Jan 22, 2016
Executives
Robert Sarver - CEO Dale Gibbons - CFO
Analysts
Casey Haire - Jefferies Joe Morford - RBC Capital Markets Brad Millsaps - Sandler O'Neill Brett Rabatin - Piper Jaffray Tim Coffey - FIG Partners John Moran - Macquarie Capital Brian Klock - KBW
Operator
Good day, everyone. Welcome to the Earnings Call for Western Alliance Bancorporation for the Fourth Quarter 2015.
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 Web site at www.westernalliancebancorp.com.
The call will be recorded and made available for replay after 2.00 p.m. Eastern Time, January 22, 2016 through Monday, February 22, 2016 at 9:00 a.m.
Eastern Time by dialing 1-877-344-7529 and entering pass code no 10078440. 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. I am happy to report today that we had a killer quarter and a killer year.
We have no oil and gas exposure, any questions?
Operator
At this time, we will begin the question-and-answer session. [Operator Instructions] And our first question will come from Casey Haire of Jefferies.
Casey Haire
Good morning guys, nice open, Rob. I guess I'll start on the -- where do I start?
I guess on the NIM outlook going forward, where are loan yields in the wake of a Fed hike and then are you seeing any pressure on the deposit side?
Dale Gibbons
Yes, so we had a 9 basis point increase at a margin during the quarter that was probably a little more than we expected. We did have some recoveries or prepayment penalties on loans paid off as well as -- but that was partially offset by a decline in terms of the accretion we had on purchase loans from Bridge primarily.
Going forward, the biggest thing that took place like you alluded to Casey was the FOMC action which we re-priced $2.9 billion of claim loans and 750 million of LIBOR tied loans on December 17th. Those combined we think added about one basis point to the margin in the fourth quarter and if you just carry that out for the first quarter that should be a lift of about another nickel.
But moving against that however is going to be lower accretion, you see this on one of the pages where we have lower accretion from loans purchased in prior periods as well as today at least the long-term curve has come down significantly, so it gives us a little less opportunity in terms of reinvestment of our securities book. So all in all I am looking for the margin to be stable to kind of slightly up moving into the first quarter as we have these headwinds that pull away from the benefit from the FOMC.
Robert Sarver
We also paid off our 10% subordinated debt that we had borrowed 5 years earlier and then also offsetting that a little bit is the change in the Federal Reserve Bank dividend going forward that's going to come down.
Dale Gibbons
Yes, that's going to cost us about a penny in 2016.
Casey Haire
Okay, switching to expenses a little bit higher than usual a couple of lines little higher than I thought, when you guys just were doing some discretionary spending on a strong revenue quarter and then where do we settle out going forward?
Dale Gibbons
Yes, no, I wouldn't call those discretionary, there was always a little bit of noise, I think this quarter overall was quite quiet, but we did have a couple of items in occupancy expenses, I'll call them one-time but not really discretionary, in nature same thing as professional fees. We did have a decline in compensation cost like I expected on our last call.
Moving into 2016, the first quarter is always a little challenged from an efficiency or an expense standpoint, one of course because on the denominator or the revenue side we have fewer days during the quarter, but on the expense side we have some seasonal items where you kick-in again with personnel cost regarding FICA, vacation accruals and there is a couple of other items. But moving forward, so we're going to again state that we see our loan to deposit pipelines is strong.
So if we look at 1.4 billion a year or 350 million a quarter in growth that should drive to double-digit top line revenue growth and expenses we think are going to be maybe mid-single-digit range. So we again should see operating leverage throughout 2016.
But maybe a little bit of a stutter step as we move into the first quarter.
Casey Haire
And then just lastly on credit, first non-recovery quarter for you guys in a while. Is it safe to say that 2016 is, we’re going to see positive net charge-offs and no more recoveries over -- on a year basis?
Robert Sarver
I would say yes that’s probably the case although we still have a tail in terms of recovery. So as I look on the horizon right now and try to look at specific credits that are classified or non-accrual I can’t point to that.
But my instinct is that we’ll probably get back to a little more normalized basis where charge offs exceeds recovery on a quarterly basis. But I don’t see anything significant.
Casey Haire
And just housekeeping, tax rate was a little late this quarter. What’s a good go forward rate?
Dale Gibbons
You should augment -- you should increase that tax rate a little bit, came in about 1% lighter than we were expecting. We had some onetime items and that will pick up a little bit, but not dramatically in this year.
Operator
And our next question will come from Joe Morford of RBC Capital Markets.
Joe Morford
Just wondering if you could touch on the loan growth specifically it look like most of it came in the C&I portfolio. I was just wondering what were some of the drivers there and how much was coming from Bridge?
And also just the activity you did in the central business line portfolio?
Robert Sarver
The loan growth was really pretty well spread out throughout the company. So there really aren’t any concentrations.
It was spread out primarily through California, Arizona and then some of our centralized business areas, warehouse lending, corporate finance, little bit of technology, but pretty diverse.
Joe Morford
And given the uncertainty in the market and volatility, are you sensing any more caution on behalf of your borrowers, or just what’s the general sense of demand right now?
Dale Gibbons
We haven’t seen that in terms of our borrowers. But having said that, we’re prepared for it in case things do slow down and then we spent quite a bit of time recently going through some contingency plans in case things do slow down, we go into recession and really looking at how we would combat that.
And so we think we’re well prepared. But in terms of our customer base and our loan demand and our pipelines and the reporting that we get from our borrowers, we’re really not seeing that.
Of course we’re not exposed to some of those markets that are getting hit pretty hard right now. So no, we haven’t really been seeing it.
Joe Morford
And then lastly just the loan balances are down in Nevada and what drove that? And how is just the economic picture there shaping up for 2016 versus 2015?
Dale Gibbons
I think it's shaping up a little better. If I look at their goals and the budgets for this year for ’16, I am thinking they’re going to be up about 100 million for the year.
But the market there is still fairly slow and it's not a real big market. And our job and one of the things I think has done a good job of communicating to everybody throughout our organization is, we want to get the best risk adjusted returns we can get regardless of where it is.
And so we’re really down more on our capital allocation business along with credit administration and then trying to figure out whether to do that. So we’re not going to push something that doesn’t make sense just because we want to fill a bucket in the region.
Operator
And the next question will come from Brad Millsaps of Sandler O'Neill.
Brad Millsaps
Dale, just back to the credit thing, I appreciate the commentary around net recoveries. Just wondering if could maybe talk about the provision for a minute, just looking at some of the segment data, one of the big benefits you had was the fairly big year-over-year decline in the provision and central business lines.
Do you anticipate that? You’ve had a fair amount of growth there.
Would that be a swing factor in pushing that up maybe much higher than what we saw on 2015 in terms of the overall provision?
Dale Gibbons
The provision was quite nominal shall I say in 2015 led by gross charge offs being exceptionally low as well. We’re seeing the provision moving markedly from where it has been but again coming off of something near zero, but still to be a level that would be probably considered low on a historical standards.
So, we think it's going to be coming up but as Robert said earlier, we don’t really see anything on the horizon that moves charge offs higher. But just from the aspect of a rising loan book with that -- from our consistent growth.
The flip side of that is that overall as everyone is used to see these moving averages to compute your reserve and everyone's reverse has been coming down. Our historical loss behavior for the past you know six or seven years is darn near pristine and so those ratios continue to come down.
So I can see the reserve ratio continue to bleed off from a combined basis now at 1.25% as it has a little bit in 2015, but expect for it continue this year.
Robert Sarver
What do you forecast our reserve provisioning to be for '16 Brad?
Brad Millsaps
But you know I think I wouldn't disagree with you guys but you know, I don't know, up $15 million, we'll see.
Robert Sarver
That's probably pretty close.
Brad Millsaps
Then Robert just to follow up, M&A. Can you talk about you know whole bank deals, you know potential groups of lenders you could bring in you know organic hires things like that, kind of what you see in the market and your appetite?
Robert Sarver
We had a pretty good quarter in terms of organic hires, and especially in a couple of new business lines that we have which we've done a good job recruiting some really key performers in that. In terms of on the M&A front, I think we're in a pretty good position, we raised our capital levels a little bit.
We want to kind of build up our cash a little bit at the parent because every deal wants a little bit of cash. I think we're in a good place because we can increase our capital little bit.
It doesn't really hurt our EPS because our earnings growth is so strong. And then since we have a good currency we know we're going to be doing some deals, so we'll be able to put it to work.
So we're somewhat optimistic in that area.
Brad Millsaps
In terms of size would you think it looked kind of a lot like Bridge, would you do something larger?
Robert Sarver
I don't know -- I wouldn't, I don't know, I won't answer that.
Brad Millsaps
Okay, great, thank you guys.
Operator
The next question, sorry, the next question is from Brett Rabatin of Piper Jaffray.
Brett Rabatin
Wanted to ask, you mentioned some payoffs, could you maybe elaborate a little more on what those were in the quarter and kind of how much that would have impacted the growth in 4Q.
Dale Gibbons
You're talking in terms of the NIM.
Brett Rabatin
Correct.
Dale Gibbons
Or the growth of the loan book?
Brett Rabatin
Well I mean basically you can talk into either way but just like how…?
Robert Sarver
You can figure that about 20% of our loan book is paying off every year. So we do a lot of loans to grow because our book is primarily short term, but in terms of the prepayment income, Dale you referred to that a little bit earlier.
NIM -- Some of that every quarter.
Dale Gibbons
Yes, we do, so that was up - that was up to…
Robert Sarver
Dale always tries to say that the NIM the next quarter's going to be lower and so he comes up with these explanations and he's wrong every quarter so.
Dale Gibbons
This last quarter I reversed and luckily it worked. But you know, we did have some…
Robert Sarver
If he tells you it's going to go up be nervous.
Dale Gibbons
So, you know it's just a few basis points. Two or three basis points got to attribute to that.
Brett Rabatin
Okay, and then speaking about Bridge, maybe a little update on how those guys are going and the growth of their platform since you've acquired them.
Robert Sarver
Yes, they're doing really well. They grew in the last six months between loans and deposits, they had organic growth of about $400 million, and just to remind everyone, in terms of the Bridge portfolio, on their loan book about 32% of their loan book is technology and on the deposit book it’s probably closer to 50%-60%.
But the integration there has done well, we've actually added about 20 new people to the company that somehow touched developing new relationships and new businesses, we added life science group, based out of San Diego that's getting going and it was doing well, I mean, you know obviously the stock market's been hit a little bit and the technology piece of that is not immune but we're feeling good, the venture capital funds have a lot of dry powder, they raised $28 million in 2015. We've got a good management team at Bridge with very seasoned and experienced bankers in the innovation sector and credit portfolio managers that have managed successfully through these cycles before.
I think that some of the investors in the industry is actually kind of relieved that there is a little bit of a pull back and makes the business little more rational, but our credit exposures is you know it’s pretty conservative. About two thirds of the technology book is asset based so it’s secured primarily with cash and receivable monitored on a regular basis, on a daily basis.
And you know in terms of going forward I think Bridge for 2016 could see loans and deposits both grow 100 million a quarter range, maybe even a little more.
Brett Rabatin
Okay, appreciate the color, thank you.
Operator
The next question is from Tim Coffey of FIG Partners.
Tim Coffey
Dale, the new loans back in the quarter, what yields were they come on at?
Dale Gibbons
See here, so we -- 5%.
Tim Coffey
Okay great thanks. And then the follow-up on the last question talking about Bridge and its footprint, there has been a noticeable slowdown in IPO [ph] activities in the second half of ’15, has that caused you to kind of change the way you structure credits in the Bridge footprint or your outlook on that business?
Dale Gibbons
No I don't think necessarily a change, I mean, I think the way the business is designed is to be available to demand through different cycles. And if you look at the way we restructure our business and kind of a niche we're in, it gives us a little more cushion there, but the readjustment that's taking place now evaluations is just part of a normal cycle, it's kind of reflection or market discipline.
And as long as it doesn't erode too much value or really cripple investor confidence it's healthy for the market. There was $20 billion raised in DC funds in 2015 which is now the highest levels ever.
There is a lot of dry powder on the sidelines and one thing it does do with the slowdown IP market is it provides more companies looking for banking credit and banking business that necessarily maybe won't go public soon. So all things considered I think it's just -- when you get into business like this you got to run it expecting these types of cycles and not be too aggressive when things are good and they’re two concerned of things, so we're really more of an [indiscernible] type operator in this sector, so we're not doing anything different.
Tim Coffey
Okay so it sounds like you think the shakeout of the adjustments going on the market right now could create opportunities for us alliance more than anything else?
Dale Gibbons
Well, I think they create some opportunities as there is more business, but I think the bigger opportunity for us we have expanded our footprint a little bit there, we've opened an office in Atlanta, hired a few more bankers and so we're able to touch more companies and given what I see today with that market, I don't see a serious impact for us. Obviously that could change, we talk next quarter maybe it'll be different, but given what we see today and where that market is it's fun.
Operator
And the next question comes from John Moran of Macquarie Capital.
John Moran
Just a quick follow-up on a couple of things, one on the margin Dale, if I am reading you right it sounds like 1 basis point positive from the Fed hike in December but that was really very-very tail-end to the quarter, just running the math on it's kind of let's call it 5 to 7 basis points of benefit that we could carry forward and then make some adjustments for elevated payoffs but all that equal we’re kind of heading up and then some just regular competitive pressure as the year 16 kind of rolls forward assuming no other rate hikes?
Dale Gibbons
Yes, I think that's certainly fair, my number is a little lower at 5 basis points greater than 5 to 7, but yes that's I agree.
John Moran
Okay, all right, and then just a ticky-tack one on OpEx and kind of efficiency ratio, you guys I think in the past have said, we could still see a couple of million bucks coming out of Bridge sometime late in ’16 or early ’17 on systems conversion and that would sort of allow you to twiddle efficiency down into like the low 40s, is that still the thinking?
Dale Gibbons
So our final switched conversion is in October and with that should come additional cost savings like you've just mentioned, and in the meantime though I still expect that we're going to have revenue growth exceeding expense growth even though that will be more from just managing operating leverage rather than efficiencies from the Bridge deal. So that will give us a step-down, but we still think we're on different glide path for revenue growth and expense growth.
John Moran
Got you, so positive operating leverage is driving efficiency lower regardless I think you gave kind of step function down sometime late in ’16 or early ’17?
Dale Gibbons
Correct.
John Moran
Okay perfect and then the last one is just kind of a quick follow-up on the M&A question that was asked. Footprint wise I think last time we caught up, I mean historically you guys have been, I don’t want to say agnostic but more willing to kind of look at something sort of outside of existing footprint and maybe that's sort of shifting a little bit, are you kind of more focused on sort of expanding heft in the existing MSAs?
Robert Sarver
Well, first we're continuing to be focused on the organic piece because as Dale mentioned we -- our secret sauce is we can really grow our revenue faster than our expenses, we only have 40 office, we don't have a big overhead structures, we're pretty flat and so we're going to continue to make good money by organic growth. In terms of looking to deals, our focus will kind of continue to be in California where we think there is some good opportunity, but we're also going to position ourselves to be very opportunistic in case some of these markets really get rattled, so we want to be in a position where we’re able to take advantage of it a little bit towards the end last time, but we want to be able to take advantage of it through the whole cycle this time and so we think having good capital, liquidity and been opportunistic can provide some really good opportunities and not just opportunities for a penny or two additional earnings, but significant opportunities and so in addition to California, we’re going to keep our eyes open.
Down the road that maybe more 2017, but we want to be in a position, like Wells was when banks got bad last time, where they really could buy some stuff cheap and so we’re looking at other markets closely that I am sure you’re familiar with and we’ll see what happens.
Operator
And next we have a question from Brian Klock of KBW.
Brian Klock
So, Robert you talked about the organic hires, so can you remind us how many hires you had in the fourth quarter? What regions or products, and what’s the expectation for hires this year and where you’re looking to hire.
Is it more within Bridge Bank or more in the legacy Western Alliance, and in what geographies?
Robert Sarver
It’s both, some of it would be in Bridge Bank, technology, life science, and some of it would be in just our core corporate banking. The real estate side probably not so much we’re in pretty good shape there.
We’re watching our concentrations on the real estate side. So more in the C&I.
We’ll bring on about 10 new people a quarter average, and I mean producer types, not support, but people out there hitting the street trying to bring in business, is about average run rate. And that leads us along with our existing momentum to reaffirm to you guys our guidance on loan and deposit growth at about 1.4 billion each on the organic side for 2016.
And we don’t really put a limit on good people we can find. We’re always recruiting.
And as you know, when you’re doing well it helps to recruit, so momentum is a good thing. We have some pretty good momentum right now.
We have a number of people that are looking to us as a good place to be.
Brian Klock
That’s good, definitely does help. My other question, maybe it ties into it, but this is actually -- you mentioned the real estate concentration, the commercial real estate concentration.
You actually had a decrease this quarter in the owner occupied commercial real estate. So were those just pay downs or maybe talk about what you’re thinking about or how you’re managing that commercial [multiple speakers]?
Robert Sarver
We manage it based on rate, some of this rate where customers are able to get things at much lower rates or better credit structure and we just let it go. We probably ran off in that bucket about 200 million of real estate in the fourth quarter of real estate credits.
So, it’s kind of a balance looking at that and it’s also looking at different geographic regions so like we’re not going to be real aggressive in North California and commercial estate right now. And so we just go in real estate market-by-market and product within the market and try to have good diversification.
But in general I think real estate values are pretty robust right now and so we’re probably a little more cautious on the real estate side right now. And that’s our general outlook.
Brian Klock
So that 200 million you ran off, was that in California or is that spread across the footprint?
Robert Sarver
That’s just throughout the whole Company.
Brian Klock
Any markets you’re thinking about on the non-owner occupied? You’ve seen some good growth there.
Is there anything there that’s getting a little bit croppy for you?
Robert Sarver
We can have matrix put together, we’ll look at 10 different asset classes and look at the different geographies and doing a little more or little less. But that’s really specific.
So I couldn’t even say Phoenix because if I look at Phoenix I’d break it down between Westside, Scottsdale, East Valley and Central Phoenix. So, if you want to come spend a couple of hours with us we can show you what we’re doing more than lesser, but it's a little more detailed.
Brian Klock
I would love to, if you’ve seen the weather forecast up here, I’d love to come up with you and spend some time. Thanks for your time guys.
Robert Sarver
You got smart and put your conference in Florida instead of Boston last time, it was little tough.
Brian Klock
That’s right, at least the weather will be good, so it will be a good time down there. So look forward to see you there.
Thanks for your time.
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
So, anyway as I said at the beginning, great quarter, great year, it's over. So we’re now focused on 2016.
Again, reaffirming our organic growth numbers $1.4 billion annual run rate, in both loans and deposits. Dale talked about the net interest margin, which looks to be stable or rising a little bit.
Credit quality we talked about a little bit, nothing bad on the horizon, but economy looks like it potentially could be slowing based on some of the economic data and obviously as we grow we're going to have to fund our loan loss reserves. You know we started last quarter with 2.5 million instead of zero, so that gives you a pretty good idea there.
In general in terms of our key issues for 2016 as I talked to our management team this morning, asset quality, staying on top of your borrowers, being prepared for surprises, figuring out how they're going to deal with different economic scenarios. So asset quality number one, number two continue to have good strong organic core deposit growth, number three, we got some technology things coming along this year that we need to execute on including some mobile apps and some other enhancements for our customers as well as our computer conversion.
Number four, making sure we check the box and all the big regulatory compliance areas, DSA, AML, CRA, all those buckets, make sure we're doing and executing really good there and number four -- and the final one would be, you know figure out how to create some more value through M&A given our capital position that's kind of getting a little better and our good currency that we think will continue to be at a significant premium to peers. And then the last one I always add on is just kind of keep in the back of our mind in case there's some really transformative opportunities you know maybe in 2017 or '18 in a couple of places that could be really good for us, we're going to follow that so.
So that's where we're at, appreciate you listening in to the call, will let you go, we know there's a lot of calls today. So thanks for listening in.
Operator
The conference is now concluded, thank you for attending today's presentation, you may now disconnect.