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Western Alliance Bancorporation (NYSE:WAL)

Q4 2013 Earnings Call

January 24, 2014 12:00 pm ET

Executives

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

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

Analysts

Matthew T. Clark - Crédit Suisse AG, Research Division

Herman Chan - Wells Fargo Securities, LLC, Research Division

Casey Haire - Jefferies LLC, Research Division

Joe Morford - RBC Capital Markets, LLC, Research Division

Terence J. McEvoy - Oppenheimer & Co. Inc., Research Division

Gary P. Tenner - D.A. Davidson & Co., Research Division

John V. Moran - Macquarie Research

Brett D. Rabatin - Sterne Agee & Leach Inc., Research Division

Operator

Good day, everyone. Welcome to the Earnings Call for Western Alliance Bancorporation for the Fourth Quarter 2013. Our speakers today are Robert Sarver, Chairman and CEO; and Dale Gibbons, Chief Financial Officer.

[Technical Difficulty]

Good day, everyone. Welcome to the Western Earnings -- welcome to the Earnings Call for Western Alliance Bancorporation for the Fourth Quarter 2013. Our speakers today are Robert Sarver, Chairman and CEO; and Dale Gibbons, Chief Financial Officer.

You may also view the presentation today via webcast through the company's website at www.westernalliancebancorp.com. The call will be recorded and made available for replay after 2:00 p.m. Eastern Time, January 24, 2014, through Monday, February 24, 2014, at 9:00 a.m. Eastern Time by dialing 1 (877) 344-7529, passcode 10038670.

The discussion during this call may contain forward-looking statements that relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts.

The forward-looking statements contained herein reflect our current views about future events and financial performance and are subject to risks, uncertainties, assumptions and changes in circumstances that may cause our actual results to differ significantly from historical results and those expressed in any forward-looking statement.

Some factors that could cause actual results to differ materially from historical or expected results include those listed in the filings with the Securities and Exchange Commission. Except as required by law, the company does not undertake any obligation to update any forward-looking statements.

Now for the opening remarks, I would like to turn the call over to Robert Sarver. Please go ahead.

Robert Gary Sarver

Thank you. And welcome to the Western Alliance Fourth Quarter 2013 Earnings Call. I'd like to spend a few minutes reviewing our performance highlights. Then I'll turn the time over to Dale for a more detailed report. I'll then wrap up and open the lines up for questions.

We closed out 2013 with a strong finish. Loan growth accelerated, and we had the best organic deposit growth in our history. The margin was steady, and we maintained good asset quality. One of the most important things we did to finish out the year doesn't show up in the numbers, as we consolidated our 3 banks into 1 legal charter. At December 31, 2013, we merged Bank of Nevada and Torrey Pines into Western Alliance Bank in Arizona, and now operate them as divisions of Western Alliance Bank. So as the teams of bankers for each of these divisions are the same as what they were before, we believe this change will not have an impact on our customers, but will also give us the ability to be more efficient in how we deliver our products and services, as well as to better assess and manage our risk over time.

Net income for the quarter was $31.4 million compared to $28.2 million for the third quarter and $32 million in the fourth quarter of 2012, which included a significant gain from the acquisition of Western Liberty Bancorp at a price below its tangible book value.

Earnings per share was $0.36 for the fourth quarter compared to $0.32 in the third. However, fourth quarter performance included several items that we do not believe reflect earnings power of the enterprise. These items include a $2.2 million gain on the sale of REO, a $2.3 million charge for writing up our trust preferred debt, a $1.4 million loss on the repurchase of $10 million of our senior notes and a $1.9 million in merger cost from the Centennial acquisition, consolidating our 3 charters into Western Alliance Bank in systems and conversion cost.

Finally, we saved $3.7 million in taxes from the increased deductibility of losses from Western Liberty above our original estimate. Adjusting for these items, we pegged our earnings power for the fourth quarter at $0.34, equaling a return on assets of 1.3% and a return on equity at a little over 17%.

The earnings improvement was driven by our $285 million in loan growth, amply funded by $564 million in growth and deposits, while our margin ticked up slightly to 4.44%. Net loan losses remained low at 13 basis points of loans annualized, but rose from the net recovery position we had in the third quarter. NPAs fell to 1.5% of total assets, as we sold our largest piece of REO, which resulted in most of the gain I mentioned earlier.

Our robust balance sheet growth has been essentially matched by our capital, keeping our ratio strong and stable, as tangible book value rose to $7.89 per share.

Dale M. Gibbons

These year-over-year highlights showed that net interest income increased 14% for 2013 to $333 million, which was our fourth consecutive year of double-digit top line revenue growth. Expenses grew at just over half this pace to $193 million, driving pretax, pre-provision income up 20%. Net charge-offs fell off sharply for the year at only 14 basis points of total loans, which is about the same rate as it was in the fourth quarter. But this held down our provision cost and boosted our operating income over 50% for 2013 to $114 million. ROA was 1.35%, and ROE was just under 17%.

Loan growth for the quarter was $285 million, and that is net of the disposition of our affinity credit card portfolio that I mentioned on our last earnings call with $25 million. Growth was led by C&I construction loans, which were each up over 10% on a linked-quarter basis and more than double that amount during the past year. Deposit growth was a record $563 million, as Robert mentioned. Increases were in all categories and across all of our major markets. Deposits from the Centennial acquisition fell $55 million during the quarter as our offered rates on this Internet platform were lower than our competitors, but we continue to keep that platform open as a new liquidity -- alternative for us in the future.

The graph on the left shows that adversely graded loans and nonperforming assets from our own originations declined steadily, 20%, during the past year to $302 million at year end. Half of the $74 million in non-accruing loans remain current with regard to contractual interest and principal payments. For adversely graded assets that were acquired at year end, the book balance was $98 million. However, we continue to believe that there is minimal risk of loss on these loans as they're already net of $49 million in credit and rate marks in purchase accounting.

Primarily driven by strong loan and deposit growth, total assets increased 22% in the past year to $9.3 billion. We more than funded net charge-offs during the past year as well, as our allowance rose $5 million to $100 million during the year. Tangible common equity rose 16% to $688 million, resulting in the book value per share, as Robert indicated, of $789 million.

Fourth quarter net interest income was up $5.4 million over the third quarter to $90 million, as average earning assets increased to $477 million. Third quarter noninterest income included a nonrecurring gain from bank-owned life insurance, which explains the decline that we had to -- in the fourth quarter. Operating expenses increased $3.1 million from the third quarter to $51.4 million, and include elevated costs for bonus accruals and consulting expenses related to IT conversion costs and charter consolidation, this bringing pretax, pre-provision income to $43.8 million, up 19% from a year ago.

The credit loss provision was $4.3 million as we had net charge-offs of $2.1 million and $285 million in loan growth. Net charge-offs were $13.4 million during the fourth quarter of 2012. We had a $2.2 million gain on sale of repossessed assets as we disposed of our largest ROE parcel, which essentially recovered all of our prior losses on this credit. Similar to other banks this quarter, we recognized a loss from credit spreads tightening on our trust preferred debt, and we also incurred a $1.4 million loss from the repurchase of $10 million of our $75 million of senior debt outstanding, which otherwise would mature in September of 2015.

Merger-related charges were $1.9 million from tail cost from Centennial, as well as integration of our 3 bank charters at year end. Tax expense was low, as we benefited from credit loss experienced from the Western Liberty acquisition in 2012, being significantly better than projected. We had recently anticipated that some of the credit losses would not be deductible from Western Liberty as we had reached the IRS Section 382 limits on deductibility from changes in control. Now that these limits are no longer in play because our credit experience has been better, income tax expense fell by $3.7 million, which will be a one-time event.

The loss on discontinued operations is from servicing our sold affinity credit card portfolio, and we will continue to have charges until the buyer of this portfolio converts these accounts, which is expected to take place in June. This results in net income of $31.4 million and $0.36 EPS.

If we start with that $0.36 EPS and adjust for the items that Robert enumerated that we consider not to be related to our earning power, the tax benefit from Western Liberty, the OREO gain, debt valuation adjustment, merger charges and loss on the debt buyback, we peg our operating performance as $0.34 per share.

On a consolidated basis for the fourth quarter, our margin ticked up to 4.44% as pricing pressure appears to show some signs of stabilization at least in some of our markets, although we still hear stories of what we consider to be nonsensical pricing actions from some of our competitors. Margin also benefited from a $75 million reduction in our cash position and a $320 million increase in our investment portfolio. Our loan yield crept up 4 basis points to 548 as the negative rate differential between payoffs and fundings during the quarter fell to only 10 basis points. Meanwhile, our funded cost remained stable, and we do not expect to see further reductions in deposit cost.

Operating expense ticked higher during the quarter, resulting in a modest increase in our efficiency ratio on a linked-quarter basis to 51.9%. We closed 2 offices during the quarter, 1 each from the acquisitions of Western Liberty and Centennial.

Our pretax, pre-provision income was up $1.7 million during the quarter, while the ratio has been stable at 1.92%. We still expect to achieve our earnings goal of 2% over time, primarily from driving to a lower efficiency ratio, as revenue growth should again exceed that of expense growth in 2014.

Return on assets held steady at 1.3% for the quarter. The volatility in ROA you see among the geographic divisions of Western Alliance Bank is largely attributable to changes in provisioning cost, as Bank of Nevada benefited in the third quarter from a negative provision due to its net loan loss recovery during that period.

This page tracks the changes in asset quality during the past year. At year-end 2012, the weighted grade of our loan portfolio was 4.16 and improved to 4.1 at year-end 2013. This was accomplished through organic growth that was of notably better quality than our portfolio as a whole, with 44% being in the high pass category compared to 26% at the starting point of the portfolio. However, the quality of the acquired loans was lower with none being classified as high pass. However, we continue to believe the loss potential from these credits is more than covered with the purchase discounts that we obtained on these loans, and our recent experience with a tax gain due to Western Liberty credits having been built up -- having lower built-in losses than what we expected, also appears to bear this out.

Gross loan charge-offs increased to $4.5 million during the quarter from $3.3 million in the third, but fell by nearly 75% from the $16.7 million incurred in the last quarter of 2012. Recoveries were $2.4 million, resulted in net losses of $2.1 million or 13 basis points. The provision for the quarter of $3 -- $4.3 million covered the net losses, as well as provided for growth for the $285 million that we achieved.

These tables show how that our allowance is different as a result of the acquisition accounting that's -- that we're conducting. The allowance for loan losses was $100 million at year end, 1.47% of $6.8 billion in loans. However, included in that number is $373 million of acquired loans, which have no reserve, as they've already been written down to fair value. So in the column on the right, they've been pulled from the total, resulting in a ratio of 1.56%. The lower table starts with the same data, but instead of taking out the acquired loans, it adds back the credit discounts on those loans to the reserve and the outstanding balance, adding $28 million in credit marks takes the -- would take the reserve to $128 million and a ratio of 1.87%. We believe our representation of our ratio between these 2 numbers is probably most appropriate.

On this graph, you can see the loan losses incurred by WAL trace back to the year the loan was originated rather than typical presentation of when the loss was incurred. It shows that of our cumulative losses from 2000 through 2013, $384 million or 94% were incurred on loans originated in 2004 through '08. Only $10.6 million in losses have been incurred on originations after 2008. The bottom graph shows that the loan portfolio, as of year-end '13, stratified by when the loan was actually originated, it shows that $5 billion or 74% of our loan portfolio was originated in 2009 or later. And while some of these new originations are not seasoned, the losses to date are only 5 basis points annualized.

Our capital ratios are basically flat from the last quarter and from the last year, as our strong asset quality has been matched by internal capital generation. Total regulatory capital grew $130 million during 2013 to just under $1 billion at the end of the year. The increase in our return on tangible equity to 17% for the last couple of quarters has accelerated the rate of growth of our tangible book value per share, which increased 15% in 2013 to $7.89.

Robert Gary Sarver

Thanks, Dale. Looking forward, our current loan and deposit pipeline support the balance sheet growth, should again be strong this quarter, although deposits will slow from the record fourth quarter level. As we experienced in the first quarter of 2013, we expect our margin to decline this quarter, both on a dollar and ratio basis, as almost all of our revenue is net interest income and there are 2 fewer days in this quarter. This decrease in net interest income will drive a modest decline in EPS on a linked-quarter basis from $0.34, operating performance in the fourth quarter of '13.

Expenses typically climb a little in the first quarter as a result of FICO accruals, vacation and other costs that we recommence. However, given the steep down in -- step down in bonus accruals that will take place this quarter, we do not expect the seasonal pattern to repeat this year. This will leave our efficiency ratio fairly flat with the fourth quarter, since revenue will be constrained as well. We look for our efficiency to continue to improve in the second quarter. Although we do not see anything on the horizon that will necessarily drive loan losses higher, clearly, the very low level we experienced the past 2 quarters is not sustainable for the long-term. At this time, we expect our costs to continue to bounce along the bottom of its current credit cycle, but we'll likely see some quarter-to-quarter volatility resulting from the facts and circumstances of each loan, as well as recoveries.

At this point, I'd like to open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Matthew Clark at Crédit Suisse.

Matthew T. Clark - Crédit Suisse AG, Research Division

Maybe just on the margin and the related outlook beyond the upcoming quarter. I guess, you had excess deposit growth, it looks like you invested all of it in the securities. Just curious if there might be a mix shift as we look further out, maybe funding some of the loan growth. But again, just trying to get beyond the upcoming quarter, and it sounds like pricing has stabilized. It sounds like the spread between what's coming off and what's going on is a lot tighter. So just trying to get some more visibility on earning asset yields.

Robert Gary Sarver

Yes, it is a lot tighter, Matt, in the fourth quarter. I'm a little concerned that does one quarter really a trend make? But it was over 40 basis points in the third quarter and only 10 in the fourth. But in that sense, I think the outlook for the margin is maybe going to be a little better than what we've been guiding down to in the past, but I still see vulnerability. I see vulnerability from repricing the securities portfolio. We did put some more money to work. But certainly, the new yields on the securities, and particularly, what's happened in the bond market the past couple of days is going to have replacement yields lower than our existing portfolio, which is a little over 3%. So I still think that in the first quarter, we're certainly going to see a cliff, and I think there is certainly pressure to continue to drift down, but maybe at a more modest pace than what we've been experiencing or are looking for in the past.

Matthew T. Clark - Crédit Suisse AG, Research Division

Okay. And then in terms of the -- on the M&A front, anything new and different there? Obviously, you have a nice currency. Just curious if anything's changed in terms of your appetite or markets.

Robert Gary Sarver

No, not really. I mean, I don't think we're going to talk about anything until we do something. But no, we still -- we got a good currency, and hopefully, there'll be some opportunities for us.

Operator

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

Herman Chan - Wells Fargo Securities, LLC, Research Division

A question on efficiency and expenses. You had a couple of moving parts in the expense space and your prepared remarks mentioned continuing positive operating leverage. I recall a couple of quarters ago, there was a mention of driving that efficiency ratio to 50% or below. Looking ahead into 2014, is that a realizable target at this juncture?

Dale M. Gibbons

Well, I don't know if we're going to cross 50% in 2014. I think we're going to get below 50%. Yes, and the trend is going to be lower. I mean, the increase in the fourth quarter, frankly, the biggest piece was bonus accruals as we're really hitting almost all of our stretch goals for last year. That accrual will step down, and that's kind of the lead thing in terms of why we're not going to see expenses rise in Q1. But -- and then over time, I think there is more wind at our back in terms of kind of expenses that could grow more slowly than revenue, although they'll still rise. We are still incurring significant costs in legal and loan fee collections. And so those should fade away, again, as asset quality continues to improve. So I can't tell you when we're going to drop below 50% per se, but I'm looking for that trend to continue to slope downward.

Robert Gary Sarver

Yes, and just adding to that, it's the -- a lot of those legal fees resulted what we've been running a couple of million dollars a quarter in recoveries. But they go through the provision there. I think we'll probably do better in the second half of the year because we still have -- we're a little lumpy last quarter and for the next 2 quarters on some of our data processing costs, as we've got some big initiatives going on and we're consolidating these charters. We've got some consultants engaged, and we're spending money at a pretty good clip there, and I think that starts to tail off pretty good in the third quarter.

Herman Chan - Wells Fargo Securities, LLC, Research Division

Understood. And construction loan growth was a big driver in the quarter. Curious to get your insights on what you're seeing in that loan type, where you're seeing the growth in terms of geography, property types? And is there any spec lending involved in what you guys are doing these days?

Robert Gary Sarver

Well, on the construction piece and the real estate book, the growth as a percentage on the construction book was pretty high, but the absolute dollar amount of that portfolio had come down pretty low. So it actually was fairly mooted. I looked at the 20 largest credits we booked during the quarter. And of those credits, 6 of those were real estate-related, 14 were C&I. And on the real estate, we had 3 residential lot banking deals, where typically we'll lend money to somebody at about 50% of cost to develop lots that they'll have on contract to national homebuilders. Then we financed a couple of commercial real estate, a retail center and another big project in owner-occupied real estate loans. So the construction really hasn't kind of funded up, I think it will kind of keep going, but a lot of it has to do with just your bread-and-butter housing on the construction site.

Operator

The next question comes from Casey Haire at Jefferies.

Casey Haire - Jefferies LLC, Research Division

So a question about the deposit formation. I know you guys said it's expected to not be as strong here in the first quarter. But it's been pretty impressive. And I'm just curious, what is -- if you'd provide some color in terms of what's driving it. It sounds like it's across-the-board. What's driving it? And then also, does this improve the asset sensitivity profile for you guys?

Robert Gary Sarver

Yes. Okay, I'll let Dale talk about the asset sensitivity side. But in terms of what's driving it, we brought in a couple, 3 big relationships during the quarter that accounted for about half of that balance. But they're -- I don't think they're temporary, I mean, they're relationships that should stick. Two of which are tied to existing customers. Almost all our growth is on the corporate side, the commercial side. So it's just the profile businesses we're picking up is pretty good. And, as you know, a lot of the companies are fairly cash-rich right now. It's kind of -- you can't it's hard for us to forecast to $0.5 billion in quarterly deposit growth. So as Dale said, this quarter was a little bit of anomaly. But our pipelines overall are pretty good, and the good thing that helps drive the earnings growth is our infrastructure. We only have like 40 offices. So we're fortunate that we've got an infrastructure that is efficient in terms of growing the earnings, and we're not saddled with a big retail network or a lot of offices that are expensive to operate in. Most of our money is invested in people, and those people are generating business. Dale can talk about the rate sensitivity piece.

Dale M. Gibbons

Yes, we feel good about our IRR profile as is even before what we've -- maybe what happened in DDA deposits in particular. Some of it is in the low-cost growth that we had in 4Q. With that said, no, I think it's possible that it does maybe skew us a little more to an asset sensitive position. We are cautious, however, that with the DDA, we think that there's -- maybe not rates a little bit higher, but if rates were much higher, 300, 400, 500 basis points that you might -- that maybe the industry is maybe a little bit desensitized to how volatile DDA can be and so we want to watch that to make sure that we're not kind of overly dependent and overly assuming that we've got a stable zero-based deposit funding source. But no, it's a push in the right direction in terms of improving our rate risk profile in a rising rate environment and a steeper yield curve.

Casey Haire - Jefferies LLC, Research Division

Got you. Okay, and on the M&A front, just curious, if you got an opportunity for a bank that kicked you over $10 billion, would that -- do you think you would get a lot of pushback from regulators? What's your thought there?

Robert Gary Sarver

Well, we're -- I mean, we're heading over $10 billion right now. So we're already kind of basically in the semi $10 billion category in terms of regulations. So I don't -- I mean, we're basically there, so I don't know that an acquisition really going to make a difference. We're going to get there this year anyway.

Casey Haire - Jefferies LLC, Research Division

Okay. And then on the credit side, a decent size disposition this quarter of some legacy assets. Do you -- given where we are in the recovery cycle, do you see yourselves using that strategy more in 2014?

Robert Gary Sarver

In terms of disposing like REO and [indiscernible]?

Casey Haire - Jefferies LLC, Research Division

Exactly. Just to expedite the resolution.

Robert Gary Sarver

Yes, I think we'll continue to, I mean, we got kind of 2 things going this year from that standpoint. One is that, when you look at the REO we have, we're able to have a little more time to add some value to some of these, in terms of like rezoning property and re-hab-ing property. And so we're able to add a little more value and pick up some additional gains that way. And then we've got a little bit of a tail in terms of recoveries in Nevada that's helping us a couple of million a quarter, and that will probably continue for probably most of this year. So overall, this year, should be continued recovery in terms of our nonperforming assets and asset quality should continue to get a little better. Having said that, we don't have any big problems right now on the horizon. But they can always pop up, so.

Casey Haire - Jefferies LLC, Research Division

Okay. Just 2 housekeeping questions. One, the tax rate has been a little volatile. I think, even x the benefit you got this quarter was a little light at 18%. What's the guide going forward? And then the bonus accrual for this quarter, my apologies if I missed that. What was that number?

Robert Gary Sarver

Well, what happens on the bonuses is, our bonus plan is tied to -- every employee in the company is tied to an annual bonus plan, and it's tied to, primarily, earnings per share, earnings growth and some asset quality things and some deposit loan growth and things like that. And we hit 144% in 2013. So what Dale is referring to is, on the first quarter, and primarily the second quarter, we'll accrue at 100% of those numbers. And then as the year gets further along, we'll have more visibility as to where we're at. So we had pretty heavy accruals towards the end of 2013 to take us up from 100% to 144%.

Dale M. Gibbons

Yes, that's about a couple million dollars, Casey, in the fourth quarter.

Casey Haire - Jefferies LLC, Research Division

Okay. And the tax rate?

Dale M. Gibbons

Yes, so we have true-up in the tax rate a little bit in addition to the Western Liberty benefit I mentioned. We're looking for that to be under 25% in 2014.

Operator

The next question comes from Joe Morford at RBC Capital Markets.

Joe Morford - RBC Capital Markets, LLC, Research Division

With the Vegas and Nevada economy stabilizing, should we see more growth out of that market in 2014, either just from increased production or, at a minimum, just less paydown activity?

Robert Gary Sarver

I don't think -- that economy has recovered a little bit on the residential side. And the resorts side's got a little better but it still is not in a strong recovery position. And so I don't expect to see a significant amount of loan growth in Nevada for us this year. We are in a position where we think this year the portfolio won't decline, and I hope, maybe 2015, '16, that economy kicks in a little better, but 95% of our growth we expect this year to come outside of Nevada.

Joe Morford - RBC Capital Markets, LLC, Research Division

Okay. That's helpful. And then just -- you mentioned, a few minutes ago, Robert talked review on the 20 largest credits you booked in the quarter. I'd just be curious, how big were couple of ones on the top of that list?

Robert Gary Sarver

Oh boy, we've got some big ones. Let's see, we got -- ranging from $12 million to $85 million, but the $85 million's got participation, I believe, of about $40 million out of it. And then we got another municipal deal that was probably our biggest, that's a congregate care facility in Los Angeles, and it's a very high rated credit. It's $70 million but a chunk of that will get participated here fairly soon. So if you take those 2 without -- that we're going to participate out, it goes from $12 million to $30 million. But the risk profile on all these, for the most part, is our C-rated credit, which is pretty strong. C, Ds and Es are past for us. So but yes, we've got some big credits in here.

Operator

Evoy [ph] at Oppenheimer.

Terence J. McEvoy - Oppenheimer & Co. Inc., Research Division

You haven't talked about new commercial lender hires in a couple of quarters. It seems like maybe a year ago, that was something you were discussing. How much of the organic loan growth this year came from new hires? Is that still additive as those people continue to build out their book of business?

Robert Gary Sarver

Yes, definitely. It's a combination of 2 things, like, we added some new people, we opened up a North Scottsdale office, we're under construction on a new office in Chandler, brought in some new folks in Los Angeles, so we brought in some teams, but we also have some existing teams that are generating a lot of business, and so we have been hiring lenders to help support those teams. But if you want to look at, in terms of -- from a growth perspective, of the $300 million of loan growth for the quarter, in terms of credits that were brought in with people that are within a year to the company, it's probably about 1/3.

Terence J. McEvoy - Oppenheimer & Co. Inc., Research Division

Okay. And then just as a follow-up, if I look at just -- think about loan diversification, the consumer resi piece continues to get smaller at about 6%. Any thoughts on simply -- I know there's a planned strategy to shrink residential, but as you just think about diversification, would it make sense over time to add something in the consumer space to give you that diversification?

Robert Gary Sarver

I don't think so because, number one, we don't want to be in the mortgage business. From the compliance standpoint, it's just too complicated and too risky. We wouldn't have enough volume. And I think -- we bank some consumers that are looking for personal relationships and are tied into business accounts and things like that. But in general, we compete so much more effectively against the larger banks on the commercial side versus the consumer side. And I worry, in terms of the amount of overhead, of branches, the amount of investment in technology, and on the consumer side, how to compete against BofA and Chase and Wells and maybe Google and Apple, and God knows who's going to be in the consumer business. I think we got a nice niche on the business side. We're profitable at it, we're good at it, and we don't really have any aspirations to be a big consumer bank or to really expand much into the consumer.

Operator

Your next question comes from Gary Tenner at D.A. Davidson.

Gary P. Tenner - D.A. Davidson & Co., Research Division

Just, I have a quick follow-up on the Vegas portfolio. I guess the decline this quarter was about $100 million. Was that Western Liberty-related or just kind of...

Robert Gary Sarver

Well, it was more just shifting some loans around between charters. So that really wasn't...

Dale M. Gibbons

Yes, organically, in Nevada, they were modestly lower.

Gary P. Tenner - D.A. Davidson & Co., Research Division

Okay. So I shouldn't read anything in that specific to the Nevada market.

Dale M. Gibbons

No, correct.

Operator

Your next question comes from John Moran at Macquarie Capital.

John V. Moran - Macquarie Research

Real quick one on loan growth. I mean...

Dale M. Gibbons

I'm sorry, John, we can't hear you.

John V. Moran - Macquarie Research

Sorry. Can you hear me now? I'm sorry about that.

Dale M. Gibbons

Yes, that's good.

John V. Moran - Macquarie Research

Okay. Sorry about that. So just a real quick question on the loan growth. If I kind of adjust for the $25 million, Dale, that backed out on the credit card stuff, you guys, I think, had previously talked to kind of doing about $100 million a quarter or something like that. This quarter was obviously real strong, kind of 3x that, adjusting again for the $25 million. With Nevada sort of stabilizing and seemingly business demand and kind of loan demand drivers getting a little bit better in some of the other parts of the footprint. I guess, that $100 million starts to feel awfully conservative. I just wondered if you have any thoughts around this.

Dale M. Gibbons

Yes, I think we probably outgrew the $100 million a while ago. It migrated from an average to a floor. I think we're $500 million to $1 billion this year. So that's a pretty wide range.

John V. Moran - Macquarie Research

Okay. And then just, another one and this is kind of an early modeling question, Dale. But if I'm thinking about OpEx correctly, it sounds like there was a couple of million dollars extra in this quarter on bonus accruals. In first quarter you'd normally see kind of a couple million dollars extra on FICO and some other seasonal stuff. And then there'd be a step down in second quarter, and then if I'm understanding correctly, it sounds like some of these elevated consulting and IT costs on conversion are going to stick around in first half, so that maybe we would even see an additional step down in the back half of the year, at least with respect to kind of operating leverage and efficiency ratio.

Dale M. Gibbons

Right. Yes. I think on dollars, you're not going to see that. But in terms of ratio performance, that's exactly how we see it.

Operator

Our next question comes from Brett Rabatin at Sterne Agee.

Brett D. Rabatin - Sterne Agee & Leach Inc., Research Division

Just a follow-up on that sort of topic on efficiency. I'm just kind of curious thinking about efficiency drivers going forward, kind of post that technology stuff and back-office. Are there other opportunities that you guys see that drive efficiency further over the next 12, 18 months? And then I just have one housekeeping issue, the accretable yield in the quarter for the margin, what that impacted.

Robert Gary Sarver

Yes we -- in terms of driving the efficiency, I couldn't really sit here and say that we got a bunch of positions, there are some we're going to eliminate because we've merged these charters. But what we really did is we freed up a lot of administrative time from the different CEOs and senior people at the banks to focus more on driving growth in business rather than dealing with what it takes to run your own charter. And so I think it's more of a shift in resources rather than a bunch of consolidating things that are going to drive down expenses.

Dale M. Gibbons

Yes, so on the accretable yield space, it added about -- adds about a dime. And it was up probably a couple of basis points from where we were in third quarter. So that's some potential volatility depending on what kind of collections and payouts we get on the Centennial and the Western Liberty credits.

Operator

Our next question comes from Matthew Clark at Crédit Suisse.

Matthew T. Clark - Crédit Suisse AG, Research Division

Just a follow-up on reserves. It looks as though you've got still a fair amount of flexibility with your adjusted reserves, I think, between that 156 and 187 and you're at 147. You set aside, I think, 77 basis points this quarter. 130, I think, last quarter on the net loan growth. Obviously, moving around a little bit. But just trying to get a sense for where we could see reserves sell out going forward. I know credit costs, obviously, are going to remain very contained, but just curious.

Dale M. Gibbons

You probably noticed, last quarter we kind of split out how much was growth versus covering net charge-offs. As these numbers get to be smaller, there's other moving parts in the ALL computation rather than just charge-offs and some ratio based upon net loan growth. And so I think it's becoming a little more dubious in terms of the value of that distinction. But if you look at the loans, the net growth that we put on, we would still be at 1.3%, kind of addition ratio on that $285 million. And that's been fairly consistent. The reason why it came down to 77, like you mentioned, is because of other things going on, maybe a specific allocation for a loan that came off or something like that reduced what otherwise would have taken place. So yes, I see that number, like you said, 156 to 187. I think that's going to continue to bleed off. If we reconstituted our loan growth, we'd be at 130. So I think maybe we kind of [indiscernible] maybe come down to that level over time or something. At least based upon the credit quality of the portfolio as we see it now and the originations that we've been making.

Operator

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

Robert Gary Sarver

Nothing really further for me. Just thank you for listening in and following our story as we continue to move into 2014.

Operator

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

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