Jan 23, 2008
Executives
Robert Sarver - Chairman, President and CEO Dale Gibbons - EVP and CFO Hal Erskine - President of PartnersFirst
Analysts
Hugh Miller - Sidoti & Company Joe Morford - RBC Capital Markets Christopher Nolan - Oppenheimer William Mechler - West Coast Capital Todd Hagerman - Credit Suisse Brent Christ - Fox-Pitt Kelton KC Ambrecht - Millennium
Operator
Welcome to the Earnings Call for Western Alliance Bancorporation for the Fourth Quarter 2007. Our speakers today are Robert Sarver, Chairman, President and Chief Executive Officer; Dale Gibbons, Chief Financial Officer; and Hal Erskine, President, PartnersFirst.
Today's call is being recorded and will be available for replay after 2 PM Eastern Time today until 9 AM Eastern Time, January 31 by dialing 1-877-344-7529, using the passcode 415121#. 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 performances 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 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. Now, for the opening remarks, I will now turn the call over to Robert Sarver.
Please go ahead.
Robert Sarver
Our net income for the fourth quarter was $2.4 million or $0.08 a share compared to $11.1 million or $0.35 a share for the third quarter. Net income for the full year of 2007 was $1.06 a share or $32.9 million, down from $39.9 million in 2006.
While net revenue rose 23% year-over-year, expenses rose at a higher pace relating to the expansion of our distribution system, which included the opening of six new offices and to buildup of credit reserves that we'll talk about a little later. I'd like to spend our time on this call really focusing on six key areas that I think would be of interest.
Number one: margin; number two: deposits and customer repos; number three: our securities portfolio; number four: capital; number five: loan quality; and number six: our progress with PartnersFirst. I'm going to start with credit quality, and then turn it over to Dale to talk about the others, and then, Hal will finish up giving you an update on PartnersFirst.
Just a few general comments on the markets we're in. Many of these will not be a surprise to you.
We're not sure when the real estate markets are going to turnaround, but we do not expect them to until at least 2009. Real estate values in our markets, particularly Las Vegas, Reno and Phoenix, are still slipping.
I think residential values will continue to soften during the year. The CEO of Fannie Mae said he expects us to continue into 2010.
I also expect to see the demand for in the value of land to decrease significantly, 25% or more during the year, depending on location and type. We're also beginning to see a spillover from the residential market into increased office vacancies and in certain retail vacancies too.
In Las Vegas, while we believe the future is very strong, many of the jobs will be coming online later. The first strip hotel in three years just opened.
Many of you read about the plaza consists of approximately 3,000 new rooms, making the Venetian Hotel complex the largest in the world. However, the rest of the roughly 30,000 rooms that remained undeveloped in Las Vegas do not plan to begin to come online until 2009 with Encore Wynn second tower and parts of MGM's City Center projects.
While these additional rooms will provide significant additional job growth to the tune of 60,000 to 70,000 new jobs, the beginning will not come until 2009. In terms of our bank, specifically, if you look over on page 11 of the release, you can see our non-performing assets increase during the quarter, $5.4 million.
This consist basically of two credits, one was a $3 million loan to a Phoenix homebuilder. It's a participation with the Money Center Bank.
It's secured with a first deed of trust on improved lots in completed spec homes in Phoenix's Lost Valley and the Master Plan Community. The houses and lots were appraised in June of 2007, reflecting a loan to value of 60% on the lots and 67% on the homes.
Those values have softened, but we think that in spite of that softening that the values are still in excess of the loan amounts. We also have $2 million loan secured with first deed on golf course lots, residential lots in the Reno market.
We've talked about this before. This loan is subject to some title issues we have indemnity First American title covering us on values below appraisal amounts.
So in total, on the non-performing loans and REO at the end of the year, we're 46 basis points of total assets In terms of REO, we've got $3.4 million in REO right now on the books. Three homes we have are valued at $500,000.
The balance is a custom lot subdivision in Tucson, and I believe we talked about it in the last conference call. It has 45 sites.
The improvements are about 60% complete, the off-site improvements, the on-site improvements in terms of streets and water and sewers, sidewalks, et cetera. That loan was $5.2 million.
We had to write that loan down to $2.4 million when he just got an appraisal. So it's on our books for $2.9 million.
Net charge-offs for the quarter were $4.5 million or 49 basis points annualized, half of which was this Tucson area we talked about. The balance was a myriad of smaller credits.
Net charge-offs for the year were 23 basis points. In terms of past due loans over 90 days still accruing, $2.4 million.
The bulk of that was $1.6 million first deed of trust on our commercial office building in Las Vegas. This has now been brought 100% current.
We also have a $300,000 first trust deed on small medical building that we're in a workout situation on, $300,000 equipment lease that we're in the process of collecting. Another category to look at, I know you guys look at these loans as 30 to 89 days delinquent.
That number increased from $5 million to $12 million quarter-over-quarter. Of the $12 million, a little bit of a breakdown, $3.5 million of that is now current, $5.5 million is the concentration to a local Las Vegas real estate developer.$1.7 million of that credit is unsecured.
We have reserved at already 50% in our loan loss allowance. The balance of $2.7 million is secured with the first deed of trust on a car washing land and that has been reserved at 25%.
We have another $900,000 in that category. That is a first trust deed SBA guaranteed loan.
And another $900,000 in single family mortgages -- mortgage loans in our single family mortgage portfolio. Which portfolio does continue to perform very well?
It's about $275 million. In total, we have seven loans that are over 30 days past due.
Our other impaired consist of an $800,000 loan that we've talked about before. It was adjusted 50% at the time of acquisition of one of the banks we bought.
It never had a payment problem, continues to pay as agreed. And the others are $1.96 million loan that secured with the first deed of trust on some lots and homes in Reno.
This was the credit we picked up during our due diligence process on First Independent Bank. And the loan amount is actually $4 million, but we have a $2 million holdback in cash from the purchase of First Independent Bank, and therefore, the shareholders will absorb $2 million of that loss that happened.
When we net that out, it brings our loan to value to under 30%. We do continue to feel pretty good about the underwriting in terms of we have personal guarantees in almost every one of our credits.
Our loan to value guidelines were pretty strong, land 50% or less. And we did take action 18 months ago, as we knew this market was slowing down, again to read out the bottom 5% to 10% of those credits have had some significant reductions.
On our land and constructing loans over the year, our total commitments in construction land is down from 24% of the total portfolio to about 20%. And at this time, I want to turn it over to Dale.
Dale is going to talk a little bit about deposits and customer repos, margin, securities, portfolio and capital. So, Dale, you want to go ahead?
Dale Gibbons
Thanks. The margin dropped from 4.38% to 4.16% during the quarter from the third quarter.
This was really driven by mix changes on the liability side. We actually were, I think, reasonably successful in terms of re-pricing in light of the continuing rate environment we're in.
From quarter-to-quarter, our loan yields, we're down by 26 basis points. Security yields were actually up slightly.
And our interest-bearing deposits were up by 29 basis points. But again, related to kind of the deposit situation, it's been very challenging for us.
Moving into the first quarter, our loan pipeline I think continues to look good. However, I think we're going to be hard pressed to be able to fund all of that with core deposit growth.
The title company situation continues to be very challenging for us. 40% of the decline that we had in the fourth quarter was related to title company deposits.
And we're now down to 4% to $145 million of our total deposits of title company, which was down from 20% three years ago. So, going forward, I mean I see our earning asset growth funded by lower spreads than what our current margins is at the 4.16.
And so, consequently, I think that margin is going to continue to be under pressure albeit at more modest reductions from what just transpired. On the securities portfolio, we had two CDOs we talked about at the last quarter that are backed by subprime.
Initially these were rated, each was for $5 million initial balance. One was A by Moody's and S&P, and the other one was AA by both Moody's and S&P.
S&P has left those ratings the same, and they're both CDO squared structures, which means that they are basically a pool created from other pools. The difference divergence between the rating process or the results from those two credit agencies is pretty dramatic, whereby Moody's has whacked some of the underlying pretty severely and S&P has made some modest change or in some cases no changes at all.
Presently one of those securities is now rated B1 by Moody's and the other one is Caa3. Now, both of these securities are current.
There is no default on any of the elements. However, we believe the marks on these are basically $0.50 on the dollar, and we wrote them down in aggregate to $4.9 million.
Now, in terms of where you see that, you see this in terms of on the income statement on securities impairment charge of $2.9 million. The balance of that actually reduced what would have been a larger mark-to-market gain from FAS 159.
The 159 gain results some from mark-to-markets in our securities portfolio that even though credit spreads have increased pretty dramatically, in some cases those have been more than offset by the substantial rally that we've seen in bonds and with a reduction in interest rates. Related to our capital situation, you can see our other comprehensive loss increased to $28 million, and that took our tangible common equity down to 5.44% at yearend.
If you don't consider the other comprehensive loss where actually our tangible common equity is just over 6%, I actually think our number is somewhat between those two numbers. Some of the loss that you're seeing there is an expansion of spread relationships for basically virtually all credit, something that really hasn't been deteriorated or placed on watch or anything by any of the rating agencies, these spreads have increased.
In terms of the names on there with the highest credit default spread is WAMU. Washington Mutual is in there, which is trading at $0.62 on the dollar today.
I am not sure about WAMU's future life, what lies in WAMU's future, but that may be a case in which maybe there is some credit risk there that ultimately might have to recognize sometime down the road. For others, that’s not the case.
So I see our tangible common equity between 5.4 and 6, 0 and essentially compliant with, you know, we talked about in terms of kind of 5.5% level. That said, I expect this to be pretty judicious in terms of employing capital prospectively in light of the turbulent environment that we're in at this time.
Robert Sarver
Okay. I am going to follow-up just a little bit on the deposit side.
In addition, to obviously focus on quality of our customers in terms of credit, deposits are going to be a key focus for us in 2008. Unfortunately, most of the markets that we've been in have seen -- while the good markets have seen good rises in deposits, the markets in general, overall, have seen declines during 2007.
We are realigning our incentive programs to place a greater emphasis on deposits, the customer repurchase agreements. We're beginning to see some increase in the traction in our treasury management services business that we really geared up last year as an example.
We started to capture our own merchant services and we began aggressive sales in terms of remote deposit. I also think that this sort of [aching] pressures will begin to lessen in a lower rate environment.
The deposits will be a key focus for us into 2008. In terms of PartnersFirst, we are up to, I think, a very good start there and good momentum.
At this point in time, we have four FTEs working in PartnersFirst. We spent the bulk of the fourth quarter last year getting our [TSYS] systems working.
We completed the testing of our cards in December. Today, we've signed twenty affinity groups, six of which we signed this January.
And as Hal will tell you, this quarter we're going to begin to initiate marketing all 20 those groups. So Hal, do you want to give them little more detail on kind of where we're at with PartnersFirst.
Hal Erskine
I will, and a slight correction. I think you said 14 FTE right now at PartnersFirst.
In addition, we are relatively pleased with where we are with our sales. We signed 20 groups.
We're also on plan in terms of getting our programs set up. We spent most of the fourth quarter getting our partnerships, what we call on boarded.
Our plan is to have all of our groups marketed within the 45 to 90 day timeframe. And we hit that with US Squash, Golf Magazine, Tampa Bay Lighting, National Association of Sports Medicine.
So those are off and running. We're presently planning on marketing the rest of the partners in this quarter starting end of January, 1st of February.
So those are moving along. We continue to focus on small to mid-size high demographic groups.
And we are very proud to announce two new partners, the Chicago Bar Association, which we think will change the way membership organization use their credit card and membership card, and the second is the Blue and White Scholarship, which is related to the Villanova Athletic and Alumni Association. So I was very proud of that, including Westchester County Bar, Winston-Salem State University, a couple of other high demographic, small to mid-sized professional type organizations.
Those will, of course, be marketed through our what we would think is a pretty unique method of using our web portal and partnership development approach, and we have a very strong plan for 2008 timeframe. In the first quarter of 2008 it is about count production, continue our sales growth with our partnerships and, of course, maintaining high quality standards in term of credit, and putting in place all of the things that we've developed with TSYS our partner in terms of technology to provide to our group partners.
With that, that's the PartnersFirst update, and I will turn it back over to you, Robert.
Robert Sarver
Okay, thanks. I guess at this point, I'll really like to open it up for Q&A, and we'll be happy to answer any of your questions.
Operator
(Operator Instructions) Our first question comes from Hugh Miller of Sidoti & Company. Please go ahead.
Hugh Miller - Sidoti & Company
Hi, good morning.
Robert Sarver
Good morning.
Hugh Miller - Sidoti & Company
I was wondering if you could provide us with the yearend figures for the banks tier-one total capital and leverage ratios?
Robert Sarver
For each of the base, I mean I will tell you that they are all well capitalized. I don't have that in front of me right now, Hugh, but I can email that to you.
But they're all above 5, 6 and 10.
Hugh Miller - Sidoti & Company
Okay, great. And then, Dale, you had also mentioned that you guys were seeing a loan pipeline as fairly well established.
Can you talk a little bit about: where you're seeing the strength geographically and then in what product lines?
Dale Gibbons
Yeah, sure. Maybe I will address that.
The San Diego market seems to be doing better than the other market we're in terms of business. We're seeing good C&I pipeline activity there.
We're still focused very aggressively on owner occupied commercial real estate loans. I guess the major kind of difference from a lot of the other community banks for us right now is I am not a big proponent of kind of the one-off real estate loans at low 6%, high 5% interest rates.
I think the market is still out of alignment there. And so, in terms of those loans, we're kind of backing off that.
We perceive to be really good market pricing on those type of credits, we're kind of passing that. But we opened up six new offices this year.
We got several new employees. And the reason I think we're seeing the growth is just because we've added new people during the year.
They are bringing books of business to the bank. We just opened up in the fourth quarter a new office in Mesa to cover the East Valley, which is a huge market, hired a senior banker there that's been in that market a long time.
And he is out bringing in business. So, it merely comes as a result of new offices we've opened and new people we've brought in.
Hugh Miller - Sidoti & Company
Okay, great. And you had mentioned that the loan portfolio exposure within construction lending has declined as a percentage of the total.
Can you give us a sense as to the split between residential versus commercial construction at yearend?
Dale Gibbons
Sure. About $245 million of our construction loans are commercial, and of that a third would be owner occupied and two thirds would not be.
Our residential construction portfolio, about $155 million: about half of that would be owner occupied and half would not.
Hugh Miller - Sidoti & Company
Okay.
Dale Gibbons
So that totals about $400 million, which represents a little more than 10% of our loan portfolio.
Hugh Miller - Sidoti & Company
Okay. And I am assuming that the tax rate in the fourth quarter was more of a true-up given the performance in the fourth quarter.
Is that a correct dissection, and also just your anticipation of a tax run rate going forward?
Dale Gibbons
No. I'm not going to call it a true-up.
It wasn't that we recognized any tax benefits. It's that with a lower book of income, our tax advantaged income from bank-owned life insurance and tax-exempt securities and loans is relatively flat.
And so, it becomes a larger portion of our pre-tax income, and consequently, drives down our tax rate. So prospectively, I'm looking, obviously, our earnings level comparable to where we've been historically rather than in the fourth quarter.
You'd look for our tax rate to kind of come back to that level something in kind of a lower 30.
Hugh Miller - Sidoti & Company
Okay. Great!
I'll step back in the queue. Thank you.
Operator
Our next question comes from Joe Morford of RBC Capital Markets. Please go ahead.
Joe Morford - RBC Capital Markets
Thanks. Good morning, everyone.
I guess you talked about pretty steady loan pipeline. Given the sound economies in your markets and the pullback in construction: what's kind of reasonable to expect in terms of loan demand or growth this year?
Robert Sarver
Well, as we looked at our incentives and kind of aligning our business plan, I mean: there are some cases in some areas where a loan decline is actually a win. In terms of some of the credits and credit types, then others we want to grow.
But if you can even that all out, I think something more in the lines of about $50 million a quarter in terms of net increase in loans would be maybe little more realistic for this year.
Joe Morford - RBC Capital Markets
Okay. I guess if you could just talk a little bit more funding side a couple of things here.
I mean even excluding the title stuff, the deposits have been falling. And you say you are having some success in passing on pricing, but: are you consciously pricing below the market or maybe losing some?
Just how you look into fund the loan growth going forward? Is it going to be continued increase on the borrowings?
Can you sell securities at all?
Robert Sarver
A part of our strategy with customer deposits is we don't want to uniformly raise rates so much, so it really, because each of our branches has pretty experience bankers in them, we give them a little more economy as to which accounts to raise interest rates in which not to based on keeping good relationships. Second thing I'll point out is that the overall markets just have lost deposits in them.
Las Vegas is down, and even the data you look at will be a little misleading because a number of the banks have been relying strictly on broker deposits to grow their deposits. If you strip that out, it's significantly less.
We don't have any broker deposits. We do have a significant number of a large relationship, many of which have been moving some money to repos.
And also, we had over $100 million move to sweep accounts, which are really off our balance sheet into another family of funds. And we're in the process of finding kind of a way to get that back.
So we got hit by real estate in terms of just the overall real estate people in the market have less money. We get hit by the fact that people have been losing money off balance sheet.
We've also been hit by rates going up, and with the rates going up, people now have their antenna up, and they are looking for pricing. But with the rates coming down, the pricing may not be as strong.
So I think we'll be able to make some head win and try to build some of these deposit back up. In terms of your funding side, Dale, maybe you can kind of answer.
Dale Gibbons
Yeah. I mean: I would hope, Joe, that we'll be able to obviously address this with kind of core deposits funding.
But that said, I am assuming we can't. I think we're going to be looking at Federal home loan bank borrowings.
The securities portfolio does provide a little bit of liquidity with kind of the maturity situation. Obviously, a portion of those, as shown by our other comprehensive loss, they are underwater now.
So, if we were to liquidate some of that, frankly they are very high yielding, but that's a consolation. It would result in accounting effect that we may or may not be interested in recognizing.
But we do have, I think, plenty of capacity on the borrowing side to cover any shortfall we might have in terms of our deposit goals.
Joe Morford - RBC Capital Markets
Okay.
Robert Sarver
Another thing to add on that is that in terms of the deposits rates coming down with interest rates coming down, it will make it a little easier for us in terms of reducing some of our marketing budgets for Partner First, much of which is used with teaser rates to acquire new accounts.
Dale Gibbons
We don't think we are selling out market share. We have been moving rates down aggressively, but we still think we're reasonably competitive here and really haven't had some of the customer pressure that maybe experienced other times in the past.
So, I think we're certainly competitive here. I think it is a tough deposit market.
I know you've seen that for, at least, the past year that Phoenix, San Diego and Las Vegas have all contracted a little bit.
Joe Morford - RBC Capital Markets
Right. That's very helpful.
I guess lastly, you talked about, I guess alluded to Dale some further pressure on the margin, but maybe not quite to the extent here in the fourth quarter. What does the 75 basis point rate cut, what kind of impact does that have, generally your outlook for margin with them?
Dale Gibbons
I think at 75, we expected they were going to do 50 at the meeting. And so actually we cut rates last week, we cut them again yesterday.
So, we think we basically have a 75 priced in. I think the markets are telling you that they're going to do another 50 next week.
It probably, I think, will be a little difficult for us to step into that immediately. I think we need to see where the market is and make sure one is going to caught up with where we are.
So, I think it could be a little bit a challenge in the immediate term. I would hope that we would see less, just a remediation to not only to other financial instruments, but even within our own balance sheet.
My view is and I think if there is a different trigger points for different individuals and businesses, but when you are in the 4% or 5% range, people think about where they need to be deploying their money to receive interest income. If there is 1% and 2%, the money tends to get lazier.
And I would hope that would happen again. But in any event, I think the first quarter could be a little bit challenging, particularly if we see action next week, which I think we will.
Joe Morford - RBC Capital Markets
Okay. Fair enough.
Thanks so much, Dale.
Operator
Our next question comes from Christopher Nolan of Oppenheimer. Please go ahead.
Christopher Nolan - Oppenheimer
Good morning.
Robert Sarver
Good morning Chris.
Christopher Nolan - Oppenheimer
Quick question: Beside the reserve building in the quarter, was any of that related to Partners First?
Dale Gibbons
No.
Christopher Nolan - Oppenheimer
Okay. Is Partners First beginning to generate loan balances at all?
Dale Gibbons
Nominal at this point in time.
Hal Erskine
Yeah, let say -- Chris, how are you doing?
Christopher Nolan - Oppenheimer
Hey, Hal. I'm doing well.
Hal Erskine
I'd say November and December where we put on them, I'd say a modest number of accounts to generate activity at TSYS to test all the systems, we had some issues we wanted to fix, and got all that but together. We dropped significant mail into December, 1st of January.
One of the comments I'll make about the previous questions, a drop in interest rate, and Robert alluded to, it will definitely help us in terms of in this countercyclical Partners First will as people can't go to their mortgage anymore being able to have quick access to a great product via the credit card, we expect some pretty good loan activity this quarter. We had designed our plan mainly to hit this quarter very hard and that's what's happening right now.
Christopher Nolan - Oppenheimer
Okay. It looked, I mean: Dale I think mentioned earlier how, given the lower margins, there was more emphasis on generating opportunistic balance sheet loan volume.
If that strategy continues, quoting my numbers here, looks like your capital ratios continue to climb somewhat. Is there any plan or talk about possible capital raise in 2008?
Dale Gibbons
I think our capital is fine if you just, from internal generation, I mean it will put us back on the normal earnings level, nothing obviously from the fourth quarter. And I think we're fine.
In terms of our tangible common equity ratio and things like this, I think we probably will do something to bolster out total capital ratio whether that would be a subordinated debt issue or trust preferred. I think we can address whatever we might need to do in that regard.
We have no plans and we have no expectation that we would need to raise anything that would dilute the comment in anyway.
Christopher Nolan - Oppenheimer
Got you. And finally, the credit quality, comments that Robert made, it sounds like it's almost all write-downs of real estate valuations.
Is that true or is there some senile loan deterioration in there? And: do these loans come from banks that you acquired or were they from Western Alliance originated loans?
Robert Sarver
Go ahead, Dale.
Dale Gibbons
Yeah, I mean: there are C&I elements in there. Most of the C&I deterioration we've seen are related to entities and individuals that are in real estate development, but would be classified to C&I loan.
Robert indicated one of the loans that is delinquent is an unsecured credit, and that happens to be basically to a real estate developer.
Robert Sarver
Most mergers, real estate secured, where you've houses or you've got lots, and the product's not moving and the prices are coming down. For example, in Phoenix, we probably have seen about a 25% to 30% decline in the value of housing.
And so, that's $3 million piece on our non-performing that went now. And that's what most of it is now.
Now, we try to underwrite most of these credits at a level that we think we can get out or come close to getting out. But having said that, you get a few glitches where some of the construction has some over runs.
There were some issues with the construction. On the REO in Tucson, this will give you an example.
This was a project, we made a loan $5.2 million outstanding, 45 custom lots and there was another $1.5 left for improvements. The lots were under contract to be sold for $185,000 a lot.
Now we've just got an appraisal and the appraisal has those lots at $110,000. The appraisals right now are beginning to take a very hard look at values, they're providing heavy discount rates, and you're going to begin to see more pressure this year from a regulatory standpoint on real estate exposure, real estate credits.
We saw some of this coming. That's why we unloaded about $200 million of loan secured on land over the last 18 months, and I tried to stick with the more higher quality projects with lower loan to value so that while we will have workouts, hopefully, we'll have less actual charge-offs.
And even with some of those charge-offs, we will be able to provide some recoveries down the road.
Christopher Nolan - Oppenheimer
Great! Final: are the regulators being more permissive in terms of giving you flexibility in terms of provisioning on reserve levels?
Robert Sarver
I mean: we had all our banks audited in the last six months. I haven't seen that.
But what I'm hearing is for the next 12 to 18 months, it's going to be pretty brutal.
Christopher Nolan - Oppenheimer
Got you. Okay, great.
Thanks, guys.
Operator
Our next question comes from [William Mechler] of West Coast Capital. Please go ahead.
William Mechler - West Coast Capital
Thank you. Robert, of your approximate $165 million of commercial loans that are to non-owner occupied, because I think you said there is about 245 commercial loans and a third were owner occupied: how many of those are in Phoenix?
Robert Sarver
Well, let me look at my sheet. Commercial construction, non-owner occupied, we've got $22 million.
William Mechler - West Coast Capital
$22 million.
Robert Sarver
$22 million in Phoenix, $34 million in San Diego, $31 million in Reno and $96 million in Las Vegas.
William Mechler - West Coast Capital
Okay. Into $96 million in Vegas: what's the concentration?
Is it office? Is it retail?
Robert Sarver
Some office, some medical, some retail, pretty diverse.
William Mechler - West Coast Capital
Okay. How you are seeing pre-leasing on that stuff?
Robert Sarver
Slower, definitely slower. Again, I think what you're going to see with banks is a lot of the results are going to come down to local market knowledge.
For example, some of the infield retails are doing well. If you got retail on the outskirts where a lot of these new subdivisions were projected to come on board, they are really hurting.
In terms of office in general, there has been a fallout and a decline on some of vacancies part due to the real estate market, real estate broker, real estate agents. So that's still scattered around.
The overall vacancy rates are still pretty acceptable, but the trends are somewhat --
William Mechler - West Coast Capital
Yeah. I see in Phoenix you've got about $5 million fee coming online in the next 12 months.
Robert Sarver
Yeah.
William Mechler - West Coast Capital
They are now up to 16%.
Robert Sarver
Yeah. And again, in Phoenix, you got in all Phoenix.
So downtown there is a 5% vacancy.
William Mechler - West Coast Capital
Right.
Robert Sarver
Downtown there is a demand for space. Scottsdale, forget about it.
William Mechler - West Coast Capital
Yeah, between --
Robert Sarver
I've seen it happen before. We've been through this before.
And a lot of it has to do with when it gets highly competitive.
William Mechler - West Coast Capital
Right.
Robert Sarver
Is your borrower either a) have enough equity in the project or did he buy the project cheap enough so that he can provide a lower rate to the tenant, he will get the tenant. You came in at the top of the market and you financed 80% of that purchase, you're screwed.
William Mechler - West Coast Capital
Right. And so these $22 million of commercial loans in Phoenix, you feel those they aren't soft like the Deer Valley market.
I think it got really softened in the North Scottsdale market.
Robert Sarver
No.
William Mechler - West Coast Capital
So they're not concentrated in other areas. Okay.
That's all for me. Thank you very much.
Operator
Our next question comes from Todd Hagerman of Credit Suisse. Please go ahead.
Todd Hagerman - Credit Suisse
Good morning, everybody. Robert, I was just wondering: as you've talked about the Community Bank model here over the last several months and outlined kind of the Partners First initiative, granted the company is under some pretty tough head wins right now.
And I was just wondering: one, could you talk about where you see kind of the earnings leverage near-term for the bank? And then, two, I'd be interested to hear your thoughts just in terms of: how you see the business plan changing for the company as we go into '08 relative to kind of the growth mode that has been in over the last several years?
Robert Sarver
Sure. A few comments there: One, we spend a lot of money over the last three to four years building infrastructure.
We built a data center, we've built out 25, 30 new banking offices, and we added a number of new products and infrastructure in our cash management. We don't think we need to do a lot more of that.
We have 15 offices in Las Vegas. We're not going to be building two or three here anymore.
Could we build one a year? Or: one every other year?
That may happen. San Diego: we now have seven offices.
We've covered the market. There is no one who has a business in San Diego that says: “you guys are too far away, I don't know about you”.
Instead of opening two offices here and there, we open one office every 18 months. Same with Phoenix, same with Tucson.
Reno, we're opening two more offices right now under construction. That will cover that market.
So we do not need to increase the number of branches at anywhere near the pace we've done for the next five years, and we can begin to gather a lot more operating leverage. In terms of other lines of business, credit card business, what we said is we're going to run this thing for a year.
We're gaining our traction, we're getting up and running. And at that point in time, we're going to take a look at spinning that off if it has been successful, spinning that off into a credit card bank.
It could be a wholly-owned subsidiary of one of the WAL Banks or perhaps we may bring in some additional investors for that business too. The other thing I talked about before was not only do we need to get back to basics, good customer service, managing our credits properly, doing all the things we need to do at a core banking operation, but smart people are going to make some money in this market.
The lending markets are a mess right now. Financial markets in terms of real estate mortgage are in mess.
So I talked before about how can we capitalize on them, how can WAL make some money on that? And some of the things we're looking at now is, can we create an off balance sheet vehicle or maybe we put a little money in, big investors put in a lot of money, we use some of our expertise in terms of loan processing, loan servicing, negotiating, working out the problem of credits, and get a promote in a significant upside in that, so that WAL can get some of the benefit when this market turns around.
So kind of strategically those are like are four big things.
Todd Hagerman - Credit Suisse
That's very helpful. And then just kind of a follow-up, it would be just in terms of the funding side again for Partners First, and again as that ramps up or sometimes slowly build over the course of the year.
Again: how should we think about just the funding component of Partners First as that slowly builds over '08?
Dale Gibbons
I would hope that maybe we can do better than this in terms of the deposit side, and we might be able to kind of core fund with that. But for modeling purposes I would probably dial-in, Todd, that we had some kind of FHLB kind of a funding element which typically runs around 5, 7 bps over the targeted fund rates.
Todd Hagerman - Credit Suisse
And as a backup, we could also sell the paper.
Dale Gibbons
Yeah. I think we plan on doing on that when we got to what you might call an even lot.
I don't know if that's $500 million or whatever, but that we could maybe enter the securitization market although that's obviously choppy today.
Todd Hagerman - Credit Suisse
Okay. And I'm sorry, Robert.
How many office -- net new office openings here in '08, if any?
Robert Sarver
Two. We got two in the Reno market and maybe one or two others, but probably not.
Todd Hagerman - Credit Suisse
Great! Thanks very much.
Operator
Our next question comes from Brent Christ of Fox-Pitt Kelton. Please go ahead.
Brent Christ - Fox-Pitt Kelton
Good morning, guys. In the previous question you guys alluded to the vulture on investments gaining.
I'm just kind of curious: where you are in terms of the thought process there given that the backdrop you kind of laid out at the beginning in the call with your expectations first and pretty pronounced declines in real estates values here? Are you seeing things that are appealing to you at these levels?
Or: is this still kind of too early in the cycle?
Robert Sarver
I think it's a good time in the cycle to get ready. I think there will be some good opportunities over the next 12 to 18 months.
I'm seeing a little bit of what took place back in the late 80's, early 90's in one of the downturns I would through -- where lot of these assets, especially those that are held by finance companies, but really not banks, are being managed by departments where there is lot of turnover, there is a lot of new people, and they don't really have their hands on the asset they have, and they are not in a position to really negotiate effectively. And so, there is going to be an opportunity to buy, whether its divisions of some of these finance companies or whether its assets in some of the finance companies or the companies in total.
And I do think that opportunity exists. I don't think it's an opportunity that we could put on our bank balance sheet in the morning.
We do not have enough excess capital. I think it will be confusing to you folks as to how that all works.
But we are in the preliminary process of exploring how we could be involved in a new entity that's set up where WAL could have significant upside participation in the profits that come out of that.
Brent Christ - Fox-Pitt Kelton
Okay. And then switching gears for a second, in terms of Partners First, you're kind of entering the phase where you are going to spending a little bit more on marketing cost.
I think in the past you've pointed to kind of a wide range of expected costs or dilution from the product as you do market it. And: is there any sense in terms of kind of what you're budgeting in for 2008?
Dale Gibbons
I think we're going to probably from here gradually step up. We had $0.04 in 4Q, and maybe a nickel in the first quarter, maybe hold that level or $0.06, right now, I think I wouldn't look for substantial increases in those losses, but probably a gradual increase in slope.
Brent Christ - Fox-Pitt Kelton
Okay, great. Thanks a lot guys.
Operator
(Operator Instructions) We do have a question from KC Ambrecht of Millennium. Please go ahead.
KC Ambrecht - Millennium
Thanks very much for taking my questions. Couple of them.
Rob, first one for you, I mean: you've been in and out of the real estate market your whole life. How does this compare to previous cycles like in '99 and 2000?
Robert Sarver
I think pretty similar to be honest. I mean: I would have told you a year ago, you knew I was pessimistic on it.
KC Ambrecht - Millennium
Yeah. I didn't think things would get as bad as they are.
Robert Sarver
And I think it compares very similar in terms of some of the issues with land and the valuations and just different vacancies. And the fact that we have a number of lending group of finance companies, non-banks groups that have done things that were just really too aggressive.
I would say the difference in this case is that there is a lot more money on the sidelines waiting to get in, and therefore, I think it can help stabilize the market a little quicker. The question mark is going to be how the regulators deal with it.
Back in the late '80s, the regulators really had a big impact because they were requiring everybody to get appraisal based on 90-day liquidation value and that just spiral things down. And I think that's going to be the big question mark as to how the regulators deal with this business.
KC Ambrecht - Millennium
Okay. I mean do you think it going to worsen or I mean what earnings are in here?
Robert Sarver
Worse than today?
KC Ambrecht - Millennium
Yeah.
Robert Sarver
Yeah, I do. I think values of the houses are going to go down.
I think values of land are going to go down. I think values of some of the commercial spaces are going to go down to the degree.
I am really not really sure, but I do think it’s starting to get a little worse and I think 2008 is going to be a tough year.
KC Ambrecht - Millennium
Okay. A couple of questions then: So you have talked about your capital position and do you think Western Alliance needs to raise its equity here by the end of year then?
Dale Gibbons
No, no. I think we, I think we maybe looking at some type of debt qualifying capital situation.
KC Ambrecht - Millennium
Okay.
Dale Gibbons
In terms of putting our own internal capital generation, obviously we don't have any dividend service. I think we would be fine.
KC Ambrecht - Millennium
Okay.
Dale Gibbons
And yeah.
KC Ambrecht - Millennium
What about the subprime CDO? A week and a half ago you guys wrote that down at $4.5 million.
So that's also a little more than a 50% mark?
Robert Sarver
It is slightly more than 50%.
KC Ambrecht - Millennium
Who gave you that markdown? Is that mark enough?
Robert Sarver
I think the market, well there, they don't trade, but well we did find where comparable securities that had similar, similar collateral and similar ratings and what those trade at. So that's kind of how we came up with a mark.
So I think, I think the mark is reasonable. Right now they are both performing.
It remains to be seen. I mean, if we see, I mean what Moody's is telling us is that one of them could default in this near future, the other one a little farther away.
What S&P is telling us is that they don't see it for kind of the foreseeable future in either case.
KC Ambrecht - Millennium
Okay. So that's the hard one.
Okay and then the, the earnings: how do we get a earnings run rate here? I am trying to model the company.
What's reasonable?
Robert Sarver
Well, I mean we had substantial increase in, $0.19 of our EPS which are reserved, it increases during the fourth quarter. We don't think that we are going to be in that kind of situation prospectively.
So if you kind of step back to that, you are kind of more in the run rate that we were on in the third quarter level, probably modestly higher losses at Partners First. Modest earning asset growth funded at little bit narrower our margins than what we've had in the past.
KC Ambrecht - Millennium
Okay. So probably it looks likes you're going to pass along somewhere round $1 without getting too specific?
Robert Sarver
Well, we will be too specific.
Dale Gibbons
Yeah. You can come up with your own number there.
I mean, if you adjust the fourth quarter for some of these kind of one-off items and then as I think you kind of run a trend then I wouldn't change it really dramatically either up or down.
KC Ambrecht - Millennium
Okay. Thank you.
Robert Sarver
I mean, I'm just going to add that the Partners First valuation is -- some people look at that and say well, you should kind of take that up, it's up only a little bit and some just kind of loop it in. We're going to have losses in Partners First, but we do think we are building the business that has significant upside and at the same time it can be dealt completely separately.
I can sell the bank tomorrow and not getting for Partners First a penny.
KC Ambrecht - Millennium
Okay.
Robert Sarver
What we do in Partners First has no relevance to our core deposits. We got one of the best core deposits franchisees in the country.
You know, we are trading at a 3% core deposit premium some of that is Partners First losses, it really, they are really separate entity and they can be dealt with separately. And by no means do we think long-term that we have to deal within the same.
KC Ambrecht - Millennium
Okay. I mean just then maybe if you kind of: would you consider still growing this business today?
When you signed up to this Partners First in the middle of last year, would you do that today knowing how the current market is deteriorating right now for the consumer?
Robert Sarver
From the credit market yes, I think from the credit market, its actually better to start it today. If we started 18 months ago, we probably we would even have pushed a little harder into underwriting and doing some credit stuffs that we shouldn't have done, its actually getting in the market, and today's market with the credit market is real tough, we're in a better position to further hone in the exact affinities we're going after, the FICO, I mean the stuff we're proving now, over 700 FICOs.
We're really targeting, we picked up the Westchester County bar, the Chicago Bar Association. I mean we are targeting the crème de crème and I actually think at this point of time, it's a good thing.
A lot of the other credit card banks are focusing more of their attention on reserves not as much on marketing. We can focus on marketing and we're getting into underwriting at the bottom; it’s just like real estate.
Now, is a good time to start looking into real estate in terms of the financing to people that are buying stuff at discounts on the dollar, because your average loan per square foot is a little overpriced.
KC Ambrecht - Millennium
Okay.
Robert Sarver
The timing actually is pretty good.
KC Ambrecht - Millennium
Okay. Thanks very much.
Operator
Excuse me sir, we do have a follow-up from Hugh Miller, do you have time to take that at this time.
Robert Sarver
Sure.
Operator
Please go ahead sir.
Hugh Miller - Sidoti and Company.
Great, just one quick follow-up question getting back to the possibility you guys expressed about potentially doing some type of supporting a debt, a trust preferred issuance, just to increase the capital ratios. Can you give just a sense as to if that were to happen?
What size and offering might be necessary to get yourself back up to a comfortable level?
Dale Gibbons
Maybe, right now we are at 10.4 our total capital. I mean: if we could, I wouldn't mind if that was 11.4, something like 10% that would be $40 million number.
Hugh Miller - Sidoti and Company
Okay. Great, thank you so much.
Operator
Mr. Sarver, seeing that there are no further questions, I would like to turn the call back over to you.
Robert Sarver
Well, I guess I just conclude. I mean, tough markets, tough economies and the next 12 months to 24 months are going to determine how well management has done in underwriting these credits over the last two or three years and we feel pretty good about how we have done.
We are obviously not immune to what's going on in the market. Banks are going to have to build up reserves, they are going to have to be increasing reserves because of collateral devaluations, because of new appraisals coming in, because of the fact that more loans have been classified substandard and graded, but at the end of the day it's what you end up collecting.
I think is most important and what that does to your capital base over the next year couple of years. We still think we are in pretty good shape, especially related to our peers in terms of how we've done our business.
So, I think in the next year will be real telling, but we appreciate your attendance, appreciate all your calls and Dale and I are always available to answer calls offline about the company. So thank you for attending today.
Operator
Thank you very much for attending the conference call as I said. You may now disconnect your lines.
Have a good day.