Western Alliance Bancorporation Management Discusses Q4 2012 Results - Earnings Call Transcript

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 |  About: Western Alliance Bancorporation (WAL)
by: SA Transcripts

Western Alliance Bancorporation (NYSE:WAL)

Q4 2012 Earnings Call

January 25, 2013 12:00 pm ET

Executives

Robert Gary Sarver - Chairman, Chief Executive Officer and Chairman of Torrey Pines Bank

Kenneth A. Vecchione - President, Chief Operating Officer, Director and Chairman of Finance & Investment Committee

Dale M. Gibbons - Chief Financial Officer, Executive Vice President and Executive Vice President of BankWest - Nevada

Analysts

Brad J. Milsaps - Sandler O'Neill + Partners, L.P., Research Division

Herman Chan - Wells Fargo Securities, LLC, Research Division

Matthew H. Burnell - Wells Fargo Securities, LLC, Research Division

Casey Haire - Jefferies & Company, Inc., Research Division

Joe Morford - RBC Capital Markets, LLC, Research Division

Jeffrey Bernstein

Operator

Good day, everyone. Welcome to the earnings call for Western Alliance Bancorporation for the fourth 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, January 25, 2013, through Monday, February 25, 2013, at 9 a.m. Eastern time by dialing 1 (877) 344-7529, passcode 10023314.

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 and 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 would like to turn the call over to Robert Sarver. Please go ahead.

Robert Gary Sarver

Good morning. I'd like to welcome everyone to this discussion of Western Alliance's fourth quarter and full year 2012 financial results. Ken and Dale will take you through some of these slides. And at the end, I'll follow up and talk a little bit about the Centennial Bank acquisition and a little bit about some of our thoughts going into the first quarter of 2013. And then, we'll conclude with questions and answers. Ken?

Kenneth A. Vecchione

Thank you. Let me add my good morning as well.

Yesterday afternoon, we were pleased to announce fourth quarter net income of $32.1 million, a very strong 352% increase from the fourth quarter of 2011. Earnings per share of $0.37 were 4x higher than that of $0.07 per share earned in the prior year.

Our fourth quarter earnings included several variable items, which contributed net income of $13.2 million, which will be discussed later in detail. Without these variable items, earnings per share for the fourth quarter would be $0.22, still 3x higher than the $0.07 reported last year and $0.04 greater than the third quarter of 2012.

For the quarter, our business produced increasing revenues from strong loan demand along with a higher NIM. Expenses continued to be well managed, and our efficiency ratio for the quarter was 53.48%. Our pre-tax, pre-credit income recorded its 14th consecutive increase, as we posted $36.8 million, which was 10% higher than the prior quarter.

This quarter's loan growth of $376 million was inclusive of $91 million of acquired Service1st loans. Gains and losses on other real estate owned and appraisals of our OREO book only declined by $600,000 this quarter.

For the full year of 2012, we earned $72.8 million, which was 2.3x higher than 2011's full year income of $31.5 million. 2012's full year EPS was $0.83, which compares favorably to the $0.19 EPS earned in 2011. Tangible book value ended at $6.84 in 2012. That's up from $5.63 at year end 2011.

Let's turn our attention now to asset quality for a second. Overall, problem loans and repossessed assets declined from $415 million in Q3 to $398 million in Q4. This small improvement is encouraging. But as we have said for the last several quarters, the overall level is still unacceptable. The legacy of Bank of Nevada's asset quality has prevented charge-offs from declining to a lower level. Embedded in this quarter's charge-offs are $2.6 million of PartnersFirst charge-offs, which were recognized when we moved the receivables to the held-for-sale bucket.

Fourth quarter provision expense totaled $11.5 million, and that was up $2.6 million versus Q3. Overall, non-performing assets to total assets of 2.41% did improve from the prior year and from the prior quarter.

Turning our attention to capital. Our tangible common equity rose $129 million to $589 million. Tier 1 leverage ended the year at 10.11%. The Western Liberty transaction, which closed in November, generated a bargain purchase gain of $14.8 million net of restructuring charges. The Western Liberty acquisition was constructed to increase our overall capital position. We closed Western Liberty transaction on October 17. The total acquisition cost was $59.5 million, consisting of $27 million in cash and the issuance of 2,967,000 shares valued at $32 million. The Western Liberty Bancorp deal increased our asset base by $195 million and, as I've just mentioned, produced a net purchase gain of $14.8 million. At this time, the acquisition has been integrated into the bank -- into Bank of Nevada with no customer interruption.

Net loan growth for the fourth quarter came to $376 million, bringing our full year growth to $929 million. Western Liberty's acquisition brought along $91 million of loans. Our loan growth increased for the 11th consecutive quarter.

Turning our attention to deposits. Fourth quarter deposit growth increased by $293 million. At year end, with the Tag program expiring, we did not experience any noticeable runoff in deposits. Full year deposit growth of nearly $800 million was accomplished, as our cost of interest-bearing deposits declined from 54 basis points to 35 basis points in 2012.

Today, our assets total over $7.6 billion. Shareholders' equity of $760 million grew by $123 million in 2012. Our tangible common equity ratio rose by 100 basis points in 2012. And tangible book value grew to $6.84 per share, up 21% from the $5.63 at the end of 2011. The Western Liberty acquisition generated a $14.8 million net purchase bargain option, which aided the growth in tangible book value. End-of-period shares increased to 86.5 million. As I've mentioned, there's 2.9 million shares were issued in conjunction with the purchase.

Turning our attention to the individual banks. Western Alliance Bank, which conducts business in Arizona as Alliance Bank and in Northern Nevada as First Independent Bank, finished the year on a strong note.

For the fourth quarter, net interest income rose to $26.7 million, an increase of over 9% from the prior quarter. This quarter marked the 13th consecutive increase for Western Alliance Bank.

For the full year, net interest income of $98 million grew 18% over 2011. Pre-tax, pre-provision income totaled $15.2 million as pre-pre ROA reached 242 basis points. Net income for the quarter was $10.4 million and for the full year of $37 million. Full year net income increased 85% from last year.

Torrey Pines Bank, with branches in San Diego, L.A. and San Francisco, reported higher pre-tax, pre-credit income of $12.2 million by increasing revenue and maintaining a stable expense base. Torrey Pines ended the fourth quarter with an efficiency ratio of 46.3%. Torrey Pines' net income for the quarter of $5.2 million was impacted by the recognition of placing the PartnersFirst loan book into the held-for-sale bucket. Without this adjustment, net income would have been $6.8 million with an ROA of 140 basis points.

Bank of Nevada completed its second year of profitability by earning $18.1 million, which was 2.5x greater than 2011's net income of $7.5 million. For the quarter, Bank of Nevada's net income of $7.6 million was supported by increasing net interest income and flat expenses. Bank of Nevada's efficiency ratio declined to 48%; and pre-tax, pre-credit income jumped to $16.7 million or 221 basis points.

Now just a few words regarding the economies where we conduct our business. While the headlines have been dominated with various levels of uncertainty caused by the political divisions, the fiscal cliff conversations, tax rates and debt ceiling stories, the fundamental economies of Arizona and California continued to improve. Housing and employment in both states continue to repair themselves. And as I've discussed, our loan growth reflects the economic development -- improvement, I should say.

In Nevada, the economy continues to improve, but there have been some starts and stops along the way. In 2011, Las Vegas' economy did demonstrate meaningful year-over-year growth in visitor volume, occupied room nights, average daily room rates, convention business and airline passenger traffic. The rate of improvement has softened somewhat in 2012. Visitor volume growth, for example, has moderated with the lowest rate of improvement since 2009. Convention attendance also waned somewhat. Offsetting this softness were improvements in Las Vegas Strip gaming revenue, which saw an 8.8% increase in the third quarter. There is also some improving news regarding employment and housing. The unemployment rate is now 11%, which was -- which fell from well over 14%, still way high, but improving. Existing home prices for the first 8 months of 2012 increased in value, while new home sales showed improvement as home prices rose.

Finally, we are beginning to see firmer and stronger bids for OREO inventory. The Las Vegas economy is moving forward. But as I said, it will take several twists and turns along the way.

At this time, I'll turn it over to Dale.

Dale M. Gibbons

Thanks, Ken. For the fourth quarter of 2012, we, again, achieved record net interest income of $77.4 million, which was up 12% from the same period last year. NII benefited from higher earning assets, from strong loan growth, the acquisition of Western Liberty, as well as the loan pre-payment fee of $1.2 million.

Operating non-interest income declined to $5.1 million due to our exit from the wealth management business in the third quarter. Total operating revenue was $82.5 million. And for the full year, operating revenue was $312 million, which was up over 10% from 2011 and marks our third consecutive year of double-digit top line revenue growth. Operating expense increased 6.8% to $45.7 million during the quarter from the same quarter 1 year ago, in part as a result of additional expenses from the Western Liberty acquisition. With improved operating leverage from revenue growth of 11% and expenses of under 7%, pre-tax, pre-provision income was up 16.8% to $36.8 million for the quarter.

The credit loss provision was $11.5 million for the quarter compared to net charge-offs of $10.9 million, excluding $2.6 million of charge-offs to write down our affinity credit card portfolio to fair value, as we now classify it as held-for-sale.

At year end, the allowance to total loans was 1.67%. The net loss on repossessed assets was $0.5 million, our third consecutive quarter of under $1 million in valuation volatility.

For the full year, ORE revaluation impairments dropped sharply from $24 million in 2011 to $4 million in 2012. As Ken mentioned, stability in the valuation of our properties is further shown by our dispositions during the fourth quarter, which were at 105% of appraised value. Of the $14.8 million net acquisition gain that Ken mentioned, $12 million resulted from reestablishing a deferred tax asset for timing differences that had been written off by Western Liberty.

Amortization of affordable tax credits increased to $1.1 million, which will further mitigate our tax liability prospectively. Income taxes were comparatively low, primarily due to the after-tax benefit of the $12 million deferred tax recognition from the transaction. If you back that out, our tax rate is a little over 25%, which is what we expect going forward.

Discontinued operations are higher due to onetime charges relative to the expected disposition of our affinity credit card unit as well, resulting in $32 million of net income.

At 12/31, our qualifying SBLF loan growth is $246 million, which is well above the $151 million needed to qualify the lowest preferred rate -- dividend rate of 1% or $400,000, resulting in EPS of $0.37.

From the $0.20 operating EPS that we discussed during the third quarter, net interest income rose $5.5 million or the equivalent of $0.04 per share in the fourth quarter. However, we had onetime, pre-payment fees that we received a $1.2 million.

Operating expenses increased $1.8 million, which caused a $0.01 each, resulting in an operating EPS, or our view of what our run rate was for the quarter, of $0.22. Net merger benefits, including the BPO and acquisition charges, added $0.15, marking down our credit portfolio to fair value and disposition costs related to that, the same cost, $0.04; and we have $0.04 of other gains, including securities, litigation and settlements, resulting in our GAAP EPS number of $0.37 for the quarter.

Our margin improvement of 14 basis points to 4.55%, half of that was due to the loan pre-payment fee and another 12 basis points as a result for mark accretion on Western Liberty loans. But for those items, the margin would have actually declined by $0.05. However, unlike the onetime prepayment gain, the accretion from Western Liberty assets will continue.

Operating expense increased to $45.8 million, but our efficiency ratio improved to 53.5%, as a result of our strong revenue growth. Return on assets for the fourth quarter is 1.68%. Excluding the BPO and other items we mentioned, ROA was 99 basis points for the quarter. For the full year, reported ROA was 1.01%, and ROE was 10.5%.

Short-term investments increased as we moved our balance sheet close to an interest rate risk-neutral position from modestly liability-sensitive. Our investment portfolio declined, and the yield improved as we sold low-yielding, short-duration GSE paper at a gain during the bond rally.

Loan yields increased 18 basis points, including 9 basis points from the prepayment fee. In addition, loan yields on new originations rose 15 basis points for the quarter to 4.55%. That's the highest origination yield we've had since the fourth quarter of 2011.

Finally, interest-bearing and noninterest-bearing deposits increased during the quarter, while funding costs fell. The expiration of the Tag program had a negligible effect on our balance sheet or cost of funds.

Despite the strong loan growth we had in 2012, the quality of our portfolio also improved. This page shows the change in the grade of our pass credits during the year. We grade pass credits from 1 to 5. And at year end 2011, 22% of our portfolio was all being high pass, graded 1, 2 or 3. 1 year later, that proportion increased to 28%. Meanwhile, the lowest pass category, grade 5, fell from 42% to 34%, as we also increased to grade 4.

Aggregate problem assets declined to $398 million at December 31, which is down 10% from $441 million 1 year ago. Within the problem asset category, non-performing loans fell $17 million, and we had improvement in each of our markets in this line item.

Of the $106 million in non-accruing loans, approximately half remained current with regard to contractual principal and interest payments. Reported net charge-offs increased $9 million in the third quarter to $13.5 million in the fourth, including the $2.6 million I mentioned, writing down our affinity credit cards to fair value. Without this change, the annual charge-off rate would have been 80 basis points instead of the 99 basis points shown here.

Of our provision expense of $11.5 million for the quarter, $4.2 million was incurred to cover the $285 million of loan growth, excluding what we acquired from Western Liberty. The weighted average reserve allocation of the net -- new loans was 1.4%, which compares to our overall allowance of 1.67% of total loans at year end.

This slide shows charge-offs by year of loan origination without regard to when the charge-off was actually taken. If you look at the pie on the left, which compares our cumulative charge-offs for the 13-year period from 2000 to -- through 2012, $366 million of the $384 million in losses or 95% were from loans originated from 2004 to 2008. The pie on the right shows that, of our $5.7 billion loan portfolio balance at December 31, 2012, 68% were originated in 2009 or later. The table at the bottom shows cumulative charge-offs for all loans, except for credit card made each year and the remaining balance of our loans as of each year end. Lining up with the pie on the right, you can see that the balances originated after 2008 is $3.8 billion, which have had cumulative losses of only $5 million for the 4-year period.

This graph tracks charge-offs by vintage for perhaps the 2 most volatile loan sectors: construction and land and non-owner occupied commercial real estate. For example, using the vintage column on the left, look down to 2006. Moving to the right on the 2006 row, under the 2006 column, you'll see that we charged off $0.1 million of loans that were originated that same year. $2.3 million of the 2006 originations were charged off in 2007. And in the worst year, 2009, we charged off $22.6 million of those loans. The total column on the right shows that, to-date, we have charged off $55 million of loans originated in that year, which was our worst vintage year. At December 31, 2012, we have a remaining balance of $102 million of loans originated in 2006.

Looking at the column on the right and the rows for the years 2009 through 2012, which are boxed in red, you can see we have incurred 0 charge-offs in these loan categories for credit originated in those years. If you look at the circles, you can see the charge-offs generally start the year after origination and peak in either the third or fourth year after origination. So for 2009 originations, we should be at peak charge-offs in 2012, and we should start to be incurring losses from loan originations in 2010 and 2011. But as you can see, in every case, they have been 0.

The point of these last 2 slides is to show that our asset quality of loans originated after 2008 appears strong and now constitutes over 2/3 of our loan portfolio. The combination of our $0.83 per share in EPS for 2012, issuance of 3 million shares that Ken mentioned to consummate the Western Liberty transaction and mark-to-market gains in our securities portfolio has driven our tangible book value up 21% during the past year to $6.84. Our capital ratio has climbed during the fourth quarter with Tier 1 common equity relative to risk-weighted assets at 8.6% at year end.

I'd like to turn the time back to Robert to comment on Centennial.

Robert Gary Sarver

Thanks, Dale. And on Slide 18 is really a pretty good slide. I looked at it a little bit differently. And that even during the tough times, say, over the last 5, 6 years, our annual charge-offs in real estate have been well under 1%. I think that's probably one of the strengths of our company, it's our ability to underwrite commercial real estate.

And that kind of leads us to the next slide on Centennial. Centennial has a commercial real estate portfolio of about $450 million. There is no land or construction in that portfolio, and they haven't made any loans for the last 4 years. So the portfolio is all-season commercial real estate, most of which is in Southern California. We've done a pretty thorough review of this portfolio. On 2 occasions, I've actually personally looked at the 12 largest loans in the company, and we're comfortable with our due diligence. We're comfortable with our valuations and our numbers on the loan book. We do think this deal will be accretive to the company. But we're not going to get into specifics until next quarter on it. There will be no stock issued to close this transaction, but we will most likely do a small debt issuance of about $25 million. We anticipate this deal to close at the end of the first quarter or around March 31.

Let me just follow up with a little bit of outlook for the first quarter of 2013. Our loan and deposit pipelines are still very, very strong. I'll say a little bit of our loan fundings that we thought may fall into the first quarter of this year got closed at the end of last year. So our first quarter loan fundings could be a little lower. But in general, for the year, I anticipate that organic growth for both loans and deposits will be pretty similar to what we did in 2012.

As I mentioned before, Centennial has got a $450 million loan book. It's currently running off at about $25 million a quarter, but part of that is due to the fact that they're not originating new loans. So we think, well, that portfolio will decline probably not quite at that rate, as some of those customers are customers that we're going to want to retain and some of those credits we'll be retaining and renewing versus just let them run off.

Dale talked about the interest margin. I'll just add a couple of things. At the beginning of this year, we locked in $200 million of 5-year, fixed-rate financing at about 1%. Obviously, as that gets deployed, it will help us position for a rising interest-rate environment. Some of that funding is going to be used for this Centennial acquisition, where their deposits are really more wholesale funded and that will fit in nicely with a good margin for us.

I will say that, as Dale mentioned, we're looking for our margin to decline a little bit. If you take into account the prepayment penalties you talked about and some of these other items, we're going to be in the 4.25% to 4.35% range for the first quarter for our net interest margin.

In terms of our efficiency ratio, we're getting down to low 50s. I think at the end of the day, when we're operating in a totally normal environment on all 8 cylinders, we should be in the mid- to high-40s in terms of our efficiency ratio at that point. But going into this year, we do have some costs rising. Obviously, compensation and some of the related balance sheet growth areas in terms of our growth are going to be going up. But we do have, offsetting that, lower legacy asset costs. And so, net-net, when you put that all together, our total operating overhead should be up just very slightly.

Asset quality. Our weighted average risk-graded portfolio is going to continue to improve. The influx of new problem loans is low. The acquisition of Western Liberty and Centennial will increase our classified loans. Now we're very comfortable that the values of these loans have been marked properly. And that's obviously not reflected in the loan loss reserve because those loans are marked net based on the reserve in there. Our non-performing asset ratios and charge-offs will not be negatively affected by the acquisitions and are expected to continue to gradually improve throughout the year. But the classifieds will bump up a little bit.

In terms of the acquisition, at Western Liberty, as Ken mentioned, we did complete that conversion under our new platform in December without any incidents. So we have got that pretty well digested. And we are hoping to close the Centennial acquisition by March 31, and we feel pretty comfortable about being able to digest that.

So with that review, I think we'll open it up to questions right now.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Brad Milsaps, Sandler O'Neill.

Brad J. Milsaps - Sandler O'Neill + Partners, L.P., Research Division

Dale, I just wanted to follow up on some of the margin's guidance. Did you say that new loan originations were coming in? I think you said around 4.55%. Is that right? I just want to make sure I heard that number correct.

Dale M. Gibbons

Right, that's correct. Yes, they're up from where they were in the third quarter, but they're still below what the prepayments -- or payments on our existing book are coming off at. So it should mitigate the decline a little bit. But we still should look for an overall decline in loan yields, except for the pop that we see because of Western Liberty, which will be sustained.

Dale M. Gibbons

And to give you, kind of, a couple of specific numbers, Brad, if you went to the fourth quarter, the average rate on loan maturities was 5.28%, and the average rate on originations was 4.555.

Brad J. Milsaps - Sandler O'Neill + Partners, L.P., Research Division

Okay. That's great. And is 2013 a heavier year for renewals, or things coming due that you feel like you're going to have more adjust-down relative to 2012? Or is it relatively stable?

Dale M. Gibbons

It's about the same as last year. We've got -- when you look at our maturities, we've got lines that are up every year. But really, it's term loans that are subject to pressure for refinancing and new rates and things like that. And so, I think, pretty similar. Obviously, a lot of the real high-rate loans have already been refinanced if they're going to be refinanced. But we still have a fair amount of loans in the 6s that could be under a little pressure to refinance as we go on.

Brad J. Milsaps - Sandler O'Neill + Partners, L.P., Research Division

Sure. And just kind of switching to asset quality, Robert. In the last couple of quarters, I guess, the core charge-off rate has been, kind of, in that 70 or 75 basis points range. Can you talk a little about what you think -- as you go into 2013, where you think that can, sort of, finish out the year as it relates also to your provisioning?

Dale M. Gibbons

Yes, yes. I mean I think it's going to get better, and one of the main reasons it's getting better is we're seeing an uptick in the valuations of real estate collateral in Las Vegas, specifically in land. Land is actually starting to get a little more popular. We got 1 nice piece of land. We actually got 5 offers this week on. And so, we're seeing an uptick in the collateral values, and that's going to have an impact. So we -- I'm hopeful we'll be 50 basis points this year, maybe less if we do a good job.

Operator

The next question comes from Herman Chan at Wells Fargo Securities.

Herman Chan - Wells Fargo Securities, LLC, Research Division

I want to revisit Slide 18. It looks like the 2007, 2008 vintage investor CRE and construction loans saw a pick up in losses last year. Any color on loss expectations going forward from these 2 vintages?

Robert Gary Sarver

You mean from the $6.2 million to the $7.1 million?

Matthew H. Burnell - Wells Fargo Securities, LLC, Research Division

Right.

Robert Gary Sarver

I mean, I don't have any particular color on it. I think I don't have the breakdown of those losses. But fairly modest, I guess, $9.7 million down to $6.2 million and up to $7.1 million. I'd say, going forward in general, just overall, commercial real estate, and evaluations and the health of that market is getting a little better in all our markets. So we'll continue to see that number maybe improve a little better in 2013.

Dale M. Gibbons

What's clearly driven the losses that we've taken is really what Robert was just saying. It's all about the kind of the valuations that have been incurred, and that we are seeing stabilization, certainly improvement particularly in other markets, but perhaps in Nevada as well. So obviously, stats and circumstances are going to affect a particular charge-off. It can result in a number there. But overall, we're looking for the trends to continue to...

Robert Gary Sarver

Yes. There have been 2 we've been doing some of. And you may see a little bit of this too in the Centennial deal, although the accounting for that is a little different because of the way they're marked. But when you do these A/B Notes, so we have some of these credits where -- these real estate credits where we do an A Note that has good cash flow coverage and also there's the B note, and that B Note for accounting and regulatory purposes kind of gets charged off, but it's still on the books with the customer, and the customer still owes the money. And some of that helps us with the asset quality numbers, but it increases the -- it helps us with the classified numbers, but it increases the charge-offs a little bit. But we still hope to be able to recover a good chunk of that at the end of the day, it's just going to be back-end loaded.

Herman Chan - Wells Fargo Securities, LLC, Research Division

Right, understood. Thanks for the color. And your comments on larger bids for OREO, how aggressive are you in this position in Q4, particularly in Nevada? And should we expect a somewhat steeper drop in OREO balances in 2013?

Robert Gary Sarver

I don't think we're going to get a real steep drop-off. We have some few pieces -- a few big pieces in escrow, but the commercial real estate stuff, we're selling. But some of the land we had, we've written it down for like 3 or 4 years, and now it's really starting to turn. And so, what you may see with some of that is, the new appraisals are actually going to increase the values of the OREO, and some of that stuff is going to be start to be written up. So I don't necessarily see the total coming down quickly. Over the next 24 months, yes, I do see that total coming down. But is there an urgency today to unload all this stuff just as the market turn? No. I mean, I think, over the next 12 months, we'll be looking for strategic buyers and developers that are looking to develop this property that will pay us a better price.

Dale M. Gibbons

In total, our undeveloped land is held at 17.5% of current original appraisals, and that number is up. That's up from about 14.5% at the trough. So to the degree that we're on maybe a little bit of a turn here, there might be some value benefit from not selling at the bottom.

Operator

The next question comes from Casey Haire at Jefferies.

Casey Haire - Jefferies & Company, Inc., Research Division

Just a follow-up on the originating loan yields at 4.555. I'm just curious, what's driving that? Are you guys -- are you seeing less competition, or are you going after riskier credits? Just a little color as to what's -- I noticed Arizona, the NIM was up 2 bps. Just some color there would be helpful.

Robert Gary Sarver

Yes. I think the biggest thing that's driving that is that we've really established ourself as the lender of choice in these markets for customers that would prefer to not deal with one of the real big banks. We're like the person left. And with that, we're able to get decent pricing. I mean, not 1% or 2% higher than the market, but we're able to get a premium. And so, we've got a nice niche in the marketplace for businesses whose needs are too complex for some of the small community banks here, but also would like the local service of the community bank. We've also been pretty aggressive at bringing in new relationship officers that have moved books of business with them that have been with them for a long, long time. And that also helps them get a little bit of a premium. So now, if anything, we're -- our credit underwriting probably is better than it's ever been. And our clients plays a value on access to executive management, and the larger banks don't really have that. So we do quite a bit of that, and we're getting paid a little bit for it.

Dale M. Gibbons

And as I commented earlier, I mean, our average risk grade is actually getting better, despite the fact that we had strong loan growth as well as an increased price -- at least this last quarter, increased in price.

Kenneth A. Vecchione

Casey, this is Ken. Where we can price at a premium, if a customer has a need and that need needs to be filled quickly, rather than having a large loan circle through San Francisco or somewhere in Charlotte, we get that loan done quickly, but we get a premium price for that. We price a little bit better, and that helps us as well.

Casey Haire - Jefferies & Company, Inc., Research Division

Okay. And just switching to expenses. Rob, your comments on the efficiency ratio, normalizing the 45%, I assume that's mostly credit-sensitive expenses fading. How much is in the run rate currently? And what's your kind of expectation as to when these go away?

Robert Gary Sarver

Well, there's 2 pieces of that on the expense side. One is, like you said, credit-related. So you still got heavy -- you got your OREO cost. You got your workout cost. You got your legal cost. We still got high FDIC premiums at one of our banks, and you got some of these legacy credit costs that flow through the operating expenses. The other piece of it, I'll say, is we put a lot of money in people, especially people on the administrative side. So when you talk about risk management, investments, municipal compliance, audit, all of these belts and suspenders that we've really geared up on over the last 3 or 4 years having learned some lessons when the market went bad, we've got an executive team in place that we don't need to augment as we grow. So if we add another $0.5 billion or $1 billion in assets, we don't have a lot of people overhead other than maybe some production people to bring in to do that. And when you get those 2 working together, you get -- now what I said is mid- to high-40s. You jumped to 45. So that's -- I mean -- and that's probably what I told our staff too, 45. So we'll stick with 45.

Casey Haire - Jefferies & Company, Inc., Research Division

Got you. Okay. But the credit-sensitive expenses, how much of that is currently in the run rate?

Robert Gary Sarver

Credit-sensitive expenses, I would ballpark at about $250,000 a month. So call it $3 million a year.

Casey Haire - Jefferies & Company, Inc., Research Division

Okay. Got you. And then, just lastly, Dale, on the tax rate down to 25%, does this mean that -- I mean, are we at the right rate here in terms of the offset on the amortization expense going forward?

Dale M. Gibbons

Yes, yes. So -- yes, we're looking for 25% in 2013. Obviously, it's lower than that because of what I commented on the DTA reestablishment at Western Liberty. But if you back that out, that's where we were in the fourth quarter. You also saw, in the fourth quarter, we had a little bit higher charge related to amortization of Low-Income Housing Tax Credits. That's going to, again, provide a tax shield for us so that, as we look for -- for improvement in 2013 over 2012, we will be able to shield a little more of that income from federal income tax, and that's kind of how we'll get there on a sustained basis, at least for 2013.

Operator

Our next question comes from John Nash at Wellington Management.

Unknown Analyst

I have 2 questions for you. First, how much, if any, of the Torrey Pines' loan loss provision relates to the affinity card business? And second, Robert, if you could just talk about the outlook for lender recruitment.

Dale M. Gibbons

Okay. On the Torrey Pines, basically, we took about a $2.5 million loss and -- but a chunk of that was already in the reserve. So you're basically transferring it from the reserve through as a loss to bring the thing to market, $0.95 on the dollar, And then we charged off anything 60 days and older. So if you exclude that, Torrey Pines' charge-offs had been pretty light. In terms of -- what was the other thing you asked about?

Unknown Analyst

New hires.

Dale M. Gibbons

Oh, new hires.

Robert Gary Sarver

Things aren't as good as you'd like to think, John. And I think you probably should sell us all that debt you're getting 10% on at par.

Unknown Analyst

I'm just waiting for rates to go up.

Robert Gary Sarver

Yes. Speaking of efficiencies, we got $75 million of debt at 10% hanging out there. I can't wait to pay you guys off. But in terms of new hire, yes, the recruitment has been pretty good. We're -- we just brought in a guy, a good hire, to head up a new office we're going to do in North Scottsdale. We're going to put a new big office in North Scottsdale. We're looking for a good location right now. We've had some success in Los Angeles with a few new hires, also in the Bay Area. And then, one of our goals -- I mean, we really have an opportunity to be a dominant player in our market here in Phoenix, Arizona, and we've been expanding there. And so, we're hiring people. I mean, we've got a pretty good incentive plan for them to bring in new business. We got a good -- we compensate people well that are successful in bringing in new business, and they know they can get business done here. They can get good business done, and we've got a pretty good pipeline of folks who are always in recruiting mode for the right people and that really ties into our strategy. So like the Western Liberty, Centennial, yes, I mean, they're adding value. It's shareholder friendly. That's all good stuff. But at the end of the day, our company is based on organic growth. That's our engine. And right now, it's pretty strong. And one of the reasons it's strong is we're able to recruit good people.

Kenneth A. Vecchione

To put a number behind what Robert just said, we hired 12 new additions for loan officers and business development people this quarter, and that's on top of the 9 people we hired in Q3, the 9 people we hired in Q2 and the 6 people we hired in Q1. So we have a lot of people that are interested in coming here, and we get to pick some of the better people.

Operator

Our next question comes from Joe Morford at RBC.

Joe Morford - RBC Capital Markets, LLC, Research Division

Dale, I wanted to just go back to Slide 13 on the margin drivers a little bit and just a couple of questions. One, the investment yield has been consistently going up. But just curious, what you're buying there and the kind of yields you're getting? And then also, your short-term investments and all were up in the fourth quarter, and I think you said that was for asset liability purposes. But I was wondering if you're thinking about -- are there opportunities to redeploy that at all?

Dale M. Gibbons

Yes. So regarding the investment yield, you can see the balance actually decline during the quarter. So we haven't really been buying much at all lately, and that's really what drove the yield a little bit higher. What pulls our yield to north of 3% is our municipal portfolio, which has an average life to maturity of about -- it's about 4.8 years to -- and the yields on that are in the high-4s on a taxable equivalent basis, which is how this is stated, and that's what pulled that up, and so -- and our GSE portfolio has come down. We started -- actually back -- at the late in the third quarter, we thought there might be some action by the administration in terms of being able to allow kind of debt forgiveness and refinancing of maybe the non-GSE paper. And so, we sold all of our GSE paper that had a premium in excess of -- that had a value in excess of 104 because we thought speeds would pick up a lot. And that's what -- I think that's helped us in terms of -- so what we're left with is we have our municipal portfolio. We still have some preferred stock, as well as some other financial institutions, and those have performed well lately also. In terms of the cash position, yes, we put on our floor mitigation strategy last -- during the third quarter. You're going to see that again in 2013. Robert commented on kind of the fixed-rate borrowing we've done to really kind of position ourselves for a rising rate environment a bit. And you see that in terms of the cash position relative to fairly more fixed-rate types of funding for that.

Joe Morford - RBC Capital Markets, LLC, Research Division

Okay. And then, just, I guess, a follow-up. It sounded like the guidance says for the margin to be down 20 to 30 basis points in the first quarter. And I know there was -- you have the absence of the prepay. But just what are the big drivers to that other than just the ongoing repricing of securities and loans, and where do we go from there?

Dale M. Gibbons

Yes, and so, I mean, the biggest driver -- I mean, 2 things have really gone on. I mean, so if you take out -- we're at 4.55%, we're going to take off 7 basis points for the prepayment deal and we're going to be in, kind of, in the high 4.40s. Well, we put on $200 million of fixed-rate financing at about 1% borrowing cost. That today is -- has not been deployed into loan growth, which we think it will be some time by the end of the second quarter. If that happens, that will -- our margin should maybe recover in that regard a bit. But in the immediate timeframe our margin comes down, not so much because of the rate of 1% on the borrowing versus something from the FHLB at 20 basis points, but because it expands the size of our balance sheet a little bit. So you've got a little bit larger base in terms of borrowing. And so, as you look at that on an earning asset basis, it's about the same amount of income, but at a higher base. That's what pulls it down. So that's going to drop at 10 to 15 basis points right there. In addition, what we're going to see, as what we have seen, is a little bit of a net crimp on the margin relative to where the new loans are coming on versus where they're coming off, and that's been running about 5 basis points a quarter. And I kind of mentioned too earlier, I mean, our margin would have gone down. But for the, kind of, the increase that we saw from the accretion of Western Liberty marks. Now Western Liberty mark accretion is going to continue. So what we've done is we -- we were guiding that we're dropping about, I'm going to say, 5 basis points a quarter, that really happened in the fourth quarter. I think it's going to happen again in the first quarter, except for we're going to be ratcheting it up a little bit because of Western Liberty. But then, we really traded that off -- it's almost the same amount. We traded that off to prepare ourselves for a rising-rate environment. So if you net those all out, we're going to be in, kind of, in the 4.30% range going from 4.45%. That would have dropped down -- 4.41%, that would drop down to about 4.36%. And you take another $0.05 or 8 basis points off of that, and you're, kind of, at the level where Robert kind of indicated. That's what we see right now. I think that will mitigate over time if our -- as our loan payment rates are not quite as high as what they've been lately and maybe we sustain a little better on the repricing of new credit. But it still should continue to crimp a little bit. That said, except for the first quarter, because we lose 2 days this quarter relative to the fourth, we are looking to be able to earn through whatever margin contraction we see through volume and increased net interest income even if the margin continues to crimp a little bit after the first quarter.

Operator

The next question comes from Jeff Bernstein at AH Lisanti.

Jeffrey Bernstein

First, I just wanted to say I really appreciate how well you guys have managed the last year and how you performed. It's really been great. Just a quick question on accounting relative to the OREO -- can you hear me?

Robert Gary Sarver

Yes.

Dale M. Gibbons

Yes.

Jeffrey Bernstein

So to the extent that these properties now come back with appraisals that are higher but you don't sell them, there will be some accretion, I guess, to book value, but we won't see in the P&L. And if you'd make a sale, we'll see it come through the P&L. Is that how to think about it?

Robert Gary Sarver

No, no. The way it works is, if the appraisal goes up, we write the OREO up and it goes through the P&L. But it can only be written back up to the level that it originally came in as OREO at. And so, what you'll see is -- in some cases, you'll see a write-up through the P&L because it came in at OREO at a much higher price, and then it's been written down. And then, in other cases, you'll see where the appraisal will come in at higher than what the actual original appraisal was when it came into OREO. And therefore, that gain can't be taken until the property is actually sold.

Operator

Our last question comes from Casey Ambrose at Icecap.

Unknown Analyst

I have a similar follow-up on that. Can you just tell me again what your OREO balance is, and how much of that is land that's being held at $0.17?

Robert Gary Sarver

Yes. I mean, we got $77 million -- say, $80 million of OREO, of which about 60% of it is land.

Dale M. Gibbons

Yes, $52 million, land.

Unknown Analyst

$52 million, land?

Dale M. Gibbons

Right.

Unknown Analyst

And then -- so just to that, a question though, if you were to write this up, how much would you write the land up by?

Robert Gary Sarver

Well, it's --

Unknown Analyst

Can you only write it back too...

Robert Gary Sarver

Well, the land right now has been written to appraisal, with the exception of maybe a few pieces that haven't been able to write up higher because of the fact that they appraised at higher than what they came in at OREO. Now that -- they still are a lot lower than what the original appraisal was when we made the loan, but when we took it into OREO and foreclosed on it. So I wouldn't say there's a big number in terms of what the REO's worth compared to what it's on the books for today. But what I'm saying is the prices are going up. And therefore, it's that appreciation that will have an impact for us.

Operator

At this time, there are no further questions. Would you like to make any closing remarks?

Robert Gary Sarver

Yes, I'll just kind of conclude with the fact that, yes, we had a good quarter, and we had a good year. But as we talked with our employees today on our earnings call, well, our staff, this is really -- we have to have the same mindset we've had over the last several years when times are really tough for us, and we call it blue-collar desperate. It's a term out of the locker room in sports. And we needed to make that same commitment and have that same attitude and approach to running our businesses even when we're making money. We still got a lot of opportunity, and we still got risk that we have to manage. And so, we're -- we got our head down, and we're going to keep pounding away with good strong organic growth and good expense control and good risk management. And we'll be back at you in 90 days and, hopefully, have another good report to give you. Thank you, all, for tuning in, and we'll talk to you next quarter.

Operator

The conference has now concluded. Thank you for attending today's event. You may now disconnect.

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