently.
To put it more succinctly, we are trying to add the muscle by eliminating some of the fat in the organization. Number four, our new business pipelines are actually more robust today than they have been in the last 12 months.
We think we can capitalize today on providing customers with that personal relationship but with a stable bank in an unstable banking environment. While customer repos declined 50 million on a linked quarter basis, customer deposits were up $14 million.
Last month, we saw an increase in deposits at Bank of Nevada for the first time since last December. Our deposit base, of which 29% was non-interest bearing DDA at quarter end, is one of our greatest strength.
While investors today are more focused on asset valuations than they are deposit valuation, long term value we believe is led by our strong stable and low cost funding source for Western Alliance. And finally, I feel good about our employee morale and spirit at Western Alliance in light of our stock price in today's challenging markets.
Our people see us as survivors and prosperous at the end of the day in this unstable environment. I'd now like to turn it over to Dale to shed more light on the financial information for the quarter.
Dale?
Dale Gibbons
Thanks. As you saw, net income for the quarter was $4.1 million or $0.14 per share.
It was held down by our provision expense of $8.1 million, which was 1.6 million in excess of our net charge offs. That was $0.03 in terms of reserve build on EPS.
We also had our net securities losses of $3.7 million. That's another $0.08 in EPS that that's held down by.
These are partially offset by a non-recurring revenue of $1.1 million or $0.02 per share. In terms of our revenue position, $55.3 million.
As Robert indicated, our margin was up 4 basis points from the fourth quarter. On a recurring basis, our non-interest income was $7.3 million.
We had a gain from a lease transaction, which we don't expect to happen again in the future. However, even without that, we were up 6% from the fourth quarter reflecting improvement in merchant services and other income as well as lower earnings credits from compensating balances.
Assets under management increased 22% to $2.1 billion at 3/31, largely reflecting our merger with Shine Investment last summer and a bit down from a year end reflecting lower equity valuations in the markets.
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PartnersFirst expenses were flat for the first quarter from the fourth quarter at about $2 million. Our efficiency ratio increased again to 68.7%.
If you back out PartnersFirst, we are at 65%. Obviously, it's not the direction we wanted to head, but we have been making progress as Robert indicated in terms of our expenses.
Our FTE was down 13 from year end, down 16 if you exclude the three increase in PartnersFirst, and that includes that we opened one office in Reno which has six employees. We opened that in March.
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Our NPAs declined from 21.3 million to 16.7 million, and Robert talked about kind of where we are on 30 days past due still on accrual, which is up 30 million as of today. Organic loan growth was 2.5% on an annualized linked quarter basis.
Most of that occurred in Torrey Pines, which is our affiliate that has been least affected by the market downturn.
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In terms of the organic deposit growth, most of that occurred at Alliance Bank for the first time. And for the first time in a couple of years we have really seen an uptick in terms of title company balances and not necessarily sure it is sustainable, but that improved our DDA balances at year end.
I would like to turn over to Hal who will talk about some of the activity going on in PartnersFirst.
Hal Erskine
Thank you, Dale. It is Hal Erskine, PartnersFirst.
We had a very productive first quarter which included 13 new partners sold, brought on for a total of 30 partners now at PartnersFirst and these partners are consistent with the group loyalty and demographics professionals that we like, which include the Chicago Bar Association made up of over 20,000 lawyers in Chicago, the Blue and White Scholarship Fund of Villanova University, the University of Arizona athletics program, Winston Salem State University, Earl The Pearl Monroe being an alumni there, as well as Westchester County Bar Association of New York, the Westchester County Bar made up of about 10,000 lawyers in Westchester County. On the marketing front, we put on over 2,000 new accounts through the quarter end and as of today, we are over 3,000 accounts.
We had a very successful marketing program with Scott [ph] Magazine, a good productive program marketing professionals. And in the Chicago bar was launched with something we feel as unique in the industry with the 9 digit unique Chicago bar lawyer number, their member number, in the plastic embedded in the bar code that they give rewards for attending continual legal education and that was lost as well within.
And we are very proud of the fact that we launched all our partners within our 45-day of signing in the first quarter as well. Our cardholder demographics are something I'd like to talk about and it's very strong.
Our average cardholder has $180,000 of income. The meaning of that is $120,000 so they have a very strong income.
20 years of paying their bills on time, a 736 FICO score. 80% are homeowners and 85% professionals.
Plus all applications at PartnersFirst we use the best technology from our partner Total Systems and it's very extensive in terms of the demographic information we get from all the bureaus, plus two reviews by all PartnersFirst management including a Thursday night application review with everybody in the company reviewing applications. So our cardholder demographics are very strong.
Cardholder service, we have a new statement we just launched with full color highlighting our partners. Our approach to our partners is full customization for every aspect of the program.
The Golf Magazine is an example which is a very exciting statement plastic Web site, the whole thing is full color and customization. We launched an online bill pay opportunity.
We have a new card design technology for our partners. Our average service calls for our cardholders is 8.5 seconds and 85% are very satisfied with PartnersFirst so far.
Other operations we signed our Total Systems contract, we are very proud of our partnership with Total Systems and that's been very exciting and they've been very helpful in reaching our 45-day to market goal for our partners with full customization. And we of course have no subprime or mortgage problems to distract us.
We are a brand new entity with strong demographics of our cardholders. With large banks having the issues that you are reading about in the paper every day, the opportunities presented for PartnersFirst this year were very exciting and we had some very large ones as well.
So with that, I'll turn it back over to you Robert.
Robert Sarver
Okay. I think we are ready for questions.
Operator
(Operator instructions) Our first question comes from Joe Morford from RBC Capital Markets.
Joe Morford – RBC Capital Markets
Thanks good morning everyone. I was first I guess curious about the classified levels, did they also decline in the quarter?
Robert Sarver
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Joe Morford – RBC Capital Markets
Okay. And on the delinquency number, I recognize there's a fair amount of volatility in that, and for the stuff that is not already cured, Robert, any kind of trend you are seeing there in terms of concentration with any single portfolio or geography or anything like that?
Robert Sarver
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Joe Morford – RBC Capital Markets
Sure. And is that land project in Nevada as well?
Robert Sarver
Yes, it's in Las Vegas.
Joe Morford – RBC Capital Markets
Okay, I guess that was my last question. Robert, I was just kind of curious on your current thoughts on the Vegas commercial real estate market, and the trends you are seeing there and then more specifically the nature of your exposure again and whether you are seeing any kind of signs of stress on that?
Robert Sarver
Stress? Yes, we got some stress.
The market in general, we have actually seen a slight reduction in the residential homes for sale in Las Vegas. And actually, the new home inventories in all the markets we are in are shrinking and doing better.
In terms of commercial, we are seeing the office market with some softening, and that's really across the board. But there's been about a 14% increase in terms of vacancies in the Las Vegas market in terms of office.
The thing that is really helping us and why we don't have the level of nonperforming loans that the peers do is our original underwriting was more conservative. We underwrote better quality real estate.
We underwrote with better guarantors than our peers and we underwrote with lower advance rates. Like for example the deal I talked to you about, where we had on commercial land in Las Vegas that we got the $1.2 million reduction and renewed that credit, we wouldn't have been in that position had we not been at a 50% loan to advance to begin with and not had a guarantor with a lot of liquidity.
So, there's a bit of a workout with a lot of real estate and land related credits throughout all the markets we are in, but if you are in a position of strength, you tend to do a little better. When I first got in the banking business, they taught at these RMA classes the five Cs of lending and it was credit and collateral and cash flow and capacity to pay and all that.
But, having gone through the downturn in the market in Arizona that I did in 1990, I learned that there's really three Cs of credit and it's collateral creates character. And if you have got the right collateral position, you can negotiate from a position of strength and do a better job resolving your credit and that is what starting to pay dividends for us, and that's why we are getting a timely resolution of a lot of our issues.
Joe Morford – RBC Capital Markets
Okay, super. Thanks, Robert.
Operator
Our next question comes from Brent Christ at Fox-Pitt.
Brent Christ – Fox-Pitt Kelton
Good morning. Just a follow-up on your comments on capital from earlier.
I think you guys mentioned last quarter you were interested in doing some type of sub-debt or trust preferred and it sounds like this sub-debt route is what you are going for. Just curious in terms of the order of magnitude in terms of how big of an offering you would do.
And then secondly, if your tangible capital levels were to continue to thin a little bit, would a common equity raise be outside of the realm of possibility?
Robert Sarver
In terms of trust preferred or subordinated, we are probably looking at about a $50 million issue. And in terms of issuing capital, in terms of common stock, perhaps in combination with a merger or acquisition, you know what I'm saying, in terms of just raising common, that would be the last thing I'd want to do.
I just like buying low and selling high, and not big into selling low right now.
Brent Christ – Fox-Pitt Kelton
Okay. And then second question was when was your last regulatory exam, or is there one upcoming?
Robert Sarver
We just finished up with our exam two weeks ago with the Federal Reserve Bank for the holding company. We just wrapped up with our exam in San Diego at Torrey Pines.
We are halfway through with our exam in Arizona and I think that is one of our strengths, I mean, in terms of regulatory relations and as I said earlier in terms of new business pipeline. For those banks that have themselves in a relatively good position today, it's a great time to be a lender.
I mean there's value in loaning money today and we are one of those banks and I think that is what is going to help us come out of this situation in good strength. We have very good regulatory relations.
Brent Christ – Fox-Pitt Kelton
And then the last question was with respect to PartnersFirst, how do you think about that in terms of the past, the profitability and kind of where you are relative to your original expectations in terms of time to break even and the progress you've made so far?
Robert Sarver
I think the progress we've made so far has been pretty good. We are pretty much on budget and on schedule in terms of starting the business.
Obviously, it's only three months old, so it's hard to really look out too far. But, the market has been very receptive to what we are doing.
I've been on a number of calls. No one said to me that we are real happy with the company we bank with.
No one said we love the bank we are with and they are doing a great job. So there's an opening there and we have had pretty good success with signing up new accounts.
The profitability of these relationships, they typically turn profitable about the end of the second year and then third, fourth, fifth, sixth is when they really kind of ramp up. So, a lot of the profitability for the Company is going to depend upon how many relationships we sign and when.
Our goal all along was to kind of run this as a subsidiary of one of our banks for about a year and at the end of that year kind of look at it and perhaps spin it off and do a separate bank. It may be 100% owned by Western Alliance or we may actually take it off balance sheet of Western Alliance, and we are an investor and bring in capital partners.
We haven't got to that point yet. But overall, I'm pleased with where we are at.
And as we gain more traction and show that we can execute, I think we'll have more opportunity to take on some bigger accounts too.
Brent Christ – Fox-Pitt Kelton
Okay, thanks a lot.
Operator
Our next question comes from Brad Milsaps at Sandler O'Neill.
Brad Milsaps – Sandler O'Neill
Good morning. Just some questions on the margin, you guys talked about an issue pretty heavily this quarter on the overnight advances and certainly that helped.
Just curious the average balance was much higher than the period end. Is that, Dale, just really sort of a point in time sort of shot and you'll continue to kind of rely on those advances as long as it kind of makes the most economic sense?
Dale Gibbons
Yes, that's our next cheapest source of funding. You saw we did a lit bit of broker deposits, not something that we really intend to keep up, but we hadn't done that before, just want to make sure that is available to us.
Obviously, our liquidity has gotten a bit tighter. But that said, we think we have really ample room with the FHLB and other areas and those are our next cheapest source.
And as you indicated, in a declining rate environment, what's nice about those is they really move kind of lockstep with FOMC action. Obviously, we would like to see our deposits increase.
It looks like they stabilized modest increase in the first quarter for the first time in a while and that's our first order of business. But, our second fallback is going to be the borrowings from the Federal Home Loan Bank.
Brad Milsaps – Sandler O'Neill
Okay, and sort of in the near-term, kind of what are your aspirations for the margin and what kind of thoughts do you have on or what are you using in your model in terms of additional Fed cuts if you have those in your model?
Dale Gibbons
Yes, in terms of the Fed cuts, I'm expecting the Fed to move 25 and then essentially be done. I think there's quite a build up, obviously, in terms of inflation expectations on commodities.
So, we are not looking for significantly more action from the Federal Reserve. Even last year, I kept stating that we are basically balanced from an interest rate risk perspective but yet our margin kept contracting and that that was really a mix issue on the liability side.
I think that the first quarter kind of demonstrates that that's essentially been the case. I'm hoping that we can hold our mix tighter to where we've been historically than some of the declines that we had in the latter half of 2007, for example.
And if we could do that, I would think our margin would be reasonably stable in here. As Robert indicated, we think we are essentially a balance from an interest rate risk perspective.
I don't see the Fed turning around and ratcheting up interest rates in 2008 at all.
Brad Milsaps – Sandler O'Neill
Dale, do you see PartnersFirst expenses accelerating materially from here on? I know you talked about kind of the $0.04 to $0.10 kind of range per quarter.
Still seeing, I know we are still early on here, but just kind of curious if that is kind of the area you are still comfortable with?
Dale Gibbons
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Brad Milsaps – Sandler O'Neill
Just curious how many, maybe this is a question for Hal, how many accounts or applications are you turning down at this point?
Hal Erskine
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Brad Milsaps – Sandler O'Neill
Okay. And then final question, just curious looking at the subsidiary banks, it looked like Reno was down a fair amount on a linked quarter basis and I know you mentioned the branch and you had a piece of OREO.
But, it looked like expenses were quite a bit higher. Just didn't know if there were anything else in there that would cause those earnings to be down a fair amount on a linked-quarter basis.
Robert Sarver
Are you talking about in the Reno bank specifically?
Brad Milsaps – Sandler O'Neill
Yes, that's correct, Robert. I think you have kind of been tracking around $1.4 million and I think it was just under $700,000 this quarter.
Dale Gibbons
Yes, they certainly did have higher expenses related to their branch opening, and then …
Robert Sarver
We also opened up another branch there this Monday too, Brad, so we are really gearing up for two new offices to be opened.
Dale Gibbons
Provision expense is also a little bit higher at $532,000. And what it had been related to one of the credits that Robert talked about has been in Reno.
Brad Milsaps – Sandler O'Neill
Sure. And finally, I know you talked a lot about Las Vegas, Robert, but can you just talk a little bit about the Reno market?
Thanks.
Robert Sarver
I'd say the Reno market is pretty similar to Vegas in terms of the economy and a lot of similarities. One thing I do feel though is that the Vegas market will be one of the first to recover.
There's roughly 900,000 jobs in Vegas and they are anticipating 100,000 new jobs over the next 36 months with the addition of these 40,000 new rooms, along with other things like the furniture mart that they are adding another almost 2 million square feet to. It's been 100% preleased.
And so, when you look at those jobs and you look at the time line of the casinos, the first one being the new Wynn addition Encore coming on in December, it looks as though we will be adding about 3% employment a year for the next 36 months. So, we are kind of feeling it the hardest maybe now in terms of some of the markets we are in, I think it will be one of the first to recover given the job growth coming its way.
Operator
Are we ready for the next question?
Dale Gibbons
Yes.
Operator
Brian Klock from KBW.
Brian Klock – KBW
Good morning or good afternoon, actually now. A quick question, I guess with the $5 million residential development loan that is in OREO, the $3.3 million of construction charge-offs is that entirely related to that?
Robert Sarver
That's it.
Brian Klock – KBW
So, it looks like you take about a 40% haircut on that.
Robert Sarver
Right.
Brian Klock – KBW
And the intention is that you will probably sell that and settle that property here in the second quarter?
Robert Sarver
Exactly.
Brian Klock – KBW
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Robert Sarver
I don't really know that it's out of the order. I think it's a little bit of a trend.
A number of businesses, most businesses their sales volume are down. And as you guys know now, it's not just the real estate contractor or the builder whatever, but it's the guy selling boats and car salesperson and just business in general, sales are down.
When sales are down and the economy is down, two things happen that hurt us. One is the average balances in their operating accounts go down.
So that increases our reliance on higher cost funding, because it hurts our DDAs. And the second thing is they have a tougher time paying their bills, and it just spread out between various different businesses.
Brian Klock – KBW
Okay. Is there any sort of concentration in one geography where you are seeing those C&I charge-offs or is that across the board?
Robert Sarver
No, it's primarily in Las Vegas.
Brian Klock – KBW
Okay. I see on the loan growth side --
Robert Sarver
We had no charge-offs in any market other than Nevada for the quarter.
Brian Klock – KBW
Okay. With the year-end balances, there is some strong annualized growth in residential real estate and commercial was actually about 13% linked quarter annualized.
Maybe a little color on where you are seeing that growth coming from with residential real estate?
Robert Sarver
Yes, about a third of our loan growth for the quarter was C&I, about a third residential mortgage, and about a third commercial real estate. In terms of where it was located, about 40% of it was in California and the balance kind of split equally between the other markets.
As I said earlier, it's a good time to be a lender right now for a couple of reasons. One, we are getting a shot at significant business relationships that were with larger banks that previously we really didn't have a good shot at but now those opportunities are kind of opening up.
And then second thing, it's a good time to be a real estate lender. But, it is kind of funny, our industry, we just move as a herd and we seem to get it backwards all the time.
We'd rather loan 100% to value on a house when it's selling for 200 a foot than loan 80% when it's selling at 100 a foot. And so, we are able to make loans that are just solid good loans with decent yield and those loans can carry extremely low advance rates, good borrowers and we are actually getting kind of 8% type loan rates and even a little higher in some cases and they are great quality loans but the banks they are at can't make any more of them, period, even if it's a good one.
Brian Klock – KBW
Got you.
Robert Sarver
And then, as you know, our industry in general, they'd rather be real aggressive when the values are high. When the values are low, they want to be conservative.
And in reality, you would probably better off being the opposite.
Brian Klock – KBW
Good point. I guess maybe on the construction portfolio, it looks like it was down modestly from the fourth quarter.
Actually part of that is due to the re-class into OREO that property you talked about. I guess what are you seeing there as far as the renewals and I guess how much do you have coming up of interest reserves that …
Robert Sarver
Well, the first thing is we don't do much interest reserves. I mean, that is just something we didn't do a lot of.
Second of all, we didn't get in the habit in the last 12 months like a lot of our peers of renewing loans and then adding interest reserves to them. So, I don't see us looking 18 months at a freight train down the road.
We are addressing these issues right now, okay?
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And so, we made them a loan on this commercial land. They are negotiating with Wal-Mart to sell part of it, which would pay us off, but it's just a really solid good quality credit.
And so, we are going to take advantage of those opportunities. We are going to continue to work down and work through existing issues but we are out doing business, and now is a great time to pick up customers.
When I look back in Arizona and in California at my banking career, during the tough times is where we actually had pretty good growth.
Brian Klock – KBW
Okay, great, I appreciate the color. And Dale, just a real quick question, I know you talked about the sort of deep haircut you've got on the bank trust preferred that are in your securities portfolio marked through an OCI.
I guess when do we need to worry about other than temporary impairment on those marks?
Dale Gibbons
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Brian Klock – KBW
Okay, great. I appreciate the color.
Thanks guys.
Operator
The next question comes from Richard Howard [ph] from Cayman Capital Partners [ph].
Richard Howard – Cayman Capital Partners
Hi, guys, how are you doing? I just had a question, it is kind of a follow on from what was raised earlier.
It's just that you mentioned sort of what trends you guys have been seeing in terms of the nonperforming assets, but I just wanted to ask whether or not those same trends are being represented in your charge-offs, whether it was flowing all the way through or whether you were seeing any particular sort of movement with relation to how your recoveries on those nonperforming assets were moving?
Robert Sarver
Well, it's tough after a couple of quarters to just really understand the trends. Obviously, as we kind of see the second quarter, I think we'll probably have a little better color for the rest of the year.
But, in terms of the amount of charge-offs, I'm not sure I really want to go on a limb on that in terms of where we are today and whether that is kind of go up or down a little bit. I don't see significant movement up, I guess is the question.
I feel good about saying that. I mean, I don't see significant movement up.
Richard Howard – Cayman Capital Partners
Yes, it's more about the composition of the charge-offs rather than the magnitude.
Robert Sarver
Okay. I see they are kind of similar.
I think we are going to have a few write-downs on some real estate stuff and then a number of smaller just C&I credits that people are having a hard time and we write them off.
Richard Howard – Cayman Capital Partners
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Robert Sarver
We do on a regular basis. I mean, one of the things we started doing that a number of the banks our size and smaller didn't do is when we underwrote these loans, we put in re-margin requirements.
Because one of the things we learned from the downturn in Arizona is you want to be able to get to your borrower not having to wait until the loan is due, but if you see prices come down reevaluate it. So, we started six months ago, went through and looked at all our portfolio and see where we thought values went down, where we needed to order appraisals, where we needed to revalue.
I mean, this is something we are living on a daily basis, including something that I personally spend a fair amount of my time involved in, I mean, reviewing these credits and appraisals. And it is not only so much getting appraisals, it is like even on land it is really more looking at what houses are selling for and backing into valuation and just really knowing your real estate.
Richard Howard – Cayman Capital Partners
And so, with that sort of up-to-date evaluation, where do you think your sort of weighted average LTVs are now for your various different loan slots?
Robert Sarver
Well, it kind of varies. If I look at our residential portfolio, for example, about 10% of our portfolio's in Arizona with a weighted average loan-to-value of about 68%.
California 18% at 62% loan-to-value. 72% of our portfolio's in Nevada at about a 68% loan-to-value.
On the commercial side in, say, land which is probably the biggest exposure, by and large the stuff you did at 50% loan to value and 40% a year and a half ago is somewhere between 75% and 100% today. I mean that is just a realistic view.
And so, many of those cases we are going back to people and they are having to put in money and re-margin and that is the benefit of starting at a low loan to value because you want to be able to get to the customer while he still has equity in the project. And we have had overall, I think, some pretty good success there.
Richard Howard – Cayman Capital Partners
Yes. Now, in terms of your commercial real estate portfolio, what's the maturity like of that this year?
I mean, how much of that stuff do you expect to roll over this year?
Robert Sarver
Well, I kind of would break the commercial real estate into two parts. One would be the owner occupied and that portfolio really doesn't tend to have significant payment issues and performance issues in this type of market.
If you look at the non real estate, our average maturity is probably at about five years, so probably about 20% of that portfolio would be coming up this year.
Richard Howard – Cayman Capital Partners
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Robert Sarver
Just office space.
Dale Gibbons
If our investor group …
Robert Sarver
You have it, Dale?
Dale Gibbons
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Robert Sarver
I'll give you a specific number. In terms of owner occupied commercial real estate loans, $750 million in Las Vegas owner occupied.
In terms of investor, $200 million; investor would be shopping centers, apartments, office that is not owner occupied.
Richard Howard – Cayman Capital Partners
You don't break that stuff down into sort of a more granular level in terms of the cost types, shopping centers, strip mall, office space?
Robert Sarver
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Richard Howard – Cayman Capital Partners
Okay. The last thing I wanted to ask you is you guys had sort of a pretty substantial sort of commitments to extend credit sort of outstanding at the end of last year.
I'm just wondering whether or not you've been following sort of the trend of some of your peers and reeling in your sort of credit limits and your (inaudible) …
Robert Sarver
Are you talking about where you go to existing customers with credit lines and say …
Richard Howard – Cayman Capital Partners
Yes, I assume that's what – I mean, you had about $1 billion worth of commitments to extend credit as of year end.
Robert Sarver
The typical C&I customer on a credit line advances about 35% of their credit line that they will have outstanding at one time. So, on the commercial side, it would be on a case by case basis.
On the residential side, in terms of home equity credit lines and things like that, we just don't have that big of a book and we don't start by making 100% home equity credit lines, or 120%. We didn't start with that portfolio, so we have not gone through and done kind of a wholesale go back and cut the credit lines down.
Richard Howard – Cayman Capital Partners
I am not talking necessarily about HELOC as much as sort of developing lines of credit for various different C&Is though, which I assume is what makes up the share.
Robert Sarver
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Richard Howard – Cayman Capital Partners
My final question is, and it may be repeating what someone else has asked, but both the OREO stuff that you offloaded at the end of the last year, you said you offloaded it at a small profit from where it was marked. What was the total sort of write-down on the sort of initial evaluation of that?
Robert Sarver
Well, the total write-down on one project …
Richard Howard – Cayman Capital Partners
Basically, what I'm getting at is what sort of loss severity are you seeing on offloading the OREO stuff?
Robert Sarver
I'm not sure I call it a trend because there is only two properties. One property, which was our worst project we had in the bank, we took a big loss on, and that loss was about $3.3 million.
Richard Howard – Cayman Capital Partners
On what sort of a size?
Robert Sarver
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Richard Howard – Cayman Capital Partners
Okay. So it's either really bad or it is not too bad?
Robert Sarver
Right.
Richard Howard – Cayman Capital Partners
Okay. All right guys, thanks very much.
That answered most of my questions.
Operator
Our next question comes from Hugh Miller of Sidoti and Company.
Hugh Miller – Sidoti and Company
Hi, good morning. Most of my questions were asked already, just had a couple of quick ones.
One, I'm not sure if I caught this, can you tell us what you are expecting for the cost of the $50 million issuance for the subordinated debt?
Robert Sarver
If you look at other deals that have done lately of institutions that are kind of BBB rated like we are, they have been going out in the high 9s. I think we are going to get something in that range.
Hugh Miller – Sidoti and Company
Okay. And I guess if you guys could just give us a little color on what you guys are seeing with the focus property group situation now and just your thoughts as we go forward on the potential impact for residential and commercial land and property values in Nevada.
Robert Sarver
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Hugh Miller – Sidoti and Company
Okay. Thank you very much.
Robert Sarver
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Operator
(Operator instructions) We show no further questions at this time. I would like to turn the conference back over to management for any closing remarks.
Robert Sarver
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