Oct 17, 2014
Executives
Robert Sarver - Chairman and Chief Executive Officer Dale Gibbons - Chief Financial Officer
Analysts
Joe Morford - RBC Capital Markets Casey Haire - Jefferies Brad Milsaps - Sandler O'Neill Brett Rabatin - Sterne Agee
Operator
Good day, everyone. Welcome to the Earnings Call for Western Alliance Bancorporation for the Third Quarter 2014.
Our speakers today are Robert Sarver, Chairman and CEO; 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 o’clock p.m. Eastern Time, October 17, 2014 through Tuesday, November 18, 2014 at 9:00 a.m.
Eastern Time by dialing 1-877-344-7529, passcode 10052772. 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 now like to turn the call over to Robert Sarver.
Please go ahead.
Robert Sarver
Thank you. Welcome to Western Alliance’s third quarter earnings call.
First, I would like to review some of our performance highlights, Dale will discuss some of them in a little more detail, and then we will open up the lines for your questions. This was another great quarter for our company, strong balance sheet growth, record revenue and operating efficiency and continued credit recoveries.
Net income was $40.9 million or $0.46 per share compared to $0.40 in the second quarter and $0.33 for the same quarter a year ago. Loan growth was $385 million or over 20% annualized on a linked quarter basis.
Deposits were up $228 million or nearly 11% annualized. Third quarter revenue grew $4 million over the prior quarter, while expenses were held relatively flat.
Our tangible book value per share increased to $9.53 during the quarter as we continue to grow our tangible book value faster than our earnings per share. Non-performing assets were steady at 1.23% of total assets, while our net recoveries increased to 15 basis points of total un-annualized or $2.8 million.
Despite our strong balance sheet growth, capital remained strong with our leverage ratio, a little over 10% and total capital at 12%. Return on assets climbed to a record 1.63% and return on tangible equity was over 19%.
Net interest income was up $4.2 million over last quarter to $98.1 million benefiting from strong loan growth of stable interest margin. Income recognition from early payoffs on impaired loans was $2.5 million for the quarter, a $600,000 decline from the second quarter.
Operating non-interest income was flat to last quarter and last year. Total revenue climbed 4% last quarter to just under $104 million, while operating expenses were held flat at $52 million.
Our strong loan growth drove a provision of $400,000 for the quarter while also collecting net recoveries. Gains and REO dispositions were $2 million.
We also recognized a gain of $900,000 from writing down our trust preferred debt as credit spreads widened towards the end of the quarter. During the quarter, we repurchased $6.5 million of our 10% senior debt due next year and that resulted in a $500,000 loss on our income statement this quarter.
All this resulted in pre-tax income of $53.9 million. Income tax expense is 24% of pre-tax income as our rate is 8% lower than the statutory rate due to a large portfolio of tax exempt investments in loans, 2.5% lower from low income housing tax credits and 1% lower for our investments in bank owned life insurance.
Diluted shares rose slightly from our employee benefit plans as no shares were sold under the company’s at the money equity offering this quarter which resulted in an EPS of $0.46. I will say given the volatility of the stock market and where our shares are, the ATM is out of service at this point.
Taxable revenue – taxable equivalent revenue increased in each of our business segments during the quarter except Arizona where deposits fell slightly. Our centrally managed business lines increased the most to 18% of total revenue.
We have renamed this segment from national business lines as we think the new name better reflects how we think about these operations. In a later slide we will review how much of each segment’s loan portfolio is outside of our three state primary market area.
Pretax income by segment generally tracks revenue except Nevada is higher as it continues to benefit from lower provisions due to net credit recoveries, while central segment is lower than its revenue proportion as – has higher provisions resulting from its stronger loan growth. The investment portfolio and cash position declined during the quarter making up the difference between the faster growth of loans over deposits.
Reflecting our strong loan growth the allowance for credit losses is up 11% in the past year to $109 million even though credit quality metrics continue to significantly strengthen. For the first time our book activity exceeds $1 billion as our tangible book value per share rose 26% in the past 12 months from $7.57 to $9.53.
This next page shows our segment reporting for loans and deposits of our $385 million in loan growth. Over 70% of it was in our central units led by $143 million in mortgage warehouse, $69 million in resort finance, $38 million in public finance.
Arizona led the geographic regions and loan growth was $74 million net increase. One thing that I will also point out is the central lines their business is a little less seasoned so we have less pay-offs, less amortization so the growth comes a little easier when our more longer established business lines in Arizona, Nevada and California have a significant rollovers, most of our loans are shorter term in nature.
Deposit growth was driven by the California region with a strong $289 million increase offset by a slight decline in Arizona of $38 million. This next slide is new and we will try to take a look at our loan diversification.
We have had a number of questions from some of you about these national lines centrally managed business lines we have and really how we look at credit. So this slide takes the deeper dive into our portfolio showing the significant business segments of our loan book.
Each of these segments is essentially competes for capital against the other which is awarded based upon where we see the highest risk adjusted return. If you look back over the last 5 to 10 years, I think one of the areas that we had a weakness in especially from a risk management standpoint is we had less geographic diversification with our customers and we had less product geographic diversification with our customers.
So one of the things five years ago we started out trying to is have more credit products and be able to lend money to more people in different markets. As all of you know our industry is a little bit of a herd, when it comes to lending money everyone kind of moves in the same direction.
We wanted to be in a position where we had more flexibility so that we can decide to put more money in different geographic markets and less money in geographic markets where we are having some economic issues. And then we can also change up our mix by product as our competition were to get overly aggressive or may or under-competitive in certain areas.
So now whether – rather than just remain on traditional C&I loans, owner occupied real estate and investor real estate we have these different product lines. So the one market and one product line one of our big bank competitors decides they are going to structure deals that we think are right or they are going price deals we think too cheap and we can do less of that and do something else.
We are not just now in a position where we have to follow what the other banks are doing, because we only have three or four different products. Consequently, we are in a position, where we are able to walk away from over 80% of our credit opportunities in some of these areas.
As an example, lot of the multi-family real estate right now were backing off of, I think that’s getting overbuilt a little bit. There are certain pockets in our market, where owner occupied commercial real estate loans are being priced at spreads in the 150 to 200 range, which we don’t think adequately accounts for the risk involved.
We also jumped into some markets that were dominated by some of the finance companies. As they pulled out, that allowed us to have a nice niche, where we could get good returns and really solid structure.
Now, they are starting to come back in some of those markets that were slowing down. Those markets are going in other markets.
Basically, what we want to do is we want to have more products, we want to have more geographic diversity, and we want to be ahead of the curve of what our competition is doing and be able to be nimble and manage our risk and our returns significantly higher than our peers. In terms of loan disbursements, 84% loans we make our two entities or collateralized by assets in our primary markets of Arizona and California, Nevada.
However, each of these geographic segments makes loans out of the areas many of our team members maintain business relationships with people that do business in other markets. A good example of why we renamed our business line centrally managed rather than national is looking at our public finance group.
7.8% of our total loans are in the footprint public finance loans and 0.4% are out of the footprint. So, the total of 8.2% of public finance loans, 95% are actually in Arizona, California or Nevada.
Essentially, however, our loan growth is relationship based with the exception of corporate finance, which acquired small pieces of shared national credits. Usually at a discount in the secondary market, this area grew $29 million in the third quarter and comprised of just 5.5% of our loans outstanding.
Community association lending has the greatest proportion of its total loans outside our primary market as it has representatives garnering core deposits and originating very low risk loans with representatives now in 29 states. Up $266 million, C&I loans grew the most last quarter, includes growth in the mortgage warehouse and public finance area, construction loans, CRE investors each increased about $60 million during the quarter, while residential and consumer loans continued to have some runoff.
I took a look at the top 25 credits originated during the quarter. Of those 16 were new relationships to the bank, 9 were renewals involving existing relationships, 19 of those credits were C&I loans, 4 were real estate construction loans and 2 were owner-occupied or investment CRE real estate loans.
In terms of deposits, $198 million of our deposit growth was in CDs last quarter as non-interest bearing fell $32 million during the period after increasing $185 million in the second period. Money market and savings accounts grew $48 million.
During the past year, loan and deposit growth has been almost perfectly matched with loans up $1.4 billion and deposits growth just $9 million higher. We have rolled out a new campaign to really focus on non-interest bearing DDA accounts over the next 15 months within our staff and really want to focus on growing our deposits.
We do have plenty of loan growth. And so a big part of our ability to grow next year is going to be dependent upon the core deposits we can bring into the company and we are focused on doing that.
I am going to turn the next few slides over to Dale who can talk a little bit about some of the income drivers and our net interest margin. Dale?
Dale Gibbons
Thanks, Robert. The cash position of the company and the investment portfolio contracted modestly during the quarter to fund the disparity of loan growth over that of deposits.
Our security yields were up 3 basis points. The loan yield decline did not follow through to the margin as it was offset by the increase in our loan portfolio relative to total earning assets.
Our funding costs continue to be very stable, only fluctuating 1 basis point during the past year. Our interest margin increased 4 basis points during the quarter to 4.43% on a 30 to 360 day basis and includes the benefit of an additional day.
This was partially offset by a 3 basis point reduction from lower disposition accretion on impaired loans. The lower graph shows the margin increased to 4.33% from 4.26% in the second quarter if we exclude the disposition accretion.
Operating expense has been flat all year at $52 million a quarter while revenue has climbed steadily each quarter driving down the efficiency ratio to 47.2%. Within the expense categories, compensation costs have climbed as FTE employees rose by 8 during the quarter and incentive payments increased in line with our loan and deposit growth.
Our – for pre-pre ROA and net income for the first time we achieved our longstanding goal of 2% during the quarter. It may slip from this jump up from the second quarter of 2014, but we believe the trend is intact to continue to improve this metric.
As net income topped $40 million, our return on assets climbed to 1.63% and ROE was just under a point. Organic adversely graded assets, which consist of other real estate non-performing loans, other classified loans and special mentioned declined to $282 million during the quarter and are down 13% from a year ago.
Acquired adversely graded assets fell to $51 million, which is net of the $31 million reserve for unrecognized credit and rate discounts primarily from the Centennial Bank portfolio. Over 70% of our $75 million in non-performing loans were current with regard to contractual principal and interest payments at September 30.
Gross charge-offs declined from an already low level to only $1 million during the quarter, which represents just 5 basis points of average loans annualized. While recovery has climbed to $3.8 million resulting in a net recovery of $2.8 million for the third quarter compared to a net recovery of $1.5 million during the same period last year.
While our total allowance for loan losses climbed to $109 million at September 30, including our $400,000 provision, strong loan growth pulled down the loan loss reserve ratio 2 basis points to 1.38% of total loans. Our capital growth in excess of assets continue to push up our tangible common equity ratio, which rose to 8.2% at September 30 from 7.9% a quarter ago and 7.4% a year ago.
The total capital ratio declined slightly during the quarter from 12.4% to 12.2% due to an increase in unfunded commitments on new credit lines. Under the Basel III rules that go into effect next year, each regulatory capital ratio will be haircut about 20 basis points, but will still significantly exceed the well capitalized regulatory standards.
Robert Sarver
Looking forward and specifically for the fourth quarter, I know Dale has been calling for modest margin contraction for about the last 7 years and it hasn’t materialized, but he still sees it on the horizon even though I maybe not in that camp as much as him. So, I am going to go on record again on that.
Continued loan pricing pressure definitely exists as new loan origin rates have been less than the rates on loans paid off. We will probably see some continued reduced gains on purchase credit impaired loans.
The flatter yield curve we are looking at and limited opportunity for funding cost reductions all point towards margin contraction, but so far we have managed every quarter to do pretty good job fighting that off. Our operating efficiency ratio is likely to climb modestly in the fourth quarter as the interest benefit from pay-offs of impaired is expected – loans are expected to fall, but we still expect our ratio to be under 50%.
As we have seen in every quarter this year, our asset quality outlook continues to be quite benign, low levels of gross loan charge-offs and we have this continued tale of recoveries in Las Vegas that should last another 9 to 12 months. On the business development side, our loan pipelines and deposit pipelines still remain pretty robust.
And finally, we got an investment grade credit rating for Western Alliance Bank yesterday from the Standard & Poor’s company. It reminds me a little bit when I look at that rating and read the report, think back to 5 or 6 years ago where we were, it reminds me a little bit long time ago when I was young the women’s tennis tour came to – used to come to Tucson every year.
My dad was involved in it. And when they had their first major sponsor, it was Virginia Slims, the cigarette company and the slogan was you have come a long way baby.
So, I think when I look at this Standard & Poor’s report, it seems to me we have come a long way baby. So, we are pretty proud of that.
That will help us a little on the deposit side too in terms of some of the larger relationships we are pursuing. So, that’s really a recap for the quarter where we see ourselves going again.
We are just cranking out some good returns quarter-over-quarter, continued to look at some deals, but for the most part, we make more money and our EPS grows faster than the companies we are looking at buying and unless things line up really good for us and make a lot of sense for our shareholders, we are really not in the business of just paying prices to reward the selling shareholders. So, having said that, as you have known, we have been involved in discussions with over 20 companies over the last 12 months, personal discussions and we do have a couple of deals that we are working on.
And so I think we will probably do something over the next 6 months, but we are remaining pretty selective, because we only want to do something that’s going to grow our earnings per share. We are not looking to get big to just get big.
So, we are going to be pretty selective there, make sure we get the right partner on board. So, that kind of concludes our remarks and Dale and I are happy to open it up and answer any questions you have for the quarter.
Operator
(Operator Instructions) Our first question comes from Joe Morford at RBC Capital Markets.
Joe Morford - RBC Capital Markets
You have done a great job holding expenses flat this quarter even this year, even reducing them slightly. What are the opportunities do you have to offset the ongoing cost associated with the growth in the business and need to invest in technology and all the regulatory stuff as well?
Robert Sarver
Well, to a certain degree some of our technology investments has been kind of front-end loaded. So, those costs are starting to taper off a little bit.
But we are fortunate that our cost structure is setup to really focus on this kind of business segment. And we don’t have a lot of offices.
Our offices are all efficient. We grind through the numbers every month and it’s about little gains right now.
It’s all about the little things we can do and those little things add up in terms of efficiencies. The other thing is our cost, most of our costs are in people and we will max out our bonuses this year.
So, that’s the big number in there. And at the end of the day, we are rewarded based on how well we do and that’s a big part of our cost structure.
I think we are good at evaluating our personnel and not just layering overhead and people to layer overhead and people. We are highly productive.
We have some more room in terms of operating efficiencies, in terms of using technology to become more efficient, and in terms of some centralization and things like that. So, we have the ability to chip away at this thing and Dale thinks it’s going to go back up a little higher towards 50, but I think we can get this thing down to 45%.
And that’s probably where we should be running.
Joe Morford - RBC Capital Markets
Okay. And then related to the margin I guess specifically to the funding cost, most of the growth this quarter in deposits came in CDs, what was driving that?
Any kind of special promotion now it seems like your focus is on growing the non-interest bearing DDA and just what exactly you are doing there?
Dale Gibbons
Well, a couple of things. I don’t believe that our cost structure is going to be climbing.
Part of the reason why we have the growth in CDs is I think I mentioned this on the second quarter call. We had a $100 million come in kind of on the last day of the quarter and went out a few weeks into July.
So that kind of boosted the second quarter number that kind of faded a little bit in the third quarter, but we believe we have still got momentum there. Robert mentioned that we have got a campaign in place now to really focus on non-interest bearing DDA.
I think this most recent decline in interest rates not just nationwide but worldwide gives us additional opportunity now to push on the liability funding costs a little bit. So not that there was a lot of room there, but we certainly don’t see kind of a step up in funding costs and maybe there is a little bit of an improvement we can take.
Joe Morford - RBC Capital Markets
Okay. Thanks so much.
Robert Sarver
Thanks.
Operator
Next question comes from Casey Haire with Jefferies.
Casey Haire - Jefferies
Hi, good morning guys. Just another follow-up I guess on the margin, I was hoping to get a little color on the originated loan yield what the new money yield is coming on in this interest rate environment versus that 5.19.
And then also what is obviously positive mix shift was a nice helper this quarter to help mitigate that pressure, what is the appetite to continue to do that deal with loan pricing pressure?
Robert Sarver
Well, in terms of the yield on the new loans we have put in place just making sure I get the right number on the report. Yes.
Okay. 4.45 was the new yield on credits we put in average on loan originations.
And what was the second part of your question.
Casey Haire - Jefferies
Just so offsetting that, the positive mix shift was loans earning assets was up 200 bps this quarter, is that - Dale is obviously being conservative given the pricing pressure on loan yields but if you can mix shift it you can offset that, I was curious how – what’s the appetite to continue to take that ratio higher?
Robert Sarver
Part of our mix shift is going to come on some of this construction funding where we have got a buildup of commitments that many of which haven’t really drawn down a lot but over the next 9 months we will start to because a lot of these deals we are doing there is 40%, 50% equity on them. So they use the cash first.
I think we have about 500 to 600 of construction commitments so that will be part of it. What else do you think fits into that.
Dale Gibbons
Yes. So we will have a mix change within our loan portfolio construction which is 8.5, portfolio will continue to climb probably towards about 10.
That will improve the loan yield as well as there is still – we still have at least $600 million of additional securities, free securities above what we would otherwise need. So I think there is room as well to move that number a little bit higher in terms of loans as a percentage of total assets which you saw during the second quarter that you are alluding to Casey as well.
Casey Haire - Jefferies
Great. Okay.
And then just following up on the expense side the – was that data processing legal had a nice step down which I think has had to do with putting some distance between the charter consolidation, can that kind of hold that level. As well – and then second part is last fourth quarter you guys had a nice – a pretty big step up in bonus accruals given that we are having a pretty good year this year, should we expect the same in the fourth quarter?
Robert Sarver
No, we dumped as much of that as we could this quarter to get the number down. We were looking for everything.
So we are pretty full on that. We don’t have any issues with that.
In terms of the technology, part of our technology stuff kicked up because, one, we were playing a little bit of catch up on some of the spending maybe we put off when the economy was bad. Part of it’s the consolidation of the charters and different consultants and people coming in working on all this.
So that number is stable or maybe going to continue to step down a little bit.
Casey Haire - Jefferies
Okay, great. And then just lastly Robert on your questions on M&A – on your comments on M&A which seem actually a little bit more constructive than what you have said in recent quarters, I am just curious you guys are still trading at a discount to the group on a PE basis, what is driving this increased optimism, is it sellers a little bit more willing to come to the table or I am just curious given that PE is still kind of a limiting factor for you in your ability to structure financially attractive deals?
Robert Sarver
Yes. I don’t think it’s like a general issue that’s driving it, it just as I look at all those specific deals and folks we are talking to we got two or three of them that are moving a little warmer.
So, it is just more specific to the companies we are talking to and the things we are looking at. We got two or three deals that we think we are pretty excited about.
So, what gets us excited is something real strategic that we think has really good long-term and short-term opportunities for us and then something that’s very accretive that we can pick up and make some good money with. And we got two or three deals that fit into one or both of those buckets.
Casey Haire - Jefferies
Okay, great. Any color on size?
Robert Sarver
I mean, if I had to guess, I mean, these are in the $1 billion to $4 billion range.
Casey Haire - Jefferies
Okay, thank you.
Robert Sarver
Yes.
Operator
The next question comes from Brad Milsaps, Sandler O'Neill.
Brad Milsaps - Sandler O'Neill
Hey, guys.
Robert Sarver
Hi.
Brad Milsaps - Sandler O'Neill
Hey, Robert. Just was curious if you maybe comment on the new hires made during the quarter, number of teams maybe split between lending and treasury management and kind of what your outlook would be call it over the next couple of quarters?
Robert Sarver
Yes. We – if you look during the quarter, we brought in what we call kind of 9 rainmaker production people.
And some of that was in Northern California. We brought in a new team that we have got that’s going to help us grow that business.
And we are probably going to open up in a couple of new markets up there, San Jose market, San Francisco market and kind of really dig in there. And that was 3 or 4 of that team of 9 bankers.
Brad Milsaps - Sandler O'Neill
Okay, great. And I appreciate your comments on M&A, but I was curious if you could maybe expand that to maybe other business lines like the resort finance?
I was just curious kind of how many of those types of teams you might be looking at, at this point to where you could further diversify that the central business kinds of things?
Robert Sarver
We have the couple of those lines we are looking at in the early stages. And so the process for new business lines for us takes about a year to year and a half before we actually open it up.
So, we are kind of researching the market and then we got to get the right people. And we are looking for niches primarily that are too small for the largest banks and too big for the biggest banks.
And they are either served by finance companies or they are poorly served by some of the banking – some of the banks. And then we got to find the right people or the right expertise, do our research, run through our risk management process and kind of get going.
So, I can’t say we are adding any new product line right now, but we got a couple where we are looking at.
Brad Milsaps - Sandler O'Neill
Okay, great. And Dale, I know you talked in the last quarter about increasing the swap book was there any change in that this quarter or was it about the same?
Robert Sarver
No, we added a few more. I think we added about $50 million or $60 million in swaps.
So, we are – really any of our kind of fixed rate longer term municipal, that’s probably where we get the biggest demand or some of our public finance situations we are swapping those kind of each one on a one-off basis. So, it increased a little bit, but our interest rate risk profile remains about the same as it was at June 30.
Brad Milsaps - Sandler O'Neill
Great. And just a final question on I think I heard you correctly some of the growth in the quarter, it sounds like mortgage warehouse was a fairly big driver.
Are you guys making a bigger effort there to pickup additional business in that? And could that be kind of pulling the yield down a bit as I know that market has gotten a lot more competitive?
Robert Sarver
Yes, a little bit. We have got a couple of new sales people and some of the calling efforts we have been working on kind of all came together at the same time.
And we are also able to get a little more funding from some of our existing clients. So, we had a good bump up there, but those are lower yields as you have noted.
Brad Milsaps - Sandler O'Neill
Got it. Okay, great.
Thanks for the color.
Robert Sarver
Thanks.
Operator
The next question comes from Brett Rabatin of Sterne Agee.
Brett Rabatin - Sterne Agee
Hi, guys. Good morning.
Wanted to I guess go back to the central business lines and just talk about maybe which businesses you are currently seeing in the past risk adjusted returns and if it’s going to make sense or if you think you will continue to have like most of the growth in the loan portfolio in those lines or if you kind of see some opportunities and maybe the essentially the other non-national markets?
Robert Sarver
Well, we are trying to explain this probably a little better I think that’s one of the things we haven’t done a real good job of, so they will put that pretty chart together with all those colors to make it look like a prefect rainbow. But the reality is kind of everything we do is somewhat specialized, I mean that’s what our whole bank is build around.
So if you go to Arizona or Nevada or San Diego we have a group that finances doctors. We probably bank 50% of the physicians in Las Vegas.
So we have a big medical group. We have a jurist doctor practicing group in Nevada, the bank’s attorneys.
We have a group that specializes in banking contractors. We have a group that does kind of a higher tier of franchise restaurant lending.
So the reality is everything we do in the bank is kind of a niche because that’s how we can make money. The way we can money is by having people with really good specialized expertise that can provide a high level of service to our customers.
And we can pick those niches and kind of exploit them and be experts in that area and command better pricing because businesses want to talk to lenders to know what the business is about and know the speak of the industry and what they are talking about. So I don’t really look at our kind of our centrally managed units much different than I look at everything else we do which is, we need a group of people that really know their stuff.
And we focus on a market whether its insurance brokers or physicians or attorneys or CPAs or local non-profits and we use that expertise to get business. It just so happens that in a couple of these centrally managed businesses in order for us to get a reasonable size book of business, the business is more spread out geographically.
And in addition we think that gives us more diversity. So, that’s how we manage it that way.
So, I think we have done kind of a bad job explaining it. And then we are always looking at which of all of these niches we can exploit more and is better to lend to them which is less to lend to.
Like our fast food stuff we are doing right now while lot of these finance companies that got out the market are getting back in the market. And so they are screwing pricing up and the risk up and so that portfolio is now starting to decline a little bit.
We will move into something else. Our municipal book is really good, it’s a great niche almost 80% – over 65% for sure the business we do on the municipal credit side our source repayment are property taxes.
When the people that own the houses and the buildings in the neighborhood they are all tax based, the rest is essential service fees and we are picking up some pretty good deposits there. Our resort finance business where we are financing essentially the receivables of these timeshare companies we are in the top tier of that.
We have now picked up credit and/or deposits for probably the top 50% of those customers nationally. So I think you guys have – of analysts kind of look at this stuff as kind of separate than the rest of our business a little bit.
And we haven’t done a good job of explaining it, but I really don’t it just happens to be that we are in other states doing it to a certain degree. But everything we do is we got to have real good expertise on the business side and that’s how we sell our customers.
Customers come to us because we know more about the business they are in and we are more responsive to meeting their needs. We make quicker decisions and they have access to senior management, so to me it’s all the same.
Brett Rabatin - Sterne Agee
Okay. That’s really good color and the additional clarifications and stuff and the PowerPoint is really helpful too.
I guess the other thing I wanted to make sure I understood was the guidance around kind of the efficiency ratio maybe an uptick in the fourth quarter, but it sounds like you think you can get it down to 45 over time, is the reduction over time from here mostly a build out of the current infrastructure or what kind of causes the efficiency ratio to move lower from here with obvious continued pressure on new origination yields?
Robert Sarver
Well, I just think and I mean, Dale probably disagrees with me, but I just think our revenues continue – is going to continue to outpace our expenses.
Dale Gibbons
I don’t disagree with you, Robert.
Robert Sarver
And over time that is going to continue to reduce our efficiency ratio.
Dale Gibbons
The point about the uptick in the fourth quarter is really related to we had some recognition of income on dispositions of credit impaired loans at a gain. And so that pulled that number down a little more than they otherwise would have, but other than that, the trend is still in place.
Even without that, we still had a climb in revenue over the second quarter and expenses were still flat. So, those trends are still in place.
So, I am thinking it may tick up a little bit in 4Q, but then I believe yes, we are in for continued improvement there. And I wouldn’t dispute Robert’s target of getting into the mid-40 area.
Brett Rabatin - Sterne Agee
Okay, great. I appreciate all the color.
Operator
At this time, we show no further questions. Would you like to make any closing comments?
Robert Sarver
Yes, just thank you all for joining us. Obviously, we are real pleased with the quarter, probably the best one in the history of the company and we will see if we can have a better one next quarter.
Thanks guys.
Operator
The conference is now concluded. Thank you for attending today’s presentation.
You may now disconnect.