Apr 20, 2012
Operator
Good day, everyone. Welcome to the earnings call for Western Alliance Bancorporation for the first quarter 2012.
Our speakers today are Robert Sarver, Chairman and CEO; Ken Vecchione, President and COO; and Dale Gibbons, Chief Financial Officer. You may also view the presentation today via webcast through the company's website at www.westernalliancebancorp.com.
The call will be recorded and made available for replay after 2:00 p.m. Eastern Time, April 20, through 9:00 a.m.
Eastern Time, April 30, 2012, by dialing 1 (877) 344-7529, pass code 10012763.
Operator
The discussion during this call may contain forward-looking statements that relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. The forward-looking statements contained herein reflect our current views about future events and financial performance and are subject to risks, uncertainties, assumptions and changes in circumstances that may cause our actual results to differ significantly from historical results and those expressed in any forward-looking 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
Now for the opening remarks, I would like to turn the call over to Robert Sarver. Please go ahead.
Robert Sarver
Thank you. Welcome, everyone.
Thanks for joining us on our first quarter earnings call. Overall, as you can see, we had a very good quarter.
The underlying fundamentals of the company continue to build. We had good customer growth, which showed up in loans and deposits growing at pretty significant rates.
We continue to recruit some good management teams to the company. We just opened up a new office this week in Beverly Hills, which is off to a pretty good start.
We put a team together that started 2 months ago. They've got $10 million in deposits and $30 million of loans on the books already.
We've recruited another team in the East Valley in the Chandler market in Phoenix, Arizona, and we're in escrow to close next week on a site to open another branch there. And we brought a couple of other teams, a corporate banking team in Phoenix we just recruited 2 people from, from another bank.
And so our focus continues to grow our balance sheet with good quality customers. As you can see, our margin held up pretty good.
Dale will give you some commentary on that.
Robert Sarver
And so revenue is good. Obviously, we continue to be weighted down on the asset quality front as the Nevada economy has now stabilized and beginning to get better.
But I think we're still 1 quarter or 2 away from really showing some improvement there. And so I would say we're still hitting on 5 or 6 cylinders in that 8.
And I think we've got some work to do there.
Robert Sarver
On the expense side, overall, pretty good. Dale will comment, we had a few front end loaded expenses as related to a few things to hit the first quarter that we don't have to continue on with.
Obviously, we're very happy about our loan growth and small business loans and the fact that our interest rate is going to drop to 1% in the third quarter. We did have a little blip-up in nonperforming loans.
The FDIC, on February 28, came out with new guidance to tell us how to account for TDR loans to tell all the main side account for TDR loans. We just finished an exam with the FDIC.
And basically, the difference there is, that you cannot use the cash flow method anymore. You have to just go straight to appraisals.
So we had about $18 million of loans that are current, cash flowing and have projected cash flows to pay us in full. However, their average loan-to-value ratio on the collaterals is 106% and, therefore, they had to go on nonaccrual.
And that's kind of the blip-up there. But we don't see that as really being any trouble for us, long term, at all.
Robert Sarver
I will pass the call on now to Ken and Dale to go through the details of our performance for the quarter and then when we're done, we'd be happy, as usual, to answer any questions about the company.
Kenneth Vecchione
Okay. This is Ken.
Both good morning, and good afternoon. Thank you, all, for joining our first quarter update.
As you know, at the close of business yesterday, Western Alliance announced first quarter net income of $11.3 million, up 119% from 1 year ago and up 59% from the fourth quarter of 2011. EPS for the quarter was $0.12, which is $0.09 greater than prior year and $0.05 higher from the prior quarter.
Pretax pre-credit income this quarter was the highest in the company's history, and the company's performance reflects several key factors, which I'd like to review with you. One, loan growth of $146 million for the quarter represents our eighth consecutive quarter of growth; and two, the company exceeded its SBLF qualifying loan growth targets, thus resetting the dividend rate on our preferred stock to 1%.
The third item I like to draw your attention to is our deposit growth which totaled $241 million, up 4.3% versus the fourth quarter of 2011. Our pretax pre-credit income of $31.7 million was supported by a 4.5% -- 4.53% net interest margin.
Net interest income grew for the 10th consecutive quarter. Expenses for the quarter did drift upward, but Dale will discuss several onetime expense charges that were included in our results.
Kenneth Vecchione
Our capital base is strong from the start of the financial crisis at the end of 2007 through the end of the first quarter. Our Tier 1 leverage ratio has risen from 7.4% to 9.8%.
Our company has gotten bigger and stronger during this period. Following some brief comments regarding asset quality, our provision expense for the quarter was $13 million.
That remained flat to prior quarter. First quarter net charge-offs of $14 million remained flat to prior quarter, although our charge-off rate of 1.18% declined versus prior quarter of 1.24% and prior year, 1.39%.
Kenneth Vecchione
Overall, asset quality was a little choppy. Watch loans classified in OREO fell.
Nonperforming loans rose by $11 million for the quarter. Going forward, the company still has some work to do.
To pick up on Robert's theme, continuing to improve the company's asset quality is important to achieving sustainable growth. Lowering our quarterly expense base below Q1 results will support our pretax pre-credit income goals.
And lastly, continuing to grow the balance sheet, loans and deposits in a prudent manner while increasing net interest income will position us to maintain our core earnings momentum.
Kenneth Vecchione
Loans grew $146 million this quarter or 3% on a linked quarter-to-quarter basis. Since the end of the first quarter of 2011, loans increased $648 million or 15%.
This quarter, we purchased $70 million of investment-grade municipal leases from another financial institution. These leases are not shared credits and the company has specific equipment collateral to support all leases.
We also continue to de-risk our balance sheet. Today, construction on land and residential and consumer loans comprise only 7% and 10%, respectively, of our loan portfolio.
C&I loans now comprise 29% of total loans, up from 22% in the prior year, and our loan pipeline remains strong.
Kenneth Vecchione
As we continue to improve the quality of our loan portfolio, I should say, we continue to improve the quality of our loan portfolio, nearly 25% of the loans booked are graded 1 through 3.
Kenneth Vecchione
The next slide should be familiar to many of you. We experienced the bulk of our charge-offs from 2005 through 2008.
However, loans originating in '09, '10 and '11 have experienced very low cumulative charge-offs to the first quarter of 2012. This is consistent with the composition of credits displayed in our prior slide.
Kenneth Vecchione
Since being accepted into the Small Business Lending Fund in September 2011, we have stated our goal was to grow SBLF by more than 10% by year-end 2012. I'm pleased to announce due to the hard work and the commitment of the people of Western Alliance, we achieved our objective this quarter.
SBLF qualifying loan growth exceeded the baseline by $169 million, which will lower our preferred dividend rate to 1% in the third quarter. Preferred stock dividends will decline from nearly $1.8 million per quarter to under $400,000.
This will improve EPS by $0.015 per quarter effective Q3. Going forward, we intend to remain focused on lending to small businesses.
This will help our customers and the local economies we serve and ensure we remain well above the baseline to support the lower dividend payout.
Kenneth Vecchione
Deposit growth was particularly strong, rising $241 million from the fourth quarter of 2011. From a linked quarter-to-quarter perspective, deposits grew 4.3%.
This growth should be viewed juxtapose to declining deposit costs which fell 8% from the fourth quarter of 2011.
Kenneth Vecchione
I would also like to point out noninterest DDA accounts represent 30% of deposits. Last year, DDA accounts represented 26% of deposits.
Last quarter, we provided greater transparency into the company by discussing financial results of each bank. Dale will provide a walk-through of our corporate results in a few seconds.
Western Alliance Bank saw its pretax pre-credit income reach $13.1 million this quarter. Western Alliance improved pretax pre-credit ROA to 236 basis points by increasing revenue and maintaining their expenses flat to prior quarter.
Their efficiency rate is now below 46%.
Kenneth Vecchione
Torrey Pines exhibited strong pretax pre-credit ROA of 263 basis points as it, too, maintained its expenses consistent with last quarter as it grew net interest income 3% from prior quarter to $21.2 million. Their efficiency ratio improved from 54.9% last year to 49% this year, and pretax pre-credit was -- income was $11.4 million, up $800,000 from the prior quarter.
Kenneth Vecchione
Bank of Nevada, operating in a difficult economic environment, maintained revenue, lowered expenses and increased pretax pre-credit income to $14.4 million, which lifted their ROA to 200 basis points.
Kenneth Vecchione
Dale?
Dale Gibbons
So for the first quarter of 2012, the net interest income was $70.1 million. That was up 14.6% from the first quarter of last year.
Again, we were successful in working both sides of the balance sheet. We had higher interest income and lower interest expense of both a linked quarter and a year-over-year basis.
Net interest income rose 2% from the fourth quarter of 2011.
Dale Gibbons
Operating expenses increased 5.7% to $44.2 million in the first quarter from the same quarter 1 year ago and 3.2% from the fourth quarter. Our pretax pre-provision income was $31.7 million or 1.86% of average assets, up from $25 million or 1.6% last year.
Our credit loss provision was $13.1 million, which was flat to the fourth quarter. In addition, net loan losses were slightly above that at $14.1 million, which is also the same as the fourth quarter of '11.
Dale Gibbons
Our repossessed asset valuation was $2.7 million. It was down from $6.1 million in the first quarter of 2011.
We had a minor charge of $333,000 in trust preferred valuation, which was offset by securities gains, leaving us with pretax income of $15.9 million.
Dale Gibbons
Our income tax rate has fallen during the past year due to an increase in tax exempt income, as well as other tax strategies resulting in net income of $11.3 million and earnings per share of $0.12, which was 4x the $0.03 of 1 year ago.
Dale Gibbons
Along with increasing our net interest income, the margin also rose slightly to 4.53% during the quarter. Noninterest expense increased $1.4 million on a linked quarter basis.
It includes $1 million for director share rewards, as well as a special production incentive for achieving the 10% growth in qualifying SBLF loans, which will maximize our dividend savings. These costs resulted in a back up of the efficiency ratio to 57% from 56.5%.
Excluding these nonrecurring charges, the efficiency ratio would have declined to 55.7%. Notably, the efficiency ratios were flat at the subsidiary banks.
Dale Gibbons
Our pretax pre-provision income continued to decline with our level of 1.86%, still in the trend line to achieving our near-term goal of 2%.
Dale Gibbons
Looking at the drivers of our net interest income, our cash position was essentially flat during the quarter. Investment balances were down modestly, but with a higher portfolio yield rising to 3.13% primarily resulting from our investments in municipal securities rated A or better.
Dale Gibbons
As Ken mentioned, our loan balances increased $146 million during the quarter, but our yields fell 16 basis points. This includes the $71 million of investment-grade municipal leases that yielded on average 2.75%, as well as our $82 million of SBLF loan growth which had a yield of 4.31%, both notably lower than our current portfolio yield of 5.6%.
Dale Gibbons
From the first quarter of last year, loan yields fell 48 basis points, which has been more than offset by an increase in the investment yield of 46 basis points and our decrease in funded cash of 30 basis points. The combination resulted in an increase in the interest margin of 4.35% to 4.53%.
Dale Gibbons
Our problem assets continued the declining trend with year-over-year reductions in watch loans of 35% to $133 million. Classified accruing loans, down 24% to $97 million.
Nonperforming loans, down 10% to $104 million; and repossessed assets, down 17% to $81 million. Each of these categories also declined from December 31, except nonperforming loans, which Robert mentioned, which were up during the quarter.
Dale Gibbons
Robert indicated that the entire increase in NPLs was attributable to loans being placed on nonaccrual that are current with regard to public rule and interest payments. For our total portfolio of $104 million, more than half of those loans are also current with regard to principal and interest and cash flow service.
Dale Gibbons
For our other real estate, it declined from $88 million to $80.7 million during the quarter. It includes $10 million of sales adjusted over 93% to book value.
Land comprises $54 million of this total and is now carried at 16% of the original appraised value. Given the severity of decline of this asset class, our improving economic outlook and the nominal carrying costs of unimproved land, we are disinclined to liquidate some of these parcels at the current depressed valuations.
Dale Gibbons
The improved property in the OREO book is carried at $27 million or 41% of the original appraised value. Using our semiannual OREO appraisal schedule, 62% of our other real estate is being appraised this quarter and includes $30 million of unimproved land in Nevada, which has typically been the most price-volatile property segment.
Dale Gibbons
Our capital levels and parent liquidity remains strong and are well above our current requirements, as well as those of Basel III, which don't take full effect until 2019. The capital ratio slippage we saw at Western Alliance Bank and Torrey Pines Bank from the first quarter of 2011 to the first quarter of '12 was driven by the robust loan growth in 2011.
Our capital ratios are flat in the first quarter at these institutions as internal capital generation has fully supported their balance sheet growth.
Dale Gibbons
Dividend service to the parent company from these 2 subsidiaries refinanced late last year and has targeted about 30% incurred net income. This increased liquidity augments the already existing ample resources at the parent at a time when the parent's cash needs may decline as a result of lower SBLF dividend payments.
Dale Gibbons
Looking ahead, our loan-to-deposit pipelines remained strong and we expect to continue our average growth rate of about $100 million per quarter for each category. However, interest margin will fall to around 4.4% this quarter as loan yields continue to decline, as well as reflecting the full effect of the lower pricing of the SBLF loans and the acquired investment-grade municipal leases.
This will -- which crimped the margin by about 5 basis points. However, with our strong balance sheet growth on loans and deposits, we continue to expect that our net interest income in dollars will rise unabated.
Dale Gibbons
In addition, as a result of achieving over 10% SBLF loan growth in the baseline for dividend service should [ph] fall, it was $1.8 million in the first quarter. It will be $1.3 million this quarter and down to $350,000 in the third quarter and thereafter.
Dale Gibbons
As we mentioned on the last call, we expect our margin to be under pressure during 2012, but it should be at a significantly more modest pace than what we experienced from going from Q1 to Q2.
Dale Gibbons
Because of the nonrecurring expense items in the first quarter, operating expenses should decline in the second quarter even though, we've continued investing in our business with the new office in Beverly Hills that Robert mentioned, as well as hiring 7 relationship managers during the first quarter. Revenue should continue to decline at a faster clip than expenses, taking the efficiency ratio below 55% by year end.
We are very cognizant of not leading with expenses to ensure our continued efficiency improvements.
Dale Gibbons
We expect asset quality to continue to improve at a similar rate of progression as what we've experienced for the past 2 years.
Dale Gibbons
Finally, looking at branch locations, Robert mentioned that not only did the office reopen in Beverly Hills this week, but we are looking at opening another facility in Arizona later this year.
Dale Gibbons
At this time, we'd like to open it up for questions.
Operator
[Operator Instructions] Our first question comes from Casey Haire at Jefferies.
Casey Haire
Just a question on the margin. I appreciate the color on the near-term outlook down to 4.4%.
Should we expect the same level of compression going forward with -- just given the pressure on loan yields and lower on the deposit side of things?
Dale Gibbons
No, we shouldn't. This has some onetime items in it.
I was kind of alluding to that have an overhang into the first quarter with the acquisition of our SBLF loans that have been at a lower rate than what our average loan origination rate has been, as well as the 2.75% yield that we had on the municipal leases that we acquired from another large financial institution. So if you back out those items, we're looking for our margin to trend down probably in the low- to mid-single digits quarterly basis points going forward.
We still expect to get some benefit from continued management of our deposit expense side, as well as perhaps an additional lift from mix changes related to our securities portfolio.
Robert Sarver
Which should mitigate that decline in the loan yields.
Casey Haire
Okay, got you. And then just on the provision, I guess a little surprised to see that flat given that the loan growth was a little bit slower and it sounds like the loans that you did put on this quarter were a little bit higher grade.
Can you just give us some thoughts on what the outlook for provision looks like going forward?
Dale Gibbons
Well, the provision, that's been one of the tougher calls for us certainly. But as Robert indicated, we completed this exam at Bank of Nevada.
They had a bit of a different interpretation in the past. That is, a restructured or an impaired loan that is current with the principal and interest that fully amortizes its principal balance to maturity.
But if in the interim now we've had a valuation change or increase in capitalization rates that results in that loan being upside down in collateral, they've mandated some of those to be either charged off or reserved and placed on nonaccrual. That did have an effect on the provision expense for the first quarter, and we're not looking for that item to necessarily carry forward into the future.
However, this has been an area where it's been difficult for us to really kind of nail the same thing with our evaluation and other real estate. But I would tell you that it did inflate the provision expense in Q1.
Casey Haire
Okay, got you. And then just lastly, the tax rate you mentioned, it got some benefits from muni investment strategy and some other tax advantage investments.
Is that sustainable going forward here at 28%?
Dale Gibbons
I would look for it to probably be at a modestly higher rate, maybe more like 30% or just over 30%. But for the most part, the enhancements or reductions that we have in our tax rate, we continue to be able to believe that we can maintain that.
Operator
The next question comes from Brett Rabatin of Sterne Agee.
Brett Rabatin
I wanted to see if I can get a little more color on the expenses. I couldn't quite keep up with all of the color around the discretion or nonrecurring stuff in the first quarter on the expense side and then what exactly reverses out in 2Q in terms of what you had in 1Q that's not repetitive?
Dale Gibbons
Sure, yes. We made a change on our director share awards this year and there's no vesting to them anymore.
So because there's no vest, instead of amortizing that cost over the year, you just take it up front. So that cost, along with our -- an incentive we had in SBLF loans that was kind of a onetime thing, was about a $1.2 million.
And so that's something that won't be recurring.
Brett Rabatin
Okay. And then, obviously, you're having the land reappraised, the $30 million reappraised in the second quarter.
Can you give us any early indications on if you expect the amount of related expenses to be higher in 2Q, like it was in 2Q last year or any thoughts on the land...
Dale Gibbons
It's hard to tell because we don't have any of those appraisals. But what I would say just in general is, I think we probably got another quarter of some write-downs based on appraisal valuations.
But I do think, starting in the second half of the year, the level of REO write-downs and costs associated with those will come down pretty significantly because as of June 30, everything will be appraised as of this year. And when you look at valuations this year going forward, and where the different markets are in terms of property values, I don't see anything close to what we've seen the last couple of years.
So we may have one more quarter with significant write-downs on the REO but beyond that, I think we're pretty stable.
Brett Rabatin
Okay. And then just lastly, I was curious on the loan pipeline and the $100 million that you mentioned.
Does that include any syndications or any transactions like the first quarter? Or is that stuff that you're all originating in-house?
Dale Gibbons
No, that would be organic.
Operator
The next question comes from Joe Morford of RBC Capital Markets.
Joe Morford
I guess first, just a couple of kind of more administrative questions on the growth. The municipal leases that you added, what's kind of duration of those, how long are those schedules?
And what bucket are they included in the loan portfolio?
Kenneth Vecchione
Yes, this is Ken. So the average life of these are about 2.6 years.
The average term is about 4.8 years. They were -- just about all of them, with the exception of one loan, was AA-rated and you'll find them in C&I.
Joe Morford
Okay. And then similarly, do you have a breakdown of the SBLF qualifying loans this quarter in terms of -- was all of that in C&I as well, or was some in kind of owner-occupied CRE at all?
Kenneth Vecchione
Yes, it'd be both. A mix of both.
Joe Morford
Okay. And then lastly, just how should we think about the mix of loan growth going forward and maybe this $100 million number you're talking about?
If you were going to kind of slow the emphasis on some of the SBLF credit, where are we likely to see more of the growth going forward?
Kenneth Vecchione
I still think you'll see 50% probably to 2/3 of our growth on loans to businesses, whether they're owner-occupied or just straight C&I, with the balance being primarily real estate.
Robert Sarver
Yes, Joe, about 75% of our SBLF loan growth was in owner-occupied, the rest was in C&I.
Operator
The next question comes from Brad Milsaps at Sandler O'Neill.
Brad Milsaps
Just a question. Kind of back to the margin, more on your guy’s ability kind of hold the line on loan yields, if you can disclose your 10-K that you've got a number of loans at floors.
They're close to 6%. Just any additional color on what the environment is right now as things have improved in your markets for holding those floors.
Is it pressure-intensified more so than last quarter and just kind of what you guys are doing to combat it?
Kenneth Vecchione
Well, there is definitely some pressure. I think the biggest thing that's offsetting that for us is our ability to just generate new customers and generate new business.
And so while there is some pressure, we're also able to pass on some of the real low-rated loans, low interest rate loans because we've got enough quality business at decent pricing and profitability that we can bring in the bank.
Brad Milsaps
Got it, got it. And then just a follow-up question on a provision.
Dale, you mentioned some of the things that occurred at the Bank of Nevada, but it also looked like Western Alliance Bank had a negative provision for the quarter. Just curious if there's anything nonrecurring there, if you just had some recoveries or kind of how to think about that as you move through the year.
Dale Gibbons
No, there isn't. That's just a function of -- each of the banks has the same loan loss reserve allocation methodology, and depending on what type of loan growth they had, what the grade of those loans are and how those balances have changed, what's maybe going on with their 114s, their specific allegations results in the provision by each bank.
So that never came out to be negative at Western Alliance Bank this time. But in aggregate, it was still a positive number.
I don't expect that to necessarily continue. But again, it depends upon where the localized growth is and what that quality looks like.
Kenneth Vecchione
We had no net charge-offs. I mean, they didn't really have any losses, and their loss rates are getting so low right now.
Each quarter, a low loss rate is replacing a previous quarter in the formula, 36 months ago or 12 months ago at higher rates.
Operator
The next question comes from Terry McEvoy at Oppenheimer.
Terry McEvoy
First question on construction loans. They were down in the first quarter.
Could you just talk about your appetite for putting on new construction loans and whether that's simply been offset by the ongoing runoff of some of the legacy loans?
Dale Gibbons
That's a good question because in the markets we're in California and Arizona, we're seeing a resurgence in construction in certain areas. And so that's a pretty good opportunity for us right now because the number of the banks haven't gotten back in the construction lending business.
And so right now, you can kind of cream the market in terms of the real high quality stuff and real good loan covenants and advanced rates. We've got a fully net lease government building construction loan we're doing.
We got a multifamily deal in California at less than a 50% loan to cost we're doing. I mean, there are some nice niche opportunities.
So I would see, going forward, that it's possible that, that construction number will be more flattish for a while rather than declining as we're booking a few credits that are really very strong.
Terry McEvoy
And then a second question. I know the first quarter looks a lot better than the first quarter of last year, but ROA is still mid 60s.
What does it take to get it back to the 1% ROA? I know Ken talked about kind of asset quality expenses and then balance sheet growth.
Could you maybe put a time line on those 3 and whether you think you can get back, again, a 1% type of deal?
Dale Gibbons
What it takes is one thing: the Las Vegas economy getting better. That's it.
We're doing great everywhere else and soon as the economy there starts picking up, and I think there's a lag behind Phoenix. I mean, Phoenix is in a strong recovery mode right now.
And my best guesstimate is that lags a year. So I think you're going to start to see us with better performance in the second half of this year.
And I think by the end of next year, we should be at more of a normalized operating performance. And if you want to call that 1%, then that's 1%.
Operator
The next question comes from Brian Klock at KBW.
Brian Klock
And then maybe just a follow-up on Terry's question. And, Robert, it seems like there has been some stabilization in the Vegas economy, even airport traffic at McCarran is up, by 5%, 6% year-over-year.
And like you said, it sounds like some of the real estate values are stabilizing. It seems like, like you said, the provision, getting the provision down, you've got to -- you're almost at your 2% pre-pre-ROA target.
So that's really the big thing, is just getting the provisions back to normal, that's the way I look at it. Does that sound...
Robert Sarver
Yes, yes. I think it's the provision and I think it's the REO stuff, too.
And so what you have is you have a lag between the economy and appraisal valuations. You have a lag going down and you have a lag going up.
So as the market gets better, like what you're referring to, the appraisals are probably about a 6-month lag on that activity, and that's really what drives a lot of what we're doing. What's the most likely scenario is, we're not going to have a gradual change in values.
It'll be more of a significant change in values when that happens. And the question is, when is that, and I think that starts in the second half of this year.
But there is a lag because a lot of the credit is driven off of appraisal valuations and appraisal valuations drag -- lag the economy.
Dale Gibbons
Brian, there's also several cost in noninterest expense that are still elevated. We have loan repossessed asset expenses.
Those are primarily driven out of Bank of Nevada. They're still paying a higher FDIC insurance premium and we still have a number of people that are allocated to special assets.
So those should fade over time as well, but yes, certainly, the provision cost is by far the biggest lever.
Brian Klock
Yes, definitely. So I guess maybe just one last follow-up question, too, and I'll get back in the queue.
Dale, just to make sure I understand it correctly, the NIM, so the guidance and the discussion about the municipal loans book that you put on with the lower yields, I think you said mid-single-digit decline in the second quarter of '12, but do you refer that to be 4.4%?
Dale Gibbons
No, no. What I meant was, okay we were 4.53%.
We're guiding to around 4.40% and -- for the second quarter. And then after that, that the rate of decline should abate from what we're going to see from Q1 to Q2.
So I said kind of low- to mid-single digits going from Q2 to Q3, Q3 to Q4.
Brian Klock
Okay. And I guess maybe just last question on this, too, is that yield you gave on the municipal book, the 2.75%, so that's not the TE growth up yield?
Dale Gibbons
No, that is the TE growth up yield. And I'm talking taxable equivalent yields when I'm referring to the margins of 4.53% and 4.40%.
Operator
The next question comes from Tim Coffey at FIG Partners.
Timothy Coffey
Robert, I was wondering what -- I mean, you made some comments already about the write-downs potential in the second quarter of this year. I'm wondering how they would compare to the second quarter of last year.
Robert Sarver
How they compared to the third quarter last year? Let's see.
REO write-downs in the third quarter of last year.
Dale Gibbons
In the second quarter, $8.6 million.
Kenneth Vecchione
Yes, I don't think they'll be that high. They'll be lower than that but they may be had higher than the $2.7 million, I guess, is Rob's getting at.
Timothy Coffey
Okay. I'll write down that one.
And then do you have any -- are you interested in buying more loans like you did this past quarter? And if so, do you have kind of a target amount?
Robert Sarver
We don't have a target amount. I think it's just more trying to be opportunistic.
We don't really view it as our part of our key strategy or it's not budgeted. It's just that if there's an opportunity that arises, we'll take a look at it, and we look at a lot of opportunities and we do very few.
So it's not something we're budgeting for or forecasting.
Kenneth Vecchione
We had a lot of deposit growth, and what we like about these loans is that they amortize real quickly. So if there is a spike-up in rate, or not holding a low rate wrote loan for a long period of time.
So it's opportunistic, as Robert said, but combined with also our strong deposit growth.
Robert Sarver
Really, it's an alternative against our securities portfolio. We haven't looked at these as loans.
They're not really behaving like that. They're rated.
So what's a better opportunity for a risk-adjusted shareholder return, to buy these AA-rated municipal loans or to buy maybe a municipal security at the same rating? Well, these had a little bit high credit on it.
Timothy Coffey
Right. I'm looking at deposit growth, too.
Operator
The next question comes from Jeff Bernstein at AH Lisanti.
Jeffrey Bernstein
Just on the TDR, the change by the FDIC and how they're looking at these. So that would be your entire portfolio was reviewed and this is sort of a onetime adjustment?
Dale Gibbons
Well, that would be the Bank of Nevada portfolio review. When you look at the other 2 banks, they just had very few of this to begin with.
So it's not -- it's only really material to the Bank of Nevada. And it's -- the GAAP, the accountants, you can account for this by using the cash flow method or using the appraisal method.
Both are GAAP, both are fine, everyone's been doing both, but they're the same amount. You just got to use the appraisal method.
Jeffrey Bernstein
Yes, totally understand that. And then so the sort of first steps to addressing that is what -- you're going back and asking the owner to put up more equity.
That's kind of the first stroke there and then sort of what happens to kind of fixing these?
Dale Gibbons
Well, yes. I mean, in some cases, you can't.
I mean, in some cases, we've got 1 loan, it's a 10-year full amortizing loan and its current and payments have been made, never missed, and nothing you can do. I mean, that's just the terms.
We just have to account for it differently.
Jeffrey Bernstein
So that will not be foreclosed. It's just how you're going to...
Dale Gibbons
No. I mean, the odds are most of this won't be foreclosed.
Yes, I mean, these are just loans that are paying, but the loan to value is higher than 100%.
Jeffrey Bernstein
Got you, totally understand. So there's no other actual impact on the P&L or on the balance sheet at all?
Robert Sarver
Well, the impact on the P&L is, the payments we get, for the most part, have to go to principal so we can't collect interest. So what will happen is down the road, when these things get a payoff or refinance, all of a sudden, we'll get a big income recovery.
Jeffrey Bernstein
Got you. And/or if the appraisal lever sort of comes back to where it makes the LTV kosher again?
Dale Gibbons
Yes, but in that case, we could put them back on accrual but you'll still never recapture the amount that was applied to principal in the interim period until such time that the actual loan is disposed of.
Operator
At this time, there are no further questions. Would you like to make any closing comments?
Robert Sarver
No. Just appreciate the participation and thanks for following us and we'll be back with you in 90 days and appreciate you listening in.
Thank you.
Operator
The conference is now concluded. Thank you for attending today's event.
You may now disconnect.