Western Alliance Bancorp (WAL) 2016 Q1 法說會逐字稿

Welcome to the earnings call for Western Alliance Bancorporation for the first quarter 2016. 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 on April 22, 2016, through Sunday, May 22, 2016, at 11:59 PM Eastern time by dialing 1-877-344-7529, passcode 100-83308. 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 opening remarks, I would like to turn the conference over to Robert Sarver. Please go ahead.

Thank you. Welcome to Western Alliance's first quarter earnings call for 2016. This one's going to be a little longer than the last one. I'll summarize our strong quarterly results and then I'll turn it over to Dale to review the performance in a little more detail. Then I'll summarize our transaction with GE Capital, give you a little information on the following quarter and we'll open up the lines for questions.

Net income for the first quarter was $61.3 million, or $0.60 a share, compared to $58.5 million, or $0.50 a share, for the prior quarter. Our EPS was up 33%, from the $0.45 a share in the first quarter of last year, as our return on assets reached a new high of 1.7%.

Net interest margin declined 9 basis points from the fourth quarter to 4.58 and is up 23 basis points from a year ago. Our efficiency ratio ticked up a bit to 45.6% during the quarter from 45.2% in the prior quarter, as expenses rose primarily related to first quarter seasonal factors.

Quarterly loan growth was $105 million, reflecting continued credit and pricing discipline for new originations. Deposit growth was a record at over $1 billion, reflecting that in March, we began focusing on the generation of liquidity needed to fund the purchase of the GE Hotel franchise finance portfolio, which closed this week.

Non-performing assets declined to 1.11% of total assets a year ago to 57 basis points at March 31, 2016. Net loan losses for the quarter were $2.3 million, or 8 basis points on an annualized basis, compared to 6 basis points in net recoveries in the first quarter last year.

Despite organic asset growth of $1 billion during the quarter, the tangible common equity ratio only slipped 1/10 of 1% to 1.9% of total assets, as our strong income performance drove a $70 million increase in tangible capital.

Dale?

Net interest income for the first quarter increased by $2.4 million on a linked-quarter basis to $145.7 million and is up $42 million, or 41% from the year-ago period. Our operating non-interest income rose $2.7 million during the quarter to $12.1 million. That included $2.5 million gain on the disposition of $24 million of loans.

Operating expenses increased $3 million during the quarter to $75.8 million; $2 million with -- of that increase was, as Robert alluded to, related to seasonal payroll taxes, as FICA starts over each year. And we also had a $1 million reduction of loan origination cost deferrals related to FAS 91, as our loan growth was slower than in the fourth quarter.

Operating pre-provision net revenue was $82.1 million, up 2.8% from the fourth quarter. And $2.5 million was again provided for loan losses, essentially matching net charge-offs for the period of $2.3 million, while most of our credit metrics were improved during the first quarter. Minor portfolio repositioning resulted in $1 million of securities gains.

The income tax line benefited from a new accounting standards update, which requires that changes in tax deductions from differences in stock values from when a restricted share award is made to when it vests should be run through the income statement.

Previously, these were -- went directly to equity. Since WAL stock price today is higher for grants divested in the first quarter than when they were made in the first quarter of 2013 and 2014, tax expense fell by $3.9 million.

Since virtually all of the awards at Western Alliance are made in the first quarter of each year, this is not likely to recur until the first quarter of 2017, and then only if the share price is different from the value when the awards were granted. The preferred dividend was eliminated with redemption of our SBLF preferred stock in the fourth quarter, resulting in net income of $61 million, or $0.60 per share.

Looking at the drivers of our net interest income. Our securities portfolio was modestly higher during the quarter at $2.1 billion, yielding 3.02%. Loan yields slipped 4 basis points to 5.31%, despite the increase in FOMC funds rate in Prime, primarily due to reduction in the day count, which cost us 6 basis points during the quarter. There was only 91 days in the first quarter. Interest-bearing deposit costs rose slightly as we selectively increased pricing to accelerate deposit growth to generate additional liquidity for the GE transaction.

Regarding the composition of earning assets, loans fell to 78.9% of total. This is the lowest proportion we've had in two years, as our cash rose substantially. This liquidity, which clipped our interest margin by 3 basis points, was deployed on Wednesday with the close of the transaction.

The margin decreased by 9 basis points during the quarter to 4.58%. As I mentioned, 6 of these basis points resulted from the reduction of the day count, as we report our margin on a 33/60 basis while some others use an actual-actual basis. Accumulating liquidity cost under the 3 basis points and reduction of loan pre-payment fees reduced it by 2 basis points more.

These items were partially offset by a 5 basis point benefit from the rise in Prime and LIBOR. The weighted rate on new loan originations for the quarter was slightly higher than that of loans repaid during the period.

Excluding purchase accounting entries, the margin decline was 10 basis points to 4.42%. And excluding acquisition from the GE loan purchase, which has not yet been determined, our scheduled accretion is expected to climb to $2.5 million in the second quarter and to $1.6 million by the first quarter of 2017.

For the quarter, revenue was up $55 million and expenses -- and $5 million in expenses increased $3 million, which took our efficiency ratio marginally higher to 45.6%. FTE increased by 18 during the quarter to 1,464 and included seven new business development officers. The ratio of our pre-provision net revenue to assets was steady at 2.27%, while along with net income, ROA climbed to an all-time high of 1.7%, our record deposit growth to total assets to $15.2 billion, and cash and investments to $900 million to -- up $900 million to $3.1 billion.

Tangible book value per share rose slightly more than EPS during the quarter to $13.16, and is up 22.8% during the past year. Loan growth slipped to $105 million during the quarter, which is net of $24 million in note sales, as we held firm on pricing and underwriting despite competitive pressures.

The strongest growth was C&I and construction by type and in Southern California, technology and mortgage warehouse by segment. These pies show the diversification of our loan portfolio by type of this year and last year. These slices, the slices from black to dark gray correspond to C&I loans from the previous slide. The brown hues are owner-occupied CRE; green shades are investor commercial real estate; and construction is in blue, while residential and consumers is in rust.

With the close of the GE portfolio, we expect it to add a new segment of -- in investor commercial real estate of about 10% of total loans, a concentration that should be stable or decline as our balance sheet growth in other segments continues.

Record deposit growth of $1.05 billion was almost double our next highest quarter and was 10 times our loan growth, which positions the bank to absorb the GE loan purchase without straining liquidity. More than half of this growth was in non-interest bearing demand deposits, with strong performance in Arizona, Nevada, Southern California and in our Homeowners Association Services division.

This growth was augmented with somewhat higher pricing for certain money market and CD accounts, which increased our average cost of funds by 1 basis point. Asset quality remains strong, with a 5% reduction in NPAs during the quarter to $87 million, or 57 basis points of total assets.

Total adversely graded assets, which includes classified and special mention loans, fell to $312 million, or just 2.05% of total assets. This amount is net of $20 million of unrecognized discounts on these loans that was established when they were acquired.

Gross loan charge-offs of $8 million during the quarter were largely offset by higher recoveries, resulting in net losses of $2.3 million, or 8 basis points of total loans annualized. This allowance was matched by the provision during the quarter as loan growth was tempered from prior periods and most asset quality measures improved.

The allowance for loan loss, as a percentage of total loans, was 1.06% at quarter end, and 1.21% including credit discounts on acquired loans, for which no reserve is provided. The capital ratios based upon total assets of tangible common equity and Tier 1 leverage were essentially flat during the quarter as strong organic capital growth was matched by the $1 billion in deposit and asset growth.

Common Equity Tier 1 and total capital both climbed as risk-weighted assets only increased $232 million during the quarter as the Company's cash position climbed. Return on tangible common equity remains strong at over 18% and tangible book value per share rose by $0.62 to $13.16.

Thanks, Dale.

Let me talk about the GE portfolio for a little bit. As I said earlier on Wednesday, we closed the transaction. We purchased the domestic hotel franchise finance loan portfolio from GE Capital. The total loans purchased were $1.34 billion.

They are all performing on payments. None of them are more than 90 -- 30 days past due. Approximately 4% of the book is classified. The weighted average current estimated loan to value is 65%. What I mean by current estimated is what they do is they look at -- on a quarterly basis, the operating performance of every one of the hotels in the portfolio, which is about 300 -- 230 hotels.

And they compare that with, looking at their loan amount versus what the current cap rates are for hotel sales in that particular market, based on the cash flow of their project. So in a sense, they're re-underwriting the loan to value on a quarterly basis. That number's about 65%.

The weighted average debt service coverage of the portfolio is 1.70%. As mentioned, we acquired the portfolio at a discount of $67 million. We're currently evaluating how the credit and rate discounts will be allocated, giving attention not only to classified loans but also to properties that could be stressed in the future because they are domiciled in energy sector markets.

One of the things we liked about this portfolio is it is based here in Scottsdale, Arizona, and there will be a team of about 35 people moving over to Western Alliance. Half of them have moved over yesterday and the other half will be moving over in about 30 days.

Their target customer is an over five-unit owner/operator in the upper end of the limited service hotel franchise business. So the limited service business is broken down into upper, upper mid-scale, mid-scale, and economy. 58% of the portfolio is in the upscale. 39% is in the upper middle-scale. Those are the areas that they play in.

If you want to look at it by type of hotel, franchise type, 19% of the portfolio approximately are Hampton Inns, which is a Hilton brand, 17%, Courtyard Marriotts; 13%, Hilton Garden Inns; 7%, Springhill Suites, which is a Marriott product; 7% Homewood Suites, which is a Hilton product; 7% Holiday Inn Express. So those six hotel products make up about 70% of the portfolio and the other 30% is pretty diverse, would include hotels like Hyatt Place, Marriott Residence Inn, the Hilton Home2 product and the Marriott Fairfield Inn. Geographically, 16% of the book is in Texas.

Within the Texas book, half the book is in Dallas in good markets, Dallas/Fort Worth, Irving, and some pretty strong markets. 20% of the book is in Houston, which I would include in what I referenced earlier, the areas that are subject to oil and gas exposure. 15% is in San Antonio; 5% in Austin; those are good, strong markets and the balance is in some outer lying Texas markets.

Next, in terms of concentration, 10% is in Georgia; 8% is in Ohio, mainly Columbus; Florida and Tennessee, both are 5% of the portfolio. So I talked a little bit about the oil and gas exposed markets, where a part of that reserve will be used and $75 million of the portfolio is in oil and gas exposed markets in Texas, which would include areas like Houston and some of the other areas outside of Dallas, San Antonio and Austin, that we think are exposed to oil and gas.

$8 million in loans in west of Pittsburgh and Pennsylvania. We included all $22 million loans in Oklahoma and $27 million loans around Canton, Ohio, where there's significant natural gas infrastructure and actually, that market's not doing bad, but there's been a few too many hotels built.

So that's the market we look at, in addition to the current classification of some of the credits we'll be taking into account. These credit marks, we do feel comfortable that we really fenced in our exposure with this $67 million in discount, and I'm not sure how much of that will go to income but as I sit here today, my best estimate is we will not use up the full $67 million in credit losses.

The duration of the portfolio is under five years. They typically do a 25-year amortization with a five-year call. About half the portfolio is fixed, half is floating. The current portfolio yield, as was mentioned, is 4.8%. We don't know yet what portion of the discount will accrete to earnings each quarter due to our purchase allocation, which is not finished yet.

But needless to say, some of that purchase will probably accrete to net interest income and therefore, to earnings. Overall, we feel good about the acquisition. It's a well-run business line and GE, as all of you know, is exiting the banking business and trying to relieve themselves of the SIFI designation, and this was an opportunistic acquisition on our part.

In terms of looking forward, even though we're coming off our best deposit quarter in terms of growth, we are on track again in this quarter to exceed our $350 million deposit growth target during the second quarter. This strong growth in funding should enable us to not only increase our organic loan growth from the first quarter, while fully absorbing the new franchise finance portfolio.

Expenses were a little bit elevated in the first quarter due to higher payroll taxes. We pay out all our bonuses in January, so all the FICA payments get -- most of them get used up in the first quarter. We also have lower FAS 91 credits, as organic growth was slowed down in order to accommodate this acquisition.

Neither one of these should increase in the second quarter. Consequently, excluding the new franchise finance business, we expect expenses to be fairly flat in 2Q. The $1.3 billion portfolio will have a marginal efficiency ratio of 30% initially and then improve into the 20%s after the redundancy is eliminated when the processing and IT transfer from GE is completed at the end of the third quarter.

There will be some limited one-time acquisition costs, included over the next two quarters in this acquisition. The bridge conversion is still on track to be completed in October. We don't see any significant changes to credit metrics on the rise and expect asset quality continuing to improve modestly.

Both gross loan losses and recoveries should fall from the first quarter level, with net losses not substantially different than that from the first quarter.

So with that, I'd like to open it up for any questions you have for Dale or myself.

(Operator Instructions)

And our first question will come from Joe Morford of RBC Capital.

Good morning, everyone.

I thought you telegraphed the slower loan growth, organic growth, in the first quarter fairly well. Now that the market appears to have settled down, at least the fears of recession have subsided, what are your expectations for organic growth in the near term and the remainder of 2016? And is pricing getting better, such that you feel better compensated for the risks you're taking, I guess?

I think two things we'll look at. One is our growth in deposits and, therefore, our liquidity will be one factor. We've still got to kind of beef up that liquidity a little bit to absorb the acquisition. We borrowed about $300 million from the Federal Home Loan Bank overnight. And we're going to want to kind of pay that off over the quarter. So that's one factor.

The other factor is competitive pressures. And that is going to continue to have some bit of an impact. We see competitors out there that are just pricing credits in some ways that we think make no sense whatsoever. And so our growth, organically in our loan book, is going to be based on those two things. And we're not going to try to push a number.

We're just trying to do the right thing in each of our business lines, be prudent, be opportunistic. And so I think that organic growth rate will begin to pick up a little bit as we have more liquidity. But realistically, I don't see us doing $1.2 billion or $1.3 billion in organic loan growth this year, given competitive pressures and given our liquidity with this acquisition.

And are you just targeting the $350 million in terms of deposit growth in the second quarter? Or are you looking for a bigger quarter like we saw in the first quarter?

Yes. I think we may do better than that. At least so far, we're off to a start that would lead us to believe that.

Okay.

And then I guess, Dale, it sounded like given your comments about the day count and then deploying the liquidity with the GE transaction this week, should we see a pretty healthy bounce-back in the margin this quarter? What are you thinking there?

Okay. So this portfolio yields a 4.80%. Our marginal cost of deposit acquisition to cover this has been in the 40-basis-point range, so a little higher than our average cost. And that contributed to our 1 basis point increase in funding.

So if you look at that on a standalone basis, that's a 4.40% margin, which would be modestly dilutive to the margin on a rate basis but substantially accretive to net interest income because our loans are now up $1.5 billion from where they were for the first quarter. So based on both of those, net interest income should be up significantly. The margin is, more or less, a push.

There could be a portion of this $67 million discount that gets recognized as well, either through pay-offs of loans or through an allocation of the purchase price premium that is not put to credit marks that comes in through revenue. But I don't have what that number is.

So all in all, I'm not looking for the margin number to change that much. But because the earning assets are going to be up significantly and the mix of earning assets is going to change, more skewed to loans, then, yes, I look for net interest income to increase substantially.

Understood. Thanks so much.

But that mix will help the margin a little. And we may get a little bit of increase on the 4.80% on the mark, so it's probably about a wash, I think.

Don't you think?

I don't think it's going to go down. I think it's going to probably go up, but not substantially.

Right. But the dollars are up significantly, as you said.

Right. We think we'll make about $100,000 a day on this deal.

Sounds good. Thanks very much.

Our next question will come from Casey Haire of Jefferies.

Hello, good morning.

Good morning.

I guess following up first on liquidity profile, I understand you are not pushing a loan growth number. You're just going to respond to the environment. But it does sound like you do want to get your liquidity profile back to where it was pre-deal. Is that an accurate represent -- if you got the loan-to-deposit ratio to the low 90% level, which is where it was pre-deal, would that take your foot off the brakes in terms of loan growth?

Yes.

Today, it's at 95%. So we pushed it down into the 80%s with the growth that we had in deposits in March; and today, it's 95%.

Okay. Great.

And then on the asset sensitivity, I know, Dale, you mentioned the day count; and then some pre-pay, I think, went against you a couple of bps. But even adding that back in, the yield, the loan yield is only up a couple of bps with increased purchase accounting.

I'm just a little surprised we didn't see a little bit more of the asset sensitivity pull through. I know you positioned intra quarter to for a little bit of a lower, longer environment. Can you just give a little bit more color on why we didn't see a little bit more of the asset sensitivity?

Well, part of it is mix. I don't think that it's kind of a permanent situation, shall I say. But there has been kind of increased competitive pressure. But we looked at our loan yields that came off, and they were just under 5%. And the weighted average of new loans put on during the quarter was just over 5%.

So if you add back the 6 basis points for the day count; add back -- and my number is 3 basis points for the cost of the liquidity piece, plus another couple of basis points for a reduction of pre-payment activity that was heavier in the fourth quarter than what we saw in the first quarter and acceleration of loan fees as such. Those are really the elements that drove this.

The other thing that would factor in a little bit is we have floors on most of our floating rate loans. Some of those loans are, right now, paying at a rate where they're paying at the floor rate instead of the contract rate.

Okay. Understood.

And then on the tax rate, if I strip out that benefit, the tax rate comes in at around 29%. Dale, I know you mentioned, depending on what the stock price does between now and first quarter of 2017, can you just provide some color on what the stock price needs to do to get that tax benefit again? And then where does the overall tax rate settle out going forward with GE now on board?

GE skews us to a greater proportion of our revenue from taxable sources, which I think is a good thing. What it does is it means we have more appetite to take advantage of different opportunities that can reduce that. I'm looking for the tax rate to be about 28% prospectively. And we're going through a process to see what we can do to, obviously, to mitigate that.

It's not going to go down to the level it was before. We benefited from a substantial portion of revenue skewed toward lower tax states, like Nevada and Arizona comparatively. As this has become more of a national revenue profile, we're in more states that have higher state income taxes. So I think we can keep it into the higher 20%s. But I'm not looking for it to go back to the mid-20%s, as it was.

Understood.

And just one more, if I may. You mentioned you're going to manage the GE business to approximately 10% of your loan book. It looks like it's 12% today. Are you going to be looking to just hit the brakes on growth in that category, or potentially sell to get down to that 10% limit? Just some color on how that trends over the next little bit?

Casey, it's about right at 10% today. If you add in the loan book to the denominator, it's just a hair over 10% -- and using the discounted amount, which is the amount that shows up on our books.

Yes, right. Okay. Great. Thanks.

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

Hello, good morning.

Good morning, Brad.

Dale or Robert, just to follow up on Casey's question. In terms of amortization on the hotel book, it sounds like you probably aren't going to be adding to it. So we should just assume that continues to decline over the next several quarters. And then at some point, you may look at maybe backfilling some of those loans. Is that kind of how to think about it, at least over the near term?

I think the best way to think about it would probably be somewhat flattish. They typically have about $300 million to $400 million a year in amortization pay-off. So we'll get that replenished.

I think there's some good opportunities out there. But also recognize, knowing this hotel business pretty good -- I've been an owner-investor for 25 years, and that was my dad's business. So I grew up in it. It's fairly sensitive to the economy. And like other areas of real estate, these low interest rates have made valuations in many areas pretty frothy.

So we're going to be cautious and make sure our underwriting is really sound. It's not a time to go crazy, growing the hell out of a loan book with hotels. But there's good selective opportunities, and the Company has some really good core customers. So I think if you think of that book as more flattish with the new originations replacing the amortization, that's probably a general way to look at it.

They've participated some of their loans in the past. There are different things that we can do that enable them to continue to be important in the space and yet manage our exposure on our balance sheet.

That's great. That's helpful.

And then, Robert, just on the deposits, I know you have put some incentives in place to really incent your folks to grow deposits. Can you just talk about more color behind what happened, I guess, this quarter? And was it several teams that came over or just refocus or -- because it looked like it was a pretty broad-based growth, really, in all regions, all business lines.

Yes, it was pretty broad-based. We do get a good bump in our Homeowner Association Banking Group, and that's cyclical. So in the first quarter, that's when a lot of the new businesses move over because of the timing of when they mail out all their payments for the year and stuff. So that was a big boost there, and the rest of it was pretty broad-based.

We're getting exposed to a number of larger deposit opportunities, especially as some of the bigger banks are exiting some of those relationships with the liquidity rules they have. And then some of the niches we're in -- whether it's life science or technology, municipality -- they're just fairly deposit-rich opportunities. So we just put a little more focus on the deposit side.

Okay. And then final question, with the GE deal now closed, what's your appetite for more M&A? It doesn't really seem like you have to do something, but just curious what your appetite is at this point.

Well, appetite is pretty much the same. The GE deal's pretty simple. It's not a heavy integration. It's no deposits, no offices, and 230 loans. So that integration is not going to be complicated.

The key there is making sure the liquidity growth and all that and capital ratios and all that are good. So operationally, it's not a challenging deal at all. Our appetite is the same as it was last quarter.

Great. Thank you.

Thanks.

The next question comes from Brett Rabatin of Piper Jaffray.

Hello. Good morning.

Hello.

I wanted to just ask, Robert, you talked about seeing some pullback or in the first quarter, obviously, some concerns around the economy at one point. I was just curious for how you see things playing out over the next year, what you're seeing in terms of the economy and how you feel about it at this point?

I think the overall general economy in the markets we're in are pretty good. I think you see some softness in some areas, other pockets. Obviously, you're hearing stuff about some areas on the East Coast and some of the areas where there's oil and gas. But in the markets we're in, it's pretty solid.

But the competition, in terms of pricing, is getting stiffer. And we just think that we have to take a close look at risk adjusted returns. Fortunately, we've got a lot of different products we can offer.

We're not stuck having to compete after these commodity-type credits, like apartment mortgages or some of the owner-occupied CRE with some of the competitors are offering high 2%s, low 3%s, in a 7-, 10-year, fixed rate loan. I mean, we're just not doing some of that.

Okay.

We lost a deal to an LA-based bank a couple months ago on a term real estate loan. It's a really safe loan, but they undercut us by 150 basis points. So there are things going on out there where a lot of the competitors are happy with a 2.5%, 3% margin. And over time, I think our business carries too much risk for that.

Okay. That's good color.

And then it sounds like the portfolio that you've acquired is underwritten pretty conservatively. But I was curious; you mentioned the 65% LTV and how to get there, and that was partly a function of the cap rates. What kind of handle on the cap rates -- do you have an idea of the assumption there?

Their systems are really good, and they have a lot of controls in place. And what I like about their systems, basically they do a few things really good that I like. For one, they've got a couple people that actually underwrite the franchisors and the business lines the franchisors have.

They also, when they look at underwriting credit, they will go back 10 years and look at average daily rates, occupancy and RevPAR in particular markets. So they're cautious to lend into what's been a good market for the last 12 months. They want to know how was that market during the last recession.

Then what they do is they pull from a lot of databases. So they look at what is the current cap rate in a particular hotel market right now because you could be deceived by saying okay, we got a 1%-2% cash flow coverage from a hotel. But that hotel may be in a market that people are really nervous about, and so that cap rate may be 10% or 11%. And so the value of that hotel may not be what it appears to be, based on the debt service coverage.

And so they're trying to get together -- and it's pretty good -- more real-time valuations of these loans. And that was one of the things in general that really kind of sold me on the Company is well, one, I know the business pretty good.

Two, it's local. But really, the way they underwrite and the type of metrics they use are really good. And so they've got a really good handle on how these hotels are performing and how to underwrite them. And some of the things they do, I'm going to use in all other areas of our Company.

But that's kind of what they do. You could go to an area maybe in Texas or Oklahoma and have pretty good cash flow today. But those cap rates could be 11%, which is -- you could go to another market, and the cap rate could be 6.5% today.

Okay. Thanks for all the color.

Next we have a question from Brian Klock of Keefe, Bruyette & Woods.

Good morning.

Good morning, Brian.

Congratulations on the GE Capital loan purchase. From what you've talked about, it just seems to me highlights again pretty low-risk and high-profitable deal for you.

So does it make sense -- I'm kind penciling out something that looks like the return on those assets you're acquiring because it's pretty low overhead. Something that's north of 250 basis points of ROA on that acquired portfolio, does that sound like--?

Well, I said it's about $100,000 a day pre-tax.

Yes, okay. And then I guess having said that, if you don't grow earnings from this current quarter, which I think seems unreasonable, that's an EPS accretion that could be something in the 12% to 13%, even maybe 14% range. So does that sound right, thinking about that kind of accretion from the deal?

$100,000 a day. (laughter)

If you look at the pieces of this -- so the margin, excluding what might happen on accretion of discounts, is not much different than ours. But the cost associated with it, this is operates at a 30% efficiency ratio out of the gate and improving starting in the fourth quarter from there. So that's a pretty good number.

One of the key measures of productivity we look at for ourselves is how much of the balance sheet does each person carry? So at Western Alliance, if you add our loans plus our deposits together and divide that by our FTE, which is just under 1,500, it's $16 million per person.

GE -- obviously it doesn't come with a funding source, so there are other elements you need. But on a marginal basis, that number is $40 million per person. You take 35 people and divide it into just under $1.4 billion.

So that is dramatically much more efficient than this. And so consequently, it drives you, as you're alluding to, Brian, to a higher ROA and higher incremental performance relative to the size of this balance sheet, the size of Western Alliance's balance sheet, getting to double-digit accretion, like you mentioned.

Okay, great.

And then, Robert, you aren't turning off loan growth, obviously. You're going to look at liquidity. But given the strong deposit growth you've had to fund this deal with a lot of low-cost deposits, you may not get back to what that target was before. But the growth rate should be better than you had in the first quarter from an organic Western Alliance perspective going forward.

Yes, I think it will. I think that's accurate.

Okay. Thanks for your time. Appreciate it. And congratulations.

Thanks.

The next question comes from John Moran of Macquarie.

Hello.

Hello, John.

Just a follow-up on the GE piece of things. I understand it's a somewhat more volatile stream here. But any sense of what sort of through the credit cycle loss content in that book would be?

I know that, obviously, it's bought at a discount to par here. But what provisioning requirements might look like kind of once we're through the initial phase of this?

Yes, we've got those numbers on what the losses were during that period.

And I will say too, obviously, that was pretty tough recession. And they did change their business model a little bit. They went more upper end in terms of in the limited service space. And I mentioned earlier in the call, right now 97% of the portfolio is upper scale or upper middle. And so they did make some adjustments from that.

But if you want to look at what their historical losses were during the last recession, those numbers -- do you have them, Dale?

Yes. We also ran this through the Moody's Commercial Mortgage Metrics Program. And the losses based upon the baseline case for the CCAR process are quite nominal. And then in the severely-adverse scenario, which I don't think anyone is projecting, those numbers are really on top of the total discount that is in the transaction.

Got you. So even in a sort of a severely stressed scenario, we're looking at 5% discount to par or whatever coverage you have.

Yes, using the CCAR scenario.

Got you. Okay. Perfect. That is helpful.

Then the other kind of just on credit. I guess Simi Valley saw some charge-off activity out of the early stage book. I know Bridge is just a little bit different than that. But are you seeing anything kind of bubbling up out of that portfolio that has you incrementally concerned at the margin? Or are you feeling pretty good there?

No, I think we're feeling pretty good. Remember, our innovation loan portfolio is about $564 million at quarter end. And the majority of that portfolio for us continues to be underwritten by collateral with really limited exposure to venture debt or enterprise lending.

And so the fluctuations in valuations, which has been the biggest concern, I think for this year, investors continue to believe that the valuation's probably the biggest challenge based on the industry. In spite of the fact that fundamentally, BC investment continues to have pretty good results. Venture capital fund raising in the first quarter of 2016 was $12 billion. 57 new funds raised, which is about a 50% increase over a year ago. But it's mostly concern over valuations.

And when you look at the stage that Bridge is in, we're not quite as exposed to that risk. And in addition, with some of these companies having to stay private longer, it actually gives us a little bit of an opportunity to pick up some new businesses that are going to remain private for a little bit longer.

Long term, the venture funds' performance is still pretty good. 10-year return for that asset class is 11% versus 8% for the NASDAQ and 7% for the S&P. So I don't see significant impact in that regard to our specific book at Bridge.

Perfect.

And then last one for you, Robert, just on M&A. Obviously, GE, kind of done and that will be the focus here over the near term. But preference in terms of whole bank versus line of business or additional portfolio deals or any thoughts around what's going on in that environment?

Yes, we continue to have a lot of discussions with companies. The companies that we've done business with, where we've done deals and they've gotten our stock, they've done well. But our business is to create value for our shareholders, not someone else's shareholders until they become our shareholders.

And so we're going to want to do deals that make sense for our shareholders. And we're just not out to do deals that make the Company bigger so Dale and I can get higher base salaries.

So we'll look at lines of business. We'll look at whole banks. We've got some discussions and strategic discussions in markets we like with companies, but it's all going to have to work. We're not just going to do acquisitions to get big.

Okay. Understood. Thanks very much.

Next we have a question from Gary Tenner of D.A. Davidson.

Thanks. Good morning.

Good morning.

Dale, I just had a follow-up question for you on expenses. You mentioned that some of that first-quarter personnel line was impacted obviously by seasonal FICA payroll stuff, as well as less of sort of adjustment for FAS 91.

Without a recurrence of those, as presumably loan production improves in second quarter and the FICA impact, you also said that expenses ex-GE Capital would be flat. So what's the offset to some of the personnel line relief that you might get this quarter?

I've been guiding to kind of mid-single-digit annualized growth rate in expenses, which basically is 1.25% per quarter, right? So about $1 million per quarter. And so that's kind of just the natural growth rate.

We hired seven new originators this time. Our staff was up 14. Our balance sheet continues to grow. So we're always kind of layering in additional infrastructure to keep up with the balance sheet that we're adding on. So it's going to grow naturally about $1 million per quarter.

This quarter, I don't expect that to shine through at all because of the savings we're going to have on the FICA taxes that you mentioned. And I'm not exactly sure what the loan growth is going to be, but I don't think it's necessarily going to look for another $1 million of expenses there. So it's just the natural inherent increase in the expense side relative to the revenue line.

We think we're going to still keep strong, positive operating leverage going. But that growth will be absorbed through the reductions that we're going to see in the FICA, in particular.

That helps. Thank you.

Thank you.

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

Nothing else to add. Appreciate you taking the time to listen to our first-quarter update, and we'll visit with you again in 90 days. Thanks.

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