Western Alliance Bancorporation's CEO Discusses Q1 2014 Results - Earnings Call Transcript

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

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.

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 o’clock p.m. Eastern Time, April 22, 2014, through Tuesday, May 06, 2014, at 9:00 a.m. Eastern Time by dialing 1 (877) 344-7529, passcode 10044322.

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 Sarver

Thank you. Welcome to our first quarter earnings call for Western Alliance. I’d like to spend a few minutes reviewing some performance highlights and then I’ll turn the time over to Dale. Net income was $31.4 million up 50% from $20.9 for the first quarter 2013 driven by record revenue of $96.5 million up 19% from a year-ago and even higher than the fourth quarter of last year.

EPS was $0.35 for the fourth quarter compared to $0.24 in the same quarter last year and $0.34 in the fourth quarter which included a non-recurring tax benefit from the early acquisition.

Our strong loan growth of $307 million during the quarter was matched by $311 million increase in deposit funding. For the first quarter 2014 we had two non-core items in a total increased EPS by a $0.01.

We had a $0.02 gain on other real estate that was $2.5 million which was a commercial real estate property, as a commercial real estate property recoveries continued. And a $0.01 charge from writing up the liability for trust preferred that we issued by $900,000 as credit spreads continue to tight. The improvement in commercial property valuation is also evident in our asset quality metrics as the ratio of non-performing assets fell 38% to 1.3% of total assets. And quarterly loan recoveries exceeded loan losses for the second time in the past 12 months.

Despite our strong loan growth with a 17% return on tangible common equity our capital ratios remained strong with our tangible book value per share of $1.28 in the past year to $8.32, Dale?

Dale Gibbons

Loans grew 4.5% from year end with 80% of the $307 million in commercial industrial with each of our other targeted loan categories increasing during the quarter as well. We continue to roll down our residential and consumer books. Our 4.5% growth is net of a $9 million decline in loans from the Centennial Bank acquisition during the period. $18 million or 6% of our total loan growth was in our higher building construction category which now comprise of approximately 8% of total loans. During the past year our total loans are up $1.25 billion or 21%.

Deposits grew 3.8% from year-ago during the quarter primarily in money market is non-interest bearing gave back about half of the very strong growth we had during the fourth quarter of last year. Centennial deposits fell by $31 million as we continue to reduce this comparatively high cost internet deposit channel.

[indiscernible] competition of our earning assets and liabilities on the left in yellow you can see that loans averaged $6.9 billion during the quarter which was 79% of our total earning assets generating about $87 million in interest income yield in 5.27%. At $1.65 billion our securities portfolio was 19% of earning assets but only 11% of interest revenue as the yield is much lower than loan book.

During the first quarter we shifted our earnings assets mix loans which largely mitigated the affect on the margin form the lower loan yield that I’ll discuss in a moment. The largest portion of our liabilities is savings and money market deposits with $3.45 billion costing $2.6 million or 30 basis points.

At $2 billion non-interest bearing deposits were 24% of our funding sources. Debt accounts which include our 10.4% senior notes which mature next year are only 6% of our funding but with $3.3 million in interest cost comprised 41% of our $7.9 million in total interest expense.

Primarily driven by continued loan to deposit growth total assets increased 19% in the past year to $9.7 billion. We remain in the minority of institutions that actually provided more for loan losses and that actually charged off during the past 12 months as allowance rose $8 million to $104.

First quarter net interest income was up $800,000 over the fourth quarter to $90.8 million as revenue from the increased and average earnings assets of $304 million more than offset the revenue reduction from two pure days during the quarter.

Net interest income was up 19% from the same quarter of 2013. Operating expense increased $800,000 from the fourth quarter to $52.1 million and is up 13% in the past year primarily related to IT conversion and consulting costs as we migrate to one platform most of the bank charter consolidation we undertook at the end of 2013 which resulted in pre-tax, pre-provision income of $44.4 million.

The credit loss provision was $3.5 million as we have modest net recoveries and strong loan growth during the quarter. We had a $2.5 million gain on sale of reposed assets as our over rebalance also fell $10 million to 67 at quarter end.

Writing up our trust preferred debt resulting in a charge of $1.4 million as Robert mentioned which is partially offset by securities gains. We also had a small merger charge from charter consolidation which resulted a pre-taxed income of $42.4 million compared to $36.1 in the fourth quarter of 2013.

When we originally reported fourth quarter pre-tax income in January the amount was $1.7 million lower at $34.4 million than shown here. This is because effective at the beginning of 2014, the company adopted the new FASB standard for accounting for low income housing tax credit investments. Amortization of these investments are now included in the income taxes rather than shown as a contract to the non-interest income section of the income statement.

This retrospective treatment applied has resulted in higher revenue and pre-tax income as well as higher tax expense. From negligible timing differences there is a small cumulative increase in net income and retained earnings of only $200,000 through the end of 2013 from the adoption of this standard. We believe this presentation better reflects the attributes of this program as these costs are primarily incurred to obtain credits against income tax liability.

The effects of this retrospective application on the balance sheet and income statement are detailed on the last page of the earnings release. Income tax expense now including the effects of affordable housing was $1.6 million for the quarter resulting a net income of $31.1 million or $0.35.

With the consolidation of our bank charters at the end of 2013 we have modified our segment reporting to reflect the three geographic regions of Arizona, California and Nevada where we offered commercial banking services through our network of 39 offices and especially finance segments that house are niche banking services that are centrally managed and offered on a larger geographic scale.

These include Alliance association bank providing deposit and loan services to HOA’s equipment finance, municipal financial, non-profit asset based lending, mortgage warehouse and resort finance. Each of these segments is roughly one-fourth of our total loan book at March 31st during the first quarter 70% of our loan growth was in municipal and after profit lending in the specialty finance segment.

The California and Arizona regions also grew along with that contracted by $31 million. On the deposit side Arizona and California are each about one-fourth of our total footings with the higher proportion into that and lower contribution from especially finance.

Nevada, Arizona and the Alliance association bank division of specialty finance, each contributed significantly to deposit growth for the first quarter while California which led deposit growth in the fourth quarter of last year declined.

Revenue by segment follows the distribution of loans plus deposits, Arizona and California which have more balanced balance sheets have roughly 25% each while Nevada and the Specialty lines have revenue contributions, have proportions between their loan and deposit percentages. For pre-tax income Nevada is the highest element it has the largest revenue component as well as OREO recoveries and a negative loan-loss provision during the quarter as it had no recoveries as well.

Specialty Finance was our lowest in pre-tax income in part due to its heavy provision expense to fund the loan growth that’s incurred there. Credit losses in this segment were zero.

Strong loan growth and improved asset mix more than offset the reduction in the number of days during the quarter to take interest income to a new record. The margin slipped three basis points primarily due to a decrease in interest income recognized and purchased impaired price.

The efficiency ratio improved as the linked quarter tax equivalent revenue growth rate of 13% on an annualized basis was again more than double the annualized linked-quarter operating expense from growth of 5.4%.

The cash position was fairly stable during the quarter but the margin did benefit from an increase in securities yields as well as the increasing proportion of loans to earning assets from 77% to 79% which substantially mitigated the reduction in loan yield. Loan yield fell to 527 from reduction of credit discounts on impaired loans that paid off by $1.4 million from the $1.8 million that we have recognized in the fourth quarter.

In additional loan yields are annualized on a 33/60 basis which tends to understate the true yield quarters with fewer days. For the first time in over three years during the first quarter the origination rate on new loans was slightly higher than that of the weighted portfolio yield.

Funding costs were stable during the quarter as they have been ever since 2012. Pre-tax pre-provision income rose to a record $44.4 million during the quarter while the percentage of assets of the ratio remains stable of 1.92%. And in spite of strong balance sheet growth return on assets has remained above 1.3% for each of the past three quarters.

Loan charge-offs fell by half from $4.5 million in the fourth quarter $2.1 in the first while recoveries held steady at $2.4 million, resulting in a net recovery of $300,000 for the first quarter compared to net losses of $2.1 in the fourth quarter and $5.4 in the first quarter of 2013.

Net charge-offs as a percentage of average loans has fallen from 38 basis points to recovery of two during the past year. Provision expense of $3.5 million amounted to 1.1% up to $307 million of net loan growth during the period.

Organic adversely graded assets consisting of ORE, non-performing loans, other classified loans and other assets especially mentioned declined to $295 million are down over 20% from year-ago. Acquired adversely graded assets fell to $75 million which is net $45 million of credit and rate discounts on this portfolio just over 40% of the $70 million are non-performing loans were current with regard to contractual principal and interest payments at March 31st.

The loan loss reserves were $104 million at March 31st was 1.46% of the $7.1 billion in total loans. However extracting the $363 million acquired loans which have already been discounted for flexibility increases the ratio to 1.54%.

Conversely adding back the $22 million credit discounts on the acquired portfolio, increases the reserve to loans to 1.77%. We believe these alternative computations providing a better insight into the company’s reserve adequacy.

We’ve included this graph for some time which shows the loan losses incurred by credit origination rather than when the loss was recognized on the top in the aging of the current loan portfolio on the bottom. Heavy loan losses during the financial crisis were largely talked by the dramatic fall in collateral values in our primary markets. However nearly just as sharply loan losses fell as collateral values stabilized in the beginning of 2009.

The loan losses dropped to only $5.4 million in that year for loans originated compared to $67.3 million for the 2008 vintage and in 2009 we are back to the same level they were as in 2003. Looking at the bottom of the graph and although a substantial portion of the newer vintages have not seasoned today 76% of our loan portfolio was originated in 2009 or later from which cumulatively we’ve only had gross loan losses of $12 million which is less than five basis points annualized of these newer loans.

Our capital ratios remain strong and are basically flat from last quarter and last year as our strong asset growth has been matched by internal capital generation. Under the Basel III framework to take effect next year each ratio is haircut modestly through tightening of eligible capital standards and an increase in risk-weighted assets.

Even considering Basel III our capital ratios today are higher than after the Centennial Bank acquisition which closed for cash in the second quarter of 2013. The increase in our returns on tangible equity to over 17% during the past three quarters has accelerated the rate of growth of our tangible book value per share which is up 18% in the past year and $0.42 in the past quarter 832.

Robert Sarver

Thanks Dale. By the way I just want to just compliment Dale he, he does the great job with all you analysts making all this information it’s a little complicated, it sounds very businesslike and straightforward and I know you guys take a lot of comfort in talking about our company with him, so appreciative that Dale. Overall really a good quarter for us, kind of solid all the way around, really nothing negative to report.

In terms of going forward our business development pipelines look good. Loan growth should again be strong. I was on the road yesterday actually in California, visited with three new large, new customers coming in the bank. We have a senior credit committee meeting that meets once a week, that reviews all new and looks at all new loans, loan relationships and approves credit over $10 million looking through the agenda for that committee this week we’ve got $250 million of credit that’s seeking approval. So business is strong on the credit side.

Deposit growth was really good during the quarter maybe a little more muted this quarter not sure we’ve got a few large relationships that may start funding either in the second quarter or the third quarter. We’re not really sure on that but in any event we do expect to see double-digit increases for both loans and deposits in 2014 and feel good about our budget goals which are essentially about $1 billion of organic growth in both loans and deposits for the year.

Although strong loan pricing continues, we expect we’ll be able to grow through any modest margin compression that we experienced and continue to increase our net interest income. Strong balance sheet growth coupled with more modest increases in expenses this year should continue to drive our efficiency rate lower which we would like to see under 50% by the end of the year.

Our asset quality continues to be quite benign with low levels of gross loans and a continued tale of recoveries in Nevada. And we expect to return the low levels of net charge-offs in the near-term. We, we actually have quite a group that’s really doing a great job, collecting some of these troubled assets some of which we purchased in the two bank acquisitions we did over the last 18 months. And we’re actually now in the market, going to be buying some troubled credit and working through that we think we can get really nice margins on relatively small book of business but a meaningful contribution to our earnings going forward.

At this time I’d like to open up for any questions and I’m sure we can cover any other issues you guys want to talk about.

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question comes from Casey Haire at Jeffries.

Casey Haire – Jefferies

So a question on the loan growth outlook, it sounds pretty good I think Rob you mentioned that $250 million was the size of the pipeline as we enter the second quarter. Just curious it doesn’t look like you got a lot of drawdown in the construction bucket nor did Nevada contribute positively. I know you guys have been speaking pretty positively about that recently. Is that something that we can expect to maybe contribute – as we progress throughout the year?

Robert Sarver

Well the first, the 250 I referred to were just the loans going to credit committee this week so the pipeline’s probably $1 billion. On the credit side, that were just loans seeking approval for the week, so I just kind of wanted to clarify that. Nevada is – got a bigger pipeline than they had in probably four years, five years. I think this quarter they’re looking at about a break even, in terms of growth.

And then I think in the second half of the year, we’ll probably start to see them growing a little bit, but the reality is that when you look at the market’s we’re in, like California’s so big I don’t really so much – we’re more focused on the quality of the credit and the relationship, the type of relationship it is. And so I don’t want to – Nevada will start to grow as the economy gets better and we’re bringing in accounts that we can feel comfortable with. So I don’t want to kind of push growth in any region.

One of the benefits for us, and I think starting our employees and a staff call today, why are we growing at a rate revenue and balance sheet more than our peers, and why are we making 17% in equity and most people are. And the reason is couple of reasons, I’ll point to one, is we’ve got a lot of products now that we can sell. And we’re selling the products to give us the best risk adjusted return.

So we’re not stuck selling products that either for credit quality, don’t make sense or where pricing don’t make sense. And that’s one of the key areas, and the other one I mentioned to our group was that we’ve got a great culture within the organization that really focuses on the customer. And we’ve got some really good bankers here that make a lot of money and like what they’re doing and really love the company, but this product diversification in the amount of markets we’re in gives us a chance to grow with relationships that make us money and from a risk stand point are acceptable.

Casey Haire – Jefferies

Okay, understood. And Dale on the efficiency ratio outlook, pretty constructive commentary, it does look like, I mean just given the asset, the pace of asset growth that you guys are going to cross. The $10 billion mark this quarter, which obviously brings some profitability speed bumps. Can you just walk us through how you digest that speed bump and what the drivers on how you and why you’re so constructive on the efficiency ratio?

Dale Gibbons

Well yeah, so it really eclipse two things right. So let’s talk about the revenue first, and one thing as everyone knows that we’re a commercial bank, not a consumer bank. And as such the decline we have from a reduction of the debit interchange fees is fairly modest for us; it’s only going to be $1 million. And if we cross, as you expect this year, that will start to take effect in the third quarter of 2015. So we’d lose about $250,000 in revenue beginning, end of summer of next year. So that’s a little ways away and it’s not a big number to begin with.

The second thing of course is, what’s the additional expenses from compliance with elements of Dodd-Frank, stress testing as well as the Consumer Financial Protection Bureau. And those are going to be significant, they’re not going to be a tripwire that’s going to step-in at any particular time, but something that’s going to build over time. Again there’s other institutions they’re incurring very substantial costs for the Dodd-Frank Consumer Financial Protection Bureau compliance, but for us, that’s probably going to be a little more modest as well because we don’t have that much of a consumer franchise.

So yeah, we’ve certainly considered both of those and those are going to be a little bit of a headwind in terms of keeping our efficiency ratio going down, but frankly, we believe that we’re going to get there under 50% this year before the effects of either of those come into play.

A big part of when you go over $10 billion is a stepped-up regulatory environment. So you’re going to have smarter regulators who have specialty and expertise in specific areas making sure you know what you’re doing and you’re managing your risks properly. But we started doing that three years ago and a lot of that cost has to do with people. Are you getting the right people in the right place? And sometimes as you get bigger like this, say having one person doing four things, you can have one person doing one thing.

Well we made that transition a few years ago.

And some of the comments we’ve gotten is “hey, you guys have the risk management infrastructure of the $20 or $30 billion bank already,” and we heard that a year ago. So a lot of those costs are baked in, on top of that what you get is a few things you’ve got to spend a little more money in. So for example the stress testing model, we’re probably going to be spending 250 to 500 grand a year on that depending on whether we get the catalogue or the Rolls Royce version. And so there’s a little bit of that, but the bulk of the commitment is really people related to be honest with you.

So we have somebody now who really just focuses on liability management. We’ve got someone who focuses on interest rate risk management, we’ve got a robust risk management oversight group, we’ve got – but we put all those things in place. And quite frankly, those are the things you’ve really got to put in place anyway because if you’re going to run in good company and prepare yourself for the next downturn, you’ve got to be able to do all that stuff. So we’ve already digested a lot of that.

Casey Haire – Jefferies

Got you, just really quickly, the loan pipeline ability at March 31st how does that compare versus at year-end, what was the number at year-end?

Dale Gibbons

It’s probably about the same, it’s probably about the same.

Casey Haire – Jefferies

Thank you.

Operator

Our next question comes from Matthew Clark at Credit Suisse.

Matthew Clark – Credit Suisse

Hey, good morning guys. In terms of the – I think you’ve talked about internal budgeted growth for about $1 billion for this year, is that on a net basis or is that just $1 billion in production?

Dale Gibbons

It’s net, well over that to be production, it’ll be – in order for us to grow our loans $1 billion we’re going to have to do $3 billion of loans.

Matthew Clark – Credit Suisse

Yeah I figured that, okay. And then anything lumpy this quarter, it sounded like, correct me if I’m wrong, about 70% of that C&I growth came from muni financing.

Dale Gibbons

Yeah muni and non-profit.

Matthew Clark – Credit Suisse

Okay.

Dale Gibbons

Yeah, well actually in our markets I mean so one thing about the new segments that was different than before is that business is conducted on these centrally managed areas, they’re even within our geographies are still pulled out into that segment and in fact all of the loans originated in municipal and non-profit this quarter were in either Arizona or California.

Matthew Clark – Credit Suisse

Okay and then I think you mentioned that new businesses going on for the first time in at least this cycle that higher yields and the portfolio yield. Can you give us a sense for what type of rates you’re getting on new fundings relative to the stuff that’s rolling-off?

Robert Sarver

Well it kind of varies in terms of by-product , but real estate stuff and some of the construction stuff we’re getting in the fives, five and a half yield including fees, but it’s been taking that portfolio a little bit of time to kick in because the borrowers got to use all their equity first. So a lot of those credits, there’s equity being spent. So I think in the back half of the year you’ll see a little more growth along those areas. The C&N side is still very competitive but I’m going to say we’re probably averaging of around prime plus one in that bucket, which would be four and a quarter right now.

Dale Gibbons

Yeah, so our construction loans came in at the highest yield about 5.4% and the CRE investors about in the higher fours, that’s really the range.

Matthew Clark – Credit Suisse

Okay and I guess your comment about, there might still be modest margin pressure I assume it’s just, just stuff rolling off relative to what you’re putting on in terms of magnitude?

Dale Gibbons

Yeah I mean there’s a number of institutions that are chasing the same high quality credit opportunities and you look at the liquidity out there from some of these other banks, it’s fairly substantial and so to the degree that people are comfortable with the economic outlook. I think that the loan pricing pressure is going to continue to be very strong. That said, we did some things this quarter in terms of mix, I think we’ve got more opportunity in that regard. We’ve certainly had good growth and we’ve been able to earn through that and we don’t see that dynamic changing.

Matthew Clark – Credit Suisse

Okay and then on M&A, any change in the types of conversations you’re having, do you still think that kind of large – kind of where you still need to be a lot bigger and make some more sense from that perspective or just any change there?

Dale Gibbons

No not really, maybe a little more color. Met with about a dozen companies in the last 90 to 120 days, got three things we have some interest in, but I’d tell you we’re going to be careful. When you look at the growth rate of our earnings per share, before we hand out that stock to do a deal, we’re going to make sure what we’re getting combined with what we can do to help the company we’re buying is going to keep paced with our EPS or better than it.

And so we’re fortunate we’re in a position we just don’t have to buy, to buy. And we’re not just going to get big to get big. So we’re going to be fairly disciplined in making sure we’re doing the right transaction and at this point are pretty comfortable with the internal growth rate. So to us it’s more of an add-on versus something we just kind of have to do in order to grow.

Matthew Clark – Credit Suisse

Great, thanks guys.

Operator

The next question comes from Brad Milsaps with Sandler O’Neill.

Brad Milsaps – Sandler O’Neill

Just to follow up on Matt’s question on regarding M&A, Robert I was just going to see if you maybe could talk about acquisition of talent or teams, any major hires in the first quarter and kind of as you look out through the year what are you, what you kind of envision in terms of bringing on new lending teams?

Robert Sarver

Yeah that’s really probably a pretty big focus for us just to prove the deal yesterday to bring on the team that we think we’re going to be bringing on to the bank, continued to bring our new production people. If you look at last quarter we added seven new production people in the company. And one of the things I was talking to our management team about is when you look at buying like $1 billion bank, and you look at the cost to hire a dozen production people. You know even if you highly incentivize them up front with stock, in the short term it’s maybe not as good, but in the long term it’s probably a really good way to go. So we’re going to continue doing what we’ve been doing, which is recruiting these key-people and give them good incentives and have them help, help grow the bank.

Brad Milsaps – Sandler O’Neill

Do you think seven is kind of an average number to look at, if you look throughout the rest of – I know it can be lumpy but is that kind of a good place to start, plus or minus per quarter?

Robert Sarver

Yeah, that’s probably a good place to start. People come in at different levels, I think what we’re going to probably step-up a little bit is bring in a few teams at higher levels. The people you want to hire, are the people that are looking for a job. And so sometimes those are the folks who take time and we spend a lot of time talking to people to recruit, but I’d say the profile of some of the people are going to look to hire is going to step-up.

Brad Milsaps – Sandler O’Neill

Okay great. And then Dale just a follow up on expenses, you guys have done a great job there again this quarter. Similar components maybe we’re a little different, just kind of curious if you could talk about salaries and expenses kind of being down linked-quarter, professional fees being down which you typically have just going to add some director fees and but yeah data processing. Some of the other components maybe were up more than I would have expected insurance, just and it may all net out to kind of flattish or modestly higher expenses you moved through the year. But just kind of curious if you could give us a little more color there on some of the components?

Dale Gibbons

Yeah, so I’ll start with compensation, so that came off a little bit, primarily because in the fourth quarter of last year we were, we hit all of our budget goals. And so we have that kind of cash accrual hit our fresh goals and that now fell back to a normal accrual amount. So that’s the reason why that came off and even though we have additional people as Robert indicated, so we’re looking for that should be kind of fairly flattish moving forward.

On the insurance fees, it was just a onetime kind of catch up entry I think that’s going to fall back a little bit in the second quarter, not substantially. You’ll notice in the other expense category that, that one it was up and we also had a little higher in other non-interest income. We haven’t done a whole lot of operating leases, but we did some in the fourth quarter and they’re showing up now. And that drove the revenue and the expense in that category, in those two categories on both sides of the income statement.

On the IT side, we’re inferring additional charges related to some of the conversion we’re talking about, from what we call our projects enterprise, which is integrating the three institutions into one platform. That’s going to continue for another couple of quarters and then we think that it’s going to come off a little bit. So all in all yeah, we think we’re going to have more muted expense growth than what we’re going to see on the revenue side which of course will pull down our efficiency ratio.

Brad Milsaps – Sandler O’Neill

Okay great, that’s great color and just one last thing. The loss from discontinued operations did that fell off kind of after the second quarter, is that correct?

Dale Gibbons

Yeah you’ll see it this quarter and the second quarter and I’m expecting it to have nothing there in the last half of the year.

Brad Milsaps – Sandler O’Neill

Great, thank you very much.

Operator

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

Joe Morford – RBC Capital Markets

Good morning guys, I was just curious of the $billion growth you’re targeting for the targeting for this year, how much would you think would be coming from the Specialty Finance businesses, overall do you see it being pretty broad based across the bank?

Robert Sarver

You talking about on the loan side?

Joe Morford – RBC Capital Markets

On the loan side yes.

Robert Sarver

If you took let’s say if you took all six of the Specialty businesses, I’d say of that growth, somewhere between 25% and 50%.

Joe Morford – RBC Capital Markets

Okay and then just following up on your earlier discussion Robert about the kind of product diversification and on building relationships, besides the loans what are some of these other products that you’re having success with and how good of a job are you all doing today in terms of driving that cross sale and getting the incentives properly aligned and all?

Robert Sarver

Well we’re – the cross sale driver its pretty good, like for example you’re talking about some of the municipal and non-profit lending we did. And that actually, on the municipal side, those were three of our top five new deposit relationships with the quarter too, came from municipal non-profit.

We have pretty good incentives for all employees for everything, so no matter where you were, if you bring in a check-in account or money-market account, you’re going to get paid for that. And that’s working, and so I think what we try to do is just have really smart bankers out in the market and then within they quiver, they get all these arrows. So they come across someone who’s anything to do with property management, homeowner association management, well hey, we’ve got a great group that can service that.

They come across municipalities, and when you think of how many municipalities there are there’s thousands of them just in the state of California. And so been able to go out and sell all these products for someone who is an active caller creates a lot of opportunity. And then but we see we mainly compete against the larger banks because fortunately in our main markets we don’t have a lot of community banks that we compete against.

In the larger banks at time get real aggressive at pricing certain types of products and those are the products we probably don’t have best appetite for. So it allows us to grow but at the same time grow with things that can be profitable for the company rather than just have to grow it at a select bucket. So we’re doing equipment leasing, we can call in any non-profit, any municipality, let me talk about the mortgage warehouse lending business. Our asset based lending businessman’s been adding some good revenue to our sale’s was up $47 million.

Our resort finance business only has $36 million on the books but that’s going to pick up pretty significantly in the second half of the year based on some of the commitments we have booked. And then within the traditional banking platform from the cash management side and everything else there’s, there’s very few companies that in our industries that we could call on that we really can’t, can’t do business with. And I think that has really helped us to grow like I talked about.

Joe Morford – RBC Capital Markets

Okay that’s great thanks much.

Operator

Our next question comes from Brett Rabatin at Sterne Agee.

Brett Rabatin – Sterne Agee

Hi good morning. I just wanting to maybe get a little color on the remaining other real estate owned bucket and just what you’ve guys have got less there in terms of thinking about gains going forward. Do you think you’ve pulled a lot that out or do you think there are some additional potential for gains in next few quarters in terms of as you market those properties?

Robert Sarver

No I think we’ll still have some gains coming but yeah I wish we had more. We try to hold on to a lot of the land and as that markets in the recovery and we’ve been selling it. So I think we’ve got about $60 million of real estate left. And I don’t know the $2.5 million quarter but it’s probably maybe more like $1 million a quarter right to the next couple quarters, is kind of guestimate on my part.

Brett Rabatin – Sterne Agee

Okay lot of question have been answered. Thank you.

Operator

The next question is from Eric Grubelich at Highlander.

Eric Grubelich – Highlander

Couple of things first one is when you look at the credit that you originated in the quarter are you putting on larger size credits than you were – is that part of what the volume is or not?

Robert Sarver

In certain markets it is yeah. So like for example in markets where there is a fair amount of community banks like say LA. We rather compete in larger deals, larger being 10 to 25 million because there tend to be less competition and you really only compete against the larger banks. The good thing about competing against larger banks is that the structure and underwriting in covenants and all that it will be pretty good.

And so at times when you’re competing against smaller banks you may not get that.

Now in a market like Phoenix for example where there’s not a real robust community banking market of Nevada we compete for everything because we can drive pricing and structure pretty well but if you look at our company and one of the ways – keeping an eye on it is so if our total loan portfolio. We have 217 relationships over $10 million. And that would those would be our larger credits and then everything else is below that.

Eric Grubelich – Highlander

You just sort of answered the second part of my question when you talked about the difference in the markets with the community and regional banks versus the larger bank competition that’s what I was trying to understand so that’s great, that was very helpful. And then the second question this may have been just recently and one of the other Q&A did you mention what the concentration limits were on some of the specialty lending products like the homeowners associations, resort lending. If you articulate on anything on their did I misunderstand that –

Robert Sarver

I don’t think we have, I’ll say what we have is, we have product limits that are a lot more granular for like example we’ve got a niche financing fast food operators. Franchise visa fast food and so we target operators that have a dozen or more stores. And we identify maybe the top five franchises that we want, franchises that we want to lend into. And then within that so we have an overall limit of how much we’re going to lend in that business. And then we also have a limit within that, that’s based on the different franchise or – so we’ll only take say so much of jack in the box there’s Taco Bell or so much of McDonald’s like that.

And so the key to the managing the risk for us isn’t just the kind of the headline number but its underneath there and it could be on real estate based on product type and geography or in C&I other thing so that, that the limits we have and how we manage the credit risk is, is a quite its fairly granular.

Eric Grubelich – Highlander

Okay that’s great. Thanks very much. That’s it for me.

Operator

The next question comes from John Moran at Macquarie.

John Moran – Macquarie

Thanks. Just a quick question of Dale probably on the provision, you said around 1.1% of originations this quarter, granted originations this quarter sort of skewed toward municipals and non-profits is there – is that skewed down a little bit it is 1.1% of origination still kind of the right number to be thinking about or if you put more on your sort of traditional C&I and in Arizona or California or what have yeah was that the higher or lower percent of originations?

Dale Gibbons

Yeah I appreciate that John I mean what’s difficult is there’s just so many other elements besides having the net loan growth the charge-offs in any particular quarter I mean if you have migration to or from asset, fine assets as you were alluding to the type of loan has different kind of loss history and risk history. And so the provisioning could be different, in prior quarters that number has been about 1.3 a little lower this quarter. I still think it’s – we are likely to see our reserve ratio continued to kind of – from 1.46 and go lower it has in the rest of the industry. So I think it’s still going to bleed off a little bit, I can’t give you an exact ratio but I certainly think it’s going to be below 1.5 where we’re on average today.

John Moran – Macquarie

Got it that’s helpful.

Robert Sarver

We’re working as hard as we can to keep putting money in our reserve but it’s hard.

John Moran – Macquarie

Got it. Thank you guys.

Operator

[Operator Instructions] and our next question comes from Jeff Bernstein at AH Lisanti.

Jeff Bernstein – AH Lisanti

Hi guys thanks for taking my question. Actually two questions, you talked about potentially purchasing some bad loans to collect on, can you just talk about the kind of apparatus that you have in place still for dealing with bad loans. And are we sort of keeping that machine in place and we’re going to feed it, has it already shrunk down to kind of a maintenance type level or are we feeding it just kind of go through that and what if any potential expense savings there still are?

Robert Sarver

I don’t know that there’s much expense savings left in that area. I mean the expense savings would be more the non-employee savings like the legal fees that cost to collect or paying the taxes REO, the collection costs and all that. We have a team of about half a dozen people that have been active in collecting a number of the assets that unfortunately we originated mostly in the Nevada market. And then we also have – we bought the Centennial Bank, and we picked about $400 million of term commercial of real estate loans that they’ve been handling.

And so, we’re doing a really good job with that and what we want to do is transition to hey, are there opportunities for us to acquire some of these assets. And we’re finding some niches, banks that maybe bought some of these assets through on FDI CDOs and they’re coming towards expiration in the loss share or other just portfolios out there, maybe even one off deals. So what we’re saying is that we just take that team and maybe we acquire $5 to $10 million a month of assets that we can work through, that we think we can make a nice return on. We can turn that into a small little business, it’s not anything that’s going to be real big balance sheet-wise, but it is an avenue that maybe we can make an extra $1 million or $2 million a year on.

Jeff Bernstein – AH Lisanti

Great, that’s great and then my other question was the last couple of years for the most part in your footprint, the economic news has been surprising positively more often than not, heard the first sounds of potentially some slowing in the Phoenix residential market. Can you just talk about the economics in each of your markets what you’re seeing and what you’re expectations are?

Robert Sarver

Right, right. I think our markets were got hit really hard. So things got better and they felt a lot better. So now we’re kind of back to more of a normalized environment. Arizona has done a really good job with job growth in the market. And there’s a fair amount of activity going on. What you are seeing when you see on the home building side the home building slowed down a little bit and home sales and all that. The biggest issues is its hard for first time home buyers to get financing.

And that’s part of why that market’s really slowed down now Nevada and Arizona has affordable housing. And there’s a pretty good market there, if those people can get loans and unfortunately a lot of those people with the new regulations will have to wait till the prices get higher. For them to give mortgage which is too bad but so you are sorry to see that, now if you get away from the first time home buyer market. And you move up a little bit the market’s pretty good. But I’d say Arizona in general primarily Phoenix which is our main market it is very healthy. And we have a fair amount of business going on there.

Nevada is doing okay. The gain in revenue that’s still not bounced back real strong loan demand is still not real robust but the market there in terms of real estate values and business operations is gradually improving. And the California that’s like 30 markets in one and California has been very strong. The Bay areas on fire in terms of wealth creation and business, LA has been really good we see a lot opportunities there.

San Diego has been pretty strong too. And so overall it’s been, there’s fair amount of opportunity for us. And we I think done a pretty good job in terms of marketing ourselves so that we’re in the conversation when a business is looking for financing in any of the markets we’re in. That’s gone a long way I mean that’s a different quite a different position than we’re in five six years ago.

Jeff Bernstein – AH Lisanti

Great. I appreciate it.

Operator

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

Robert Sarver

Sure just appreciate you guys dialing in for the results. And I’ll get back to work here and try to deliver another very strong quarter, the second quarter. So thanks we’ll talk to you again in 90 days.

Operator

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

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