Western Alliance Bancorp (WAL) 2015 Q4 法說會逐字稿

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 website at www.westernalliancebancorp.com. The call will be recorded and made available for replay after 2:00 PM Eastern Time, January 22, 2016, through Monday, February 22, 2016, at 9:00 AM Eastern Time, by dialing 1-877-344-7529 and entering passcode number 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 fact. 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, sir.

Thank you. I'm happy to report today that we had a killer quarter and a killer year. We have no oil and gas exposure.

Any questions?

At this time we will begin the question-and-answer session.

(Operator Instructions)

Our first question will come from Casey Haire of Jefferies.

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 pressure on the deposit side?

Yes, so we had a 9 basis point increase in the 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 purchased loans from Bridge primarily.

Going forward, the biggest thing that took place, like you alluded to Casey, was the FOMC action which we repriced $2.9 billion of prime loans and $750 million of LIBOR tied loans on December 17. Those combined we think added about 1 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 and so it gives us a little less opportunity in terms of reinvestment of our securities book. So all-in all I'm looking for the margin to be stable to slightly up moving into the first quarter as we have these headwinds that pull away from the benefit from the FOMC.

We also paid off our 10% subordinated debt that we had borrowed five 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.

That's going to cost us about $0.01 in 2016.

Okay, switching to expenses, a little bit higher than usual, a couple, Alliance a little higher than I'd thought. Were you guys doing some discretionary spending on a strong revenue quarter and where do we settle out going forward?

I wouldn't call those discretionary. There's always a little bit of noise and I think this quarter overall was quite quiet. But we did have a couple of items in occupancy expense and I'll call them one-time but not really discretionary in nature, same thing in professional fees. We did have a decline in compensation costs like I expected on our last call.

Moving into 2016, the first quarter's always a little challenged from an efficiency or an expense standpoint. One of course because on the denominator on the revenue side you have fewer days during the quarter but on the expense side, you have some seasonal items where you kick in again with personnel costs regarding FICA, vacation accruals, and there's a couple of other items.

So, but moving forward, so we're going to again state that we see our loan and deposit pipelines as strong. So if we look at $1.4 billion a year or $350 million a quarter in growth, that should drive to kind of 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.

Okay, and then just lastly on credit. First non-recovery quarter for you guys in awhile. Is it safe to say that 2016 is we're going to see positive net charge-offs and no more recoveries on a year basis?

I would say yes, that's probably the case although we still have a tail in terms of recoveries. So as I look on the horizon right now and try to look at specific credits that are classified or nonaccrual 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.

Okay, and just housekeeping, tax rate was a little light this quarter. What's a good go forward rate?

Yes, you should increase that tax rate a little bit. It came in about a percent lighter than we were expecting, we had some kind of one-time items and that will pick up a little bit but not dramatically in this year.

Okay, great thanks. Solid script Rob.

Our next question will come from Joe Morford of RBC Capital Markets.

Thanks, good morning guys.

Good morning, Joe.

Just wondered if you could touch on the loan growth, specifically it looked like most of it came in the C&I portfolio, just wondering kind of 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?

The loan growth was really pretty well spread out throughout the Company, so there really aren't any concentrations. I mean it was spread out primarily through California, Arizona, then some of our centralized business areas, warehouse lending, corporate finance, a little bit of technology but pretty diverse.

And given the uncertainty in the markets and volatility are you sensing any more caution on behalf of your borrowers or just what's the general sense of demand right now?

We haven't seen that in terms of our borrowers but having said that, we're prepared for it in case things do slowdown. And we spent quite a bit of time recently kind of going through some contingency plans in case things do slowdown, we go in a 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 but so no, we haven't really been seeing it.

Lastly the loan balances were down in Nevada and was just kind of what drove that and how is the economic picture there shaping up for 2016?

I think it's shaping up a little better. I look at their goals and their budgets for this year, for 2016, I'm thinking they are up about $100 million for the year. But the market there is still fairly slow and it's not a real big market. Our job, and one of the things we've I think done a good job of communicating to everybody throughout the organization is we want to get the best risk adjusted returns we can get, regardless of where it is.

And so we're really, Dale and I are more on the capital allocation business along with credit administration and then trying to figure out where 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 a region.

Makes sense, thanks very much.

The next question will come from Brad Milsaps of Sandler O'Neill.

Good morning guys.

Good morning.

Dale just back to the credit thing. I appreciate the commentary around net recoveries, just wanted to maybe talk about the provision for a minute. Just looking at some of the segment data, one of the big benefits you had was I guess, a fairly big year-over-year decline in the provision in central business lines.

Do you anticipate that, you've had a fair amount of growth there. Would that be a swing factor in kind of pushing that up maybe higher than, much higher than what we saw in 2015 in terms of the overall provision?

Well yes, the provision was quite nominal shall I say in 2015, lead by kind of gross charge-offs being exceptionally low as well. We see 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 by I don't know, historical standards. So yes, we think that it's going to be coming up, but as Robert said earlier we don't see anything on the horizon that moves charge-offs higher but just from the aspect of a rising loan book, from our consistent growth.

Now the flip side of that is that overall, as everyone uses these moving averages to compute your reserve and everyone's reserve has been coming down, our historical loss behavior for the past six or seven years is darn near pristine. And so those ratios continue to come down, so I could see the reserve ratio continue to bleed off from a combined basis now of 1.25% as it has a little bit in 2015, but that to continue this year.

What did you forecast our reserve provisioning to be for 2016, Brad? For the year?

Up, but I wouldn't disagree with you guys, but I don't know, up $15 million, we'll see.

Probably pretty close.

And then Robert just to follow-up, M&A, can you talk about whole bank deals, potential groups of lenders you could bring in, organic hires, things like that, kind of what you're seeing in the market -- your appetite?

Right, we had a pretty good quarter in term of organic hires and especially in a couple of new business lines that we have. We've done a good job recruiting some really kind of 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 build up our cash a little bit at the parent because very deal wants a little bit of cash.

So I think we're in a good place because we can increase our capital a 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 feeling optimistic in that area.

In terms of size, would you think it would look kind of a lot like Bridge, would you do something larger?

I don't know. I don't know, I wouldn't answer that.

Okay, great, thank you guys.

The next question -- I'm sorry, the next question is from Brett Rabatin of Piper Jaffrey.

Hi guys good morning.

Good morning.

Wanted to ask, you mentioned some pay-off, 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 Q4.

Are you talking about in terms of the NIM?

Correct.

For the growth or the loan book?

Well basically you can back into it either way, but just like how much you guys have --

Yes, 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. The NIM, we have some of that every quarter.

We do so that was up to -- (multiple speakers)

Dale always tries to say that the NIM the next quarter is going to be lower and so he comes up with these explanations and he's wrong every quarter.

The last quarter I reversed and luckily it worked. But no, so we did have some --

It's just going to go up. Be nervous.

Yes, so just a few basis points, 2 or 3 basis points I'd attribute to that.

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?

Yes, they are 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 kind of remind everyone in terms of the Bridge portfolio, on their loan book about 32% of the 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 touch developing new relationships and new businesses, we added a life science group based out of San Diego that's getting going. No, it's doing well.

I mean obviously the stock market has been hit a little bit and the technology piece of that is not immune, but we're feeling pretty good. The venture capital funds have a lot of dry powder, they raised $28 billion 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 some of the investors in the industry is actually kind of relieved that there's a little bit of a pullback and makes the business a little more rational. But our credit exposure is pretty conservative, about two-thirds of the technology book is asset-based, so it's secured primarily with cash and receivables, monitored on a regular basis, on a daily basis. And 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.

Okay, appreciate the color, thank you.

The next question is from Tim Coffey of FIG Partners.

Thank you, good morning gentlemen.

Good morning.

Dale, the new loans booked in the quarter, what yields were they coming on at?

See here -- 5%.

Okay, great, thanks and then to follow-up on the last question, talking about Bridge and its footprint. You know there's been a noticeable slowdown in IPO activities the second half of 2015. Has that caused you to kind of change the way you structure credits in the Bridge footprint, or your outlook on that business?

No, I don't think necessarily change. I mean I think the way the business is designed is to be able to manage two different cycles. And if you look at the way we structure our business and kind of the niche we're in, it gives us a little more cushion there. But you know the readjustment that's taking place now, the valuations is just part of a normal cycle.

It's kind of a reflection of 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 $28 billion raised in VC funds in 2015, which was one of the highest levels ever. There's a lot of dry powder on the sidelines and one thing it does do with the slowdown in IP market is it provides more companies looking for banking -- banking credit and banking business that necessarily maybe won't go public as soon.

So all things considered I think it just when you get in a business like this you've got to run it expecting these type of cycles and not be too aggressive when things are good and then too concerned with things. So we're really more of an even keel type operator in this sector, so we're not doing anything different.

So it sounds like you think the shake out of the adjustments going on in the market right now could create opportunities for us in Alliance more than anything else?

Well, I think they create some opportunities that there's more business but I think the bigger opportunity for us, you know we've expanded our footprint a little bit there. We 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 will be different, but given what we see today and where that market is, it's fine.

Okay, well thanks the rest of my questions have been answered, thanks.

The next question comes from John Moran of Macquarie Capital.

Hi guys.

Hello.

Hi, John.

Just a quick follow-up on a couple things. One, on the margin, Dale if I'm reading you right it sounds like 1 basis point positive from the Fed hike in December, but that was really very, very tail end of the quarter. Just running the math on it is kind of like, call it 5 to 7 basis points of benefit that we could carry forward and then make some adjustment for elevated pay offs, but all else equal, we're kind of heading up and then some just regular competitive pressure as the year 2016 kind of rolls forward assuming no other rate hikes.

Yes, I think that's generally fair. My number is a little lower, 5 basis points rather than 5 to 7, but yes I agree.

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 million bucks coming out of Bridge some time late in 2016 or early 2017 on systems conversion and that would sort of allow you to whittle efficiency down into the low 40%s, is that still the thinking?

Yes, so our final switch conversion is in October and with that should come additional cost savings like you 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 paths for revenue growth and expense growth.

Got you, so positive operating leverage is driving efficiency lower regardless and then you get kind of a step function down some time late in 2016, early 2017?

Correct.

Okay, perfect. And then the last one 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 think historically you guys have been, I don't want to say agnostic but more willing to look at something sort of outside of the existing footprint. Maybe that's sort of shifting a little bit.

Are you kind of more focused on sort of expanding heft in the existing MSAs?

Well first, we're continuing to be focused on the organic piece, because as Dale mentioned, our secret sauce is we can really grow our revenue faster than our expenses. We only have 40 offices, we don't have a big overhead structure, we're pretty flat. So we are going to continue to make good money by organic growth.

In terms of looking at deals, our focus will kind of continue to be in California where we think there's 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, you know, we are 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 being 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 may be more 2017, but we want to be in a position kind of like Wells was when things got bad last time where they really could buy some stuff cheap. And so we're looking at other markets closely that I'm sure you're familiar with and we'll see what happens.

Sure, got it, thanks very much for taking the questions guys.

Next we have a question from Brian Klock of KBW.

That's all right I've been called worse, good morning guys.

Yes, by me.

Exactly. So Robert, you talked about the organic hires, so can you remind us how many hires you had in the fourth quarter, I guess what regions or products and what's the expectation for hires this year? And where are you looking to hire, is it more within Bridge bank or more in the legacy Western Alliance and what geographies?

Yes, 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 and 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 kind of the average run rate. And that leads us along with kind of 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 recruit, so it's momentum is kind of a good thing. We have some pretty good momentum right now, we have a number of people that are kind of looking to us as a good place to be.

That's good, that definitely does help. My other question maybe it tied 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 paydowns or maybe talk about what you're thinking about or how you're managing that?

Well we manage it based on risk -- based on rate. Some of it's 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 Northern California in commercial real estate right now. 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 kind of our general outlook.

So that $200 million you ran off, was that in California or is that spread across?

That's throughout the whole Company.

Okay, so any markets I guess 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 frothy for you?

Yes, well we kind of have a matrix put together, we'll look at like 10 different asset classes and look at the different geographies and doing a little more, a little less. But that's really specific. So like I could even say Phoenix because if I looked at Phoenix I'd break it down between Westside, Scottsdale, East Valley and Central Phoenix. So if you want to come spend a couple hours with us we can show you what we're doing more than less of, but it's pretty, a little more detailed.

I would love to if you've seen the weather forecast up here, I would love to. (Laughter)

Well at least you guys got smart and put your conference in Florida instead of Boston. Last time it was a little tough.

That's right. At least the weather will be good, so it will be a good time down there, so look forward to seeing there. Thanks for your time.

You've got it.

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

Yes, sure. Anyway as I said at the beginning great quarter, great year, it's over so we are now focused on 2016. Again reaffirming our organic growth numbers of $1.4 billion annual run rate 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. So 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 talk 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've 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 in all the big regulatory compliance areas, BSA, AML, CRA, all those buckets to make sure we're doing and executing really good there. And number four -- and the final one would be 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 last one, I would add on is just kind of keeping the back of our mind in case there's some really transformative opportunities maybe in 2017 or 2018 in a couple places that could be really good for us, we're going to follow that, so that's where we are at. Appreciate you listening to the call. We'll let you go, we know there's a lot of calls today so thanks for listening in.

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