Western Alliance's (WAL) CEO Robert Sarver on Q1 2017 Results - Earnings Call Transcript

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Western Alliance Bancorporation (NYSE:WAL) Q1 2017 Results Earnings Conference Call April 21, 2017 12:00 PM ET

Executives

Robert Sarver - Chairman and CEO

Dale Gibbons - Chief Financial Officer

Analysts

Casey Haire - Jefferies

Timur Braziler - Wells Fargo

Brad Milsaps - Sandler O'Neill

Jon Arfstrom - RBC Capital Markets

Riley Stormont - D.A. Davidson

Chris McGratty - KBW

Brett Rabatin - Piper Jaffray

Matthew Keating - Barclays

Operator

Good day, everyone. Welcome to the Earnings Call for Western Alliance Bancorporation for the First Quarter 2017. Our speakers today are Robert Sarver, Chairman and CEO and Dale Gibbons, Chief Financial Officer.

You may also view the presentation today via the webcast through the Company’s Web site at www.westernalliancebancorporation.com. The call will be recorded and made available for replay after 2 O’Clock Eastern Time, April 21, 2017 through Sunday, May 21, 2017 at 9:00 O’Clock AM Eastern Time, by dialing 1-877-344-7529, passcode 10103883.

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 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, sir.

Robert Sarver

Thank you. Welcome everybody to our first quarter earnings call. I want to talk a little bit on some high level views I have for the quarter and little bit strategically. To start with, we had a really good quarter. We’re off to good start; the growth in our balance sheet, our loan pipelines, our deposit pipelines are good; our margins doing well; asset quality is good. And we’re off to I think a very good start in meeting our numbers that we talked to you about 90 days ago for the year.

Big picture wise you saw we hired Jim Haught as our Chief Operating Officer. We will be expanding our executive leadership a little bit. And you will also see in our expense run rate some increases. I don’t want to talk about all those together. First of all, our business model has gotten more complex over the last five years, for three reasons. One, the Company has been growing at a pretty good cliff, roughly 15% to 25% a year. Secondly, we are expanded in a significant way geographically and by product line.

We have a number of national business lines that we’re in. And this expansion is proven very profitable for, but also adds risk to the Company because it expands our oversight and what we have to do to manage risk and all those different business lines. And then thirdly, we’re somewhere in the later innings of the economic cycle. I am not sure if we’re in the fifth inning or the eight inning, or the ninth inning. But we want to make sure we’re prepared to be on top of our risk, especially on the credit side, so that we are number one in a better position to last recession to manage the downside. And number two that we can be more proactive in taking advantage of other people's issues earlier on in the cycle.

So having said all that, it made sense for us to put some investment in some people and some infrastructure within the Company to better address the complexity of the Company, as well as our future opportunities. We just finished integrating the acquisition of GE, the hotel portfolio; we did the system conversion there; we did our major systems conversion, all that’s gone well and started to settle down. And now we’re beginning to look for additional acquisitive opportunities that may present themselves of which it looks like there is going to be a number of them this year to take a look at.

As I look at my time and Dale's time, we probably been -- spread a little bit then. I’ve had 15 direct reports. I’ve been spending, if I look at my desk, it’s 80% on things that don’t generate revenue, 20% I think that do generate revenue. And so in order to move this company forward over the next three or five years in a manner in which our shareholders become accustom, it’s important for me to free up my desk and my time to be out looking to grow revenue. And meaningfully impact the to growth and revenue opportunities to this Company, and also to be able to be vigilant on credit quality, which is something I am pretty hands on.

And the same with Dale, you guys known Dale long time, he is very talented and skilled. aand he has gotten himself burried down in a little too much of the day-to-day. So we thought it's important to bring in somebody, and it's not just Jim, it’s some other people we brought in, who have bigger bank experience in a lot of areas that will help us manage risk and our operations technology all those kind of things to keep pace. But at the end of the day, it becomes more of a reallocation of time for myself and Dale to get out and figure out how we’re going to take that $70 million a quarter in earnings and how does that become $145 million years now, what do we need to do that. And both Dale and I are pretty good at those things, and we’ve hired other people in here who are really good at all things we need to do to manage that risk and underwrite that growth. That’s a kind of high level.

Second thing I'll talk about is our loan and deposit pipelines are good. You can see we had a first quarter growth. We’re off to a good second quarter. The business development efforts and our business development officers are saying they are busy and they’ve been -- and since they can remember, so that’s a good thing. Obviously, rates have gone up a little bit, gives a little wind at back of our sales, pushing this forward which helps the margin. We’re well positioned for that, and that’s been good.

Asset quality, I feel comfortable about, our charge offs are very minimal, as you see. And we did have a little migration on the substandard and the special mention buckets. I'll talk about three credits that are big pieces of that. The largest is a $30 million substandard credit, it’s a sneak credit but the company one other companies made depository institutions and have been for quite a while. We’re in a good position in terms of collateralon the credit stack and the Company was sold not too long ago. This loan matures November, and we expect will payoff in November from the parent company or -- from either our borrower or the parent company. So we think that will go away, either in the third or fourth quarter to pay on the timing of that.

We got a couple of other deals, two other construction loans that total $25 million that we’re watching, don’t anticipate any eventual credit issues with. But the range in California along with some of the cost overruns with the price of construction going up in Northern California, we’re watching these a little closer. The borrowers have put up all the additional money themselves to finish the project. Projects are back down schedule, but did get delayed a little bit. But we have no concern, one is at a 37% loan to value, one is at a 60% loan to value. Though get built and finished and then get off the list. One I think will get off in the second quarter and one will get off either in the second or the third. So I think those numbers borrowing any new surprises, those numbers will probably taper a down a little bit next quarter. But we look at these closely, I look at every single one of these credits closely, and I am not concerned about it.

In terms of some financial highlights, as you see, we recorded record earnings for the first quarter; again, $73.4 million, $0.70 a share; that’s up 17% from the $0.60 we recorded a year ago for the first quarter. Our margin climbed 6 basis points from the fourth quarter to 4.63%, reflecting increased asset yields from the FOMC actions in December. Our operating efficiency was 44.4% in the first quarter, little bit higher than 42.4% on a linked quarter basis but improved from 45.6% I talked about that.

I think that increased level of operating expenses this year to stay for us. I don’t anticipate it jumping up or stay or climbing up or anything, but we have invested in some infrastructure in a number of areas that’s going to take that base run rate or expenses up to about where it is this quarter. I mentioned our strong balance sheet, growth of loans and deposits. Our non-performing assets were essentially flat from the fourth quarter. Net loan losses continue to be at pretty low levels. We’ve got about third of our OREO portfolio and escrow to close this month will have a bump that down a little bit. And despite our strong balance sheet growth, we continue to have our capital levels, we remain high. Our tangible common equity is 9.4% of tangible assets and our tangible book value per share rose 18% year-over-year to $15.86.

Net interest income rose $4 million for the quarter to $179.3 million, it's up 23% from a year ago as partially offset by 16% increase in expenses. Operating non-interest income slip to 9.9% as warrant revenue decreased, that’s kind of cyclical. Operating revenue rose $5.5 million to $88.3 million in the linked quarter basis in part from seasonal factors at the start of every new year, as well as some increased infrastructure spending that I addressed to support our current and planned growth.

Operating pre-provision net revenue increased $2.2 million for the quarter to $100.9 million, that was up 23% in the same period a year ago. And consistent with our strong loan growth, we have a little more in the provision, $4.3 million compared to $2.5 million in the first quarter year ago. We had some modest gains in OREO disposition security sales. Overall, pre-tax income $97.8 million. Seasonal factors drove the tax rate to 25%, which is lower than the fourth quarter but essentially the same as it was a year ago. Diluted shares were stable from year-end just under $105 million and that resulted in $0.70 per share.

I’ll turn it over to Dale now.

Dale Gibbons

Thanks Robert. As interest rates grow during the quarter, pre-payment activity on mortgage related bonds slowed. Since majority of our mortgage back securities portfolio was purchased at a premium, the rate of amortization of this premium declines when pre-payments fall. This benefit, coupled with increased tax exempt investments during the quarter drove 27 basis point increase in our security deals to 3.08 in Q1.

Loan yields grow 6 basis points during the quarter as just over half of our portfolio was variable rate and half of the variable rate loans are tied to prime. Prime has had a more pounced move in LIBOR since late last year. Funding costs were up 2 basis points.

Consistent with our asset sensitive rate risk profile, the interest margin also rose 6 basis points during the quarter to 463. Net of interest accretion from rate and credit discounts from acquisitions, the margin was up 8 basis points to 448. The graph on the right shows that we expect fairly stable appreciation from purchase accounting marks throughout 2017. Actual accretion has historically been higher than what is shown here due to loan prepayment activity, which accelerates discount recognition.

Linked quarter expense growth in excess of the increase in revenue took our efficiency ratio up 2% to 44.2. Although, it is still improved from the first quarter of last year at 45.6. While about half of the $2 million increase in compensation cost from the fourth quarter was seasonal, the remaining personnel costs as well as the increase in professional expense have been incurred to maintain our compliance risk management and credit infrastructure to support our continued growth, as Robert discussed.

The consistency of our performance shows up on our PPNR ROA of 2.3% and 169% return on assets. Our performance on both of these measures has consistently been in the top docile performance compared to peer banks. As deposit grows well an access of loan growth during the quarter, our securities and cash position climed $450 million from year end. Core deposit grwoth drove total assets to 18 billion during the quarter, while borrowings remain low at about 2% total funding.

Loan growth of $454 million during the quarter was lead by $200 million in C&I and $125 million in constructions. Residential loans rose $50 million as we've made selective purchases of residential mortgages since we think the trough of interest rates is behind us and whole loan yields are higher than those of mortgage back securities. Lead by Arizona, loans were up in each of our geographic regions and national business lines during the quarter, except technology which was flat and mortgage warehouse that declined.

Growth in non-interest bearing deposits comprised 60% of the $806 million increase we had in total deposits during the quarter. Consistently, strong growth in this category has taken the proportion of deposits in non-interest DDA from 35% a year ago to nearly 40% today. On top of this, each of our other deposit categories of interest bearing DDA, money market and CDs, grew about $100 million at the start of the year. Among the regions, Arizona lead deposit growth of $411 million followed by Nevada with $165 million, while Northern California declined. From the national business lines, HOA services rose $222 million during the quarter as it is seasonally their strongest. And technology and innovation deposits grew just over $100 million.

Total adversely graded assets rose $43 million to $387 million with increases in special mention and classified, while nonperforming assets and repossed real estate fell modestly. On a ratio basis, adversely graded assets and NPAs have been essentially flat for the past year. These figures are net of $26 million of purchase accounting discounts to unpaid principal balance on the notes.

Half of our gross credit losses of $2.7 million during the quarter were offset by $1.4 million of recoveries prior charge offs, resulting in net losses of $1.3 million or only 4 basis points of the loan growth. The loan loss reserve rose to $128 million at quarter end and is enough to cover over 10 years of gross loan losses at our current run rate, which is well above the four year duration of our loan portfolio. In addition to the $128 million reserves, our acquired loan portfolio is held at the $45 million credit discount to the unpaid principal balance of our borrowers. As a number of these loans may pay as agreed, we expect at least a portion of this discount may also be used to cover credit charges. When this discount is combined with the reserve, the results in total coverage of 1.26% of loans.

Our strong capital growth matched our balance sheet expansion, resulting in capital ratios being flat or up slightly for the quarter, as well as over the past year. While return on tangible common equity is remained above 17%, tangible book value per share rose 20% in the last year and 4.5% on a linked quarter basis on annualized.

Robert Sarver

The outlook is sunny warm with clear skies. Any questions?

Question-and-Answer Session

Operator

[Operator Instructions] Question will come from Casey Haire of Jefferies.

Casey Haire

So want to focus on the expenses, Robert I heard you that you guys have been a small crew relative to your size. But a lot of the expense build was in that legal professional and director line. So I mean what exactly is this -- are these permanent people or are they temporary consultants? What exactly -- who are they -- what is that expense and what is it for?

Robert Sarver

Some of it is consultants that are being replaced by permanent people. So the cost -- some of that cost will go down little bit, but we got our second DFAST filing coming up. We’re expanding our risk model in second line of defense. And as I said, we’ve added a little bit more on the senior management side. We are adding a little bit more structure in overhead around our M&A strategy and M&A team. And that’s about it -- some of the outsourcing is internal audit, which is only about two third staffs over the next year that will substitute for that. I think that’s the bulk of it.

Casey Haire

Are we fully -- is the full team on the court now or I mean is there more…

Robert Sarver

What I'll say is the full cost is on the court. There may be some shifting between people and outsourcing, but the full cost is on the court.

Casey Haire

How does this relate to operating leverage dynamics going forward? We’re all conditioned due, you guys have always shot for revenuea growing 2x times expenses. What does that math look like, going forward?

Dale Gibbons

We think our expenses are going to be fairly flat into the second quarter, and with this step up in cost, we think we’re really right sized in terms of what we need to be, going forward. So they will be after the second quarter kind of a standard inflation cost increase on the expense side, which we think is going to be significantly less than what the revenue growth is going to be given where we are in terms of the first quarter on our loan and deposit growth. And as Robert indicated with clear skies, we see things to be fairly consistent prospectively.

So I think we’re back to where we are in terms of interest income growth being significantly better than expense growth, which should drive that efficiency ratio down. We’re starting from a little bit higher point in the first quarter of '17. But again, I think we’re going to still see a trend decline throughout 2017.

Robert Sarver

We did the same thing about five years ago where we went through bolstering of our management team and some of our infrastructure that get ready to take us over 10 billion and we’re kind of doing the same thing now as we’re approaching 20 billion.

Casey Haire

I mean Rob you mentioned some of the expenses towards the M&A strategy. Is this I guess the price that has to be paid to pursue potentially larger M&A targets?

Robert Sarver

I think part of it’s the price that needs to be paid, given where we operate today in terms of the complexity of our business model, and in terms of where we are in the cycle. And then part of it is the price to pay to be in a position to work on to grade those deals appropriately. We’re now at the point where when you think the size of deals we would be looking at and where we’re going forward, we need certain people dedicated to some of that stuff.

Operator

Our next question comes from Timur Braziler of Wells Fargo.

Timur Braziler

Maybe just tying out the expense question wotj one more, is any of this at all regulatory driven or done in conjunction with regulatory expectations if you are going to be doing additional M&A, going forward?

Robert Sarver

I think the regulatory expectations for our Company and our own expectations are pretty much about the same. So I guess you could say yes, I mean they’re both.

Timur Braziler

And then just kind of framing the opportunity for M&A that was great color there in the prepared remarks. But just looking forward, some of the opportunity that you potentially see in 2017, is it look look more like the GE transaction from last year where you’re acquiring a business line? Or do you see yourself going after larger whole bank M&A? And if so, what type of geographies would you be scoping, would it be something that’s relatively in footprint or would you be willing to expand that footprint?

Robert Sarver

Well, I would say all,the answer would be all the above. So look at three buckets, one would be a a niche lending opportunity like GE that’s focused again on the commercial piece. We don’t see ourselves jumping in to a big retail opportunity, but commercially focused asset generator, that’s one opportunity. Second opportunity would be a deal within our footprint, our main footprint. And that would most likely be California when you look at availability of opportunities in Arizona, Nevada that’s not much, so that would be California.

And for various reasons, those opportunities look a little better as one companies just done something -- couple of companies may be aren’t going to do something, so that could be good timing this year. And then the third would be looking at other whole bank opportunities and markets outside of Arizona, California, Nevada, we’re now doing business in 30 states. We have offices of one sort or another in DC, Boston, Rally, Atlanta, Dallas and the number of our national business lines. So we're beginning to look at other opportunities.

But having said all that, we're mostly an organic grower, so don’t look for us to go, we'll doing a whole bunch of deals. And we're select financially. If you go back and look at the deals we've done over the last 10 years, we’ve made pretty good money on. So we’re pretty disciplined when it comes to doing a deal, both in terms of the economics and the culture, which leads to not just the economics of first couple of years but the economics over five to 10 year period.

Timur Braziler

And I guess if I can just one more, looking at the organic growth engine, loan growth in the first quarter was very strong. And I understand that fourth quarter had a little bit of elevated kiosk activity. But looking forward and looking at your pipelines and excluding some of the external focus that might be placed on M&A. Is this a level that’s relatively sustainable looking at your existing pipelines or was there may be a…

Robert Sarver

I think we’re at the same place we were the quarter ago when we had the call and we said, look for us to grow. I think I don’t know may be we use the term low teens in terms of organic growth or 12% or something like that. But if you figure like an average of $400 million and may be a little more or little less quarter-to-quarter. But over the year, that’s probably about what we see right now.

Operator

And the next question will come from Brad Milsaps at Sandler O'Neill.

Brad Milsaps

So you kind of just addressed my question. But it looks like a lot of the loan growth was back end loaded. Dale or Robert anything in there that wouldn’t stick around in the second quarter, the period end, which is the lot higher than the average. So just curious if something that [multiple speakers].

Robert Sarver

Not really, I mean, a little bit of our business on the mortgage warehouse business becomes a little back end loaded as there is more real estate closings at the end of the quarter. But that's a little – the small piece of it. But in general, it just looked at -- it just happened to be the lot of the deal we're closing towards the end of the quarter for whatever reason. So majority of that’s -- our business is a little bit cyclical with the quarter. But like -- if I look at our daily report today, I think we're down $50 million from when we ended the quarter, so it’s pretty good.

Dale Gibbons

We track basically, as a microcosm of what was going on the HA data, which as you know was pretty sluggish at the beginning and then ticked up, not as strongly as we did toward quarter end. That’s typical for us. I call it a telephone wire effect in terms of -- we always kind of peak at quarter end and then it comes off. But though it was a late start and you noticed that the ending balance of our loans was $500 million higher than the average balance for the quarter. So that orders well for a continued net interest income improving at least into 2Q.

Brad Milsaps

And just a follow up on some of the components, looks like construction is crapped up to about 12% of the loan book or just under. Dale or Robert, maybe you talked in the past sort of not letting one category get about 10, don’t want to split here too much, but you are above that now. Will that slow down some, or how do you feel about that book? I know you kind of called out the two credits in California. But just any color on how you’re approaching the growth in that book would be helpful.

Dale Gibbons

I don’t think we ever said we were going to let construction go above…

Robert Sarver

That was about the Hotel portfolio. We said we’ll be pretty stable we want to keep it at 10%, no more than 10%. In terms of the total A&D and construction book, we’ve got it limited about 85% of capital and we’re significantly below that at this point. But yes what's being good for us in that market has been just residential construction loans. And we’ve been underwriting those at a pretty good levels doing A&D deals at 35% to 50% of cost, and just bread and butter housing. So that portfolio is doing well and that’s where most of that growth is.

Dale Gibbons

I think you are going to see the growth rate taper off from where it's been of late, but no I think there’s still some room there.

Operator

And next we have a question from Jon Arfstrom of RBC Capital Markets.

Jon Arfstrom

Question on the margin, the 448 core margin, I know Dale, you addressed some of the puts and takes there. But is that about what you expected, or any surprises there in terms of how things behave?

Robert Sarver

Dale is always low on the margin. If he ever tells you the margin is up 20 basis points, run for the hills. He's been low on his margin prediction for four -- about, let's see, 16 quarters running. So I'll try to be a little more accurate this time. So as you know in our 10-K, we show our interest rate risk profile. And given that you would dial in about 6 basis point increase in the margin for every 25 basis points that the FOMC act. We did a little better than that this quarter, which I would attribute to that our beta is on our deposit rates, we're still quite low. I mean, we had 2 basis point increase in funding cost. We haven't raised our posted rates, but certain selected accounts we have increased those. So our beta is probably in the high single-digits when we model about 40% beta on a weighted basis for those deals. So I think if we see continued increases from the FOMC, we're likely to see those betas continue to creep up. But that's really what drove the outsized improvement in the margin relative to the 25 basis point on average we were up during the quarter from on-time rate.

Jon Arfstrom

Seen anything you need from the March hike or is it just behaving the same way in terms of deposit pricing?

Robert Sarver

From the what?

Jon Arfstrom

From the March increase.

Robert Sarver

No, it's been consistent. So I think it is of note that we have a little more than half of our portfolio is variable rate. And then you could cut in half again and say it's prime tied or LIBOR tied. Well prime is more sensitive than LIBOR, LIBOR is only up about 25 basis points in the past five months, and of course prime is up 50. So that will temper that to some degree but no we’re seeing everything reprice as expected from what was on the mid-March.

Operator

And our next question comes from Gary Tenner of D.A. Davidson.

Riley Stormont

Just want to get some commentary on the Southern California market, in particular, I know you highlighted that one as potential for some M&A activity in the future. But I know specifically San Diego and L. A. were some markets you talked about, hoping for some more opportunity last quarter. So any color on organic progress there and competition you’re seeing would be great?

Robert Sarver

Yes, I would say the competition in those markets is a little steeper than Nevada and Arizona given the more abundant the banks that compete for business. But obviously the markets are very dense, there is a lot of business there. Southern California, the other number Dale on loan growth and deposit growth for Southern California -- that broke out for the quarter. So loans in Southern California were up $40 million for the quarter and deposits are up $14 million.

Operator

And our next question comes from Chris McGratty of KBW.

Chris McGratty

I am interested if there is any -- was there any notable shifts in the legacy bridge portfolio in the classified movement in the quarter, I know you talked about construction loans. Was there any migration in that portfolio, we’re seeing some of your peers have some movement?

Robert Sarver

No, I mean that portfolio has more ins and outs than the rest of the book, things move quicker in the innovation sector. They become problematic quicker and they get fixed quicker, everything moves quicker. So I would say the level of activity in and out is heavier than the rest of the bank and we’ve seen that the last year and half. This has been a relatively tough year last year or so for in the technology sector as pricing and valuations of companies have adjusted down. There is still a lot of powder on the side lines but the amount of investment that’s come in say last quarter compared to a year ago was down a fair amount and valuations have been resetting.

So what I’ve liked about our team at bridge is in one of the tougher environments, they’ve been able to manage their portfolio really well. I mean we have had 400,000 of loan losses since we bought Bridge Bank in that book. And so, yes, it has been a tough market for technology over the last year and a half as valuations have reset. And there are loans that come in and out of the substandard and there has been a little bit more pressure than usual because there is not a lot of wind at the back. But don’t confuse Bridge Bank with some of these others that have been shifting now.

Chris McGratty

Any kind of comments on retail commercial real estate, obviously a lot of stress given what's happen with online in brick and motor. Anything that you could speak to in terms of the portfolio review that you may have been conductive? Thanks.

Robert Sarver

First of all, we have never been a retail lender. I mean going back a long time I don’t like long term retail credit risk, never have. So most of our loans that are retail related would be construction or short term mini firm stuff. But I don’t like long term retail credit risk having. Like it weigh less now, we don’t have a real big retail book we started a review about four months ago of every credit that has retail credit risk over $5 million in the Company. We’re about 80%, 90% of the way through that and it looks pretty strong.

So I feel we're in pretty good shape with what we have. We are not doing much at all, going forward, except on select basis and focusing more on the type of retail where the market is trending, which is more entertainment related, restaurant related that kind of stuff versus some of the traditional retail. But yes, you're right on line with our thinking, three, four, five months ago when we started the review and the review looks good.

Chris McGratty

May be on M&A, we’ve obviously seen a bump in bank stock valuations and we pulled back a little bit. I am interested in your comments if there has been any bid ask spread narrowing between sellers. What they might be expecting given the bump and then the correction, and then whether any, the competitive pricing might be different in the west versus nationally?

Robert Sarver

Yes, it is different in the west, that’s the tough part. I was telling our team we were looking at deals, I mean, it's like buying a house the same house is more expensive in California than it is everywhere else. Everyone wants 20 times earnings per bank. I would say buyers are probably little more aggressive in terms of with their currency and sellers are a little more aggressive. The good news on the M&A front is a lot of bankers and a lot of banks are looking to sell. Right now, they’re just not to infatuated with the business for a number of reasons.

So there is a fair amount of opportunities, but I would say pricing is still pretty challenged. And one of the issues I struggle with and may be you can give me some insight. Yes, we traded this big multiple book value, but we don’t get a lot of respect on a PE basis. And I don’t quite understand that. You got any color from me on that?

Chris McGratty

I think that is where the opportunity is with your currency to grow into the PE multiple there, but I would agree with you. Certainly, the numbers work with your multiple and it’s just finally something that supports the growth rate of the pro forma companies may have might been…

Robert Sarver

Dale, you want to add something to that.

Dale Gibbons

Well, I was going to say that just from a buyers prospective, the price itself in dollars isn’t really what drives it.It’show many shares are going to be issued and what does the income stream adjusted for efficiency gain is going to look like after that. And so one thing about the rising tide of valuations is, while it hasn’t changed, it really hasn’t changed the calculus for a buyer, it has for a seller because the seller is interested in translating the currency they’re going to get into U.S. currency. And so in that sense, I think the bid ask has narrowed. But every deal is obviously unique and has challenges in its own separate ways.

Chris McGratty

Dale, in terms of the tax rate for the rest of the year, how would you, given little bit of noise in the first quarter. How would you guide us on the effective for the balance of the year. Thanks.

Dale Gibbons

Yes, we should be in the higher 20s.

Operator

And next we have a question from Brett Rabatin of Piper Jaffray.

Brett Rabatin

I wanted to talk about the commercial real estate owner occupied portfolio. I was just curious if you could give us some color on the linked quarter improvement in yield there. And if you’re seeing better opportunities with people may be doing less in that book, and if you’re seeing opportunities there? And then secondly just with the pull back in rates here the past months, how was that affected, what you guys are looking at for loan spread…

Robert Sarver

That will effect may be a little bit, I mean that stops either floating or tied to five year LIBOR swap rates. And so, we’ve been able to reprice some of that. And the other thing is a lot of the banks are -- some of the banks due to some of the regulatory constrains are maxed out on real estate loans. And so we’re seeing a little less competition in that area and able to get a little more pricing juice there. And also, this last bump up in the prime rate and rates kick in a little more than the previous ones, because we have some floors on some of those loan. So it took a rate or too maybe to get a rate to get us up to the floor and then the last one kind of kicks in a little bit.

But we’re really good real estate lender, our customers really appreciate the fact that we really know the business well and we’re fortunate that we get paid for. Our origination rates on those types of loans have increased about 30 basis points over the past couple of quarters. And really reflecting what’s happened in terms of the swap curve, which is what these are price off because they’re almost all fixed rate. But of late that actually come down a little bit but overall those yields are improving and they’ve been the highest they’ve been in the past couple of years.

Brett Rabatin

And then the other thing I was curious about was you mentioned not sure what anywhere in five, seven ninth inning of this expansion. And it seems like there is slightly less optimism around some of the potential changes that we’re hoping for with tax rates or regulaton what have you. What are your -- are your clients in a wait and see mode on the economy? How do you frame the outlook from your clients' perspective?

Robert Sarver

I think in general the clients are a little more optimistic than they were year ago. But the idea of managing cost for companies is still here, it’s here to stay. I think people are just more vigilant on spending, so I would say the general spending of business in terms of new technology, new infrastructure, growth, it hasn’t kicked in yet really. Our average usage of lines of credit is still below the pre-crisis numbers significantly.

Operator

The next question will come from Matthew Keating of Barclays.

Matthew Keating

Thank you.

Robert Sarver

Last man up.

Matthew Keating

Yes, exactly.

Robert Sarver

You got something new or you just got to repeat something, because you’re supposed to ask a question every time.

Matthew Keating

Hopefully, we have a couple of things new, but my question is really pertains to the growth in national business line for loan growth rather in the national business lines this quarter. It looks like the biggest chunk of that came from the other national business line segment, which I believe includes the mortgage warehouse which you said was down. So I am just wondering how much was the mortgage warehouse balances down in the quarter, and that would offset that in that segment? Thanks.

Robert Sarver

I think mortgage warehouse was down about $50 million…

Dale Gibbons

$68 million…

Robert Sarver

Okay, $68 million to be exact. And that’s really tied into, as you guys know, I mean less refinance activity so that business was down. But we’re picking up the new customers, so I think this quarter that business may not be down. I think we maybe offsetting that overall demand for that credit with some new customers. Our corporate finance business was up a little bit. And let's see what else is in that book and other -- yes, muni non-profit. We booked to couple nice deals we got a big school non-profit school in the Bay Area and a couple of other deals along those lines, so reserve finance was fairly flat…

Dale Gibbons

Yes, reserve finance business was flat. Our time share financing receivable business is pretty flat. The securities amortization markets are pretty robust there, so it was pretty flat. We got little bit of growth in our homeowner association lending book where we lend money to association to do capital improvements, but pretty…

Matthew Keating

Many of that’s warehouse, so is that around $800 million book so it seems like the decline there was a bit better than some peers. Anything special are you guys more purchase focused there or anything reason why that…

Robert Sarver

Yes, our target customers is more purchase focused. And we’re actually growing in terms of number of customers. I mean the business has been growing.

Matthew Keating

And then secondly, second topic would be on -- it's nice to see despite the strong deposit growth in the quarter, deposit cost move up that much. We have heard a few banks has seasonal progressed moment that commercial deposit tender reprice quicker. Maybe if you could just comment on your expectations there as we see additional fed rate hikes, how you think that will hold up? Thanks.

Robert Sarver

I think our deposit pricing will hold up better than most in the country, because number one, our customers that deposit with us borrow with us, so they are pretty locked in. And number two, as we said before most of our deposits come from either; one, the innovation in technology piece, which is heavy DDA; or number two, they come through our business customers in Arizona and Nevada and San Diego. And those markets have far fewer bank competitors and the top three largest banks in each of those markets, which are either Chase, Wells, BofA, they are very stingy in raising deposit prices. And so we don’t have the deposit pressure in our main markets than the rest of country has.

Operator

And this concludes our question-and-answer session. I would like to turn the conference back over to Robert Sarver for any closing remarks.

Robert Sarver

Nothing else to add. I appreciate everyone dialing in. And overall, we’re off to pretty good start and we’ll give you another update in 90 days. Thank you.

Operator

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

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