Western Alliance Bancorporation
Q4 2016 Earnings Call Transcript

Published: 27 Jan 2017

[Operator:]

Good day, everyone. Welcome to the Earnings Call for Western Alliance Bancorporation for the Fourth 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.westernalliancebancorporation.com. The call will be recorded and made available for replay after 2.00 p.m. Eastern Time; January 27, 2017 through Monday, February 27, 2017 at 9

[Robert Sarver:]

Thank you. Welcome to Western Alliance’s fourth quarter earnings call. I’d like to start up by wishing everybody a happy, healthy and prosperous New Year for 2017. 2016 for us was really a great year on all fronts and we are happy to share the news with you. So, Dale and I are going to go through some of these slides in the deck that’s posted on the website, and then we’ll open up the lines for your questions. We closed out 2016 with another record year. Our net income was $69.8 million or $0.67 a share for the quarter excluding $0.03 in non-reoccurring merger charge from our systems conversion. Diluted EPS was $0.70, up 23% from the $0.57 number in the fourth quarter of 2015. On a linked-quarter basis, our net interest margin rose 2 basis points to 457, which benefited our efficiency ratio as well as it improved to 42.4%. Driven by C&I, loans grew $175 million during the quarter to $13.2 billion and deposits were up $107 million to $14.5 billion. Non-performing assets to total assets were flat from the third quarter at 0.5% of total assets and are down over 20% from 65 basis points a year ago. In the fourth quarter, we had net credit recoveries of $800,000 and net loan losses were only 2 basis points for the whole year of 2016. Our tangible common equity ratio rose 9.4% at year end and our tangible book value increased to $15.17. For the full year, our net income climbed 33% to $260 million and our earnings per share rose 23% to $2.50. Our return on assets and return on equity were both amongst the best in the industry at 1.61% and 17.7% respectively. Net interest income for the fourth quarter increased $2.8 million or 1.6% from the second quarter to $175.3 million and is up $32 million or 22% from the prior year. Operating non-interest income fell slightly to $10.5 million, as warrant revenues slipped, operating expense essentially was held flat at $82.7 million as an increase in some consulting costs were largely offset by other savings and expenses. Operating pre-provision net revenue rose 2.3% during the quarter to $103 million. Our credit loss provision fell to $1 million as we had another net recovery quarter. Acquisition and restructuring costs were $6 million reflecting the completion of our conversion of our core banking platforms for both Bridge Bank and the GE hotel franchise transaction. In addition, we incurred some charges from the consolidation of two offices in the Nevada market. Income taxes decreased $2.8 million to $26.4 million truing up our average tax rate for the year which resulted in diluted EPS of $0.67 and operating EPS of $0.70 if you add back one-time cost. For the year, total revenue rose 34% to just under $700 million, while operating expenses rose 26% to $319 million. This improvement in operating leverage which is a hallmark of how we try to operate our organization has taken our efficiency ratio down from 45.8 in 2015 to 43.4 in 2016. While the credit loss provision more than doubled $8 million, it reflected our high credit quality as net loan losses were only $2.4 million or 2 basis points of average loans for the year. Although the ending balances in the securities portfolio was flat at $2.8 billion for the quarter, the average loan balance increased over $300 million reflecting the full effect of purchases made in the third quarter. Lower yields on the third quarter purchases drove down the yield 9 basis points to 281. Loans slipped slightly 3 basis points as an improving average note yields was more than offset by lower accretion on purchased credits. Interest-bearing deposits cost were held flat as some pressure from rising rates was offset by selective deposit pricing reductions in premium accounts. Higher loan yields drove the reported margin up 2 basis points to 457. Excluding $7 million of accretion from purchased accounting entries, the core margin rose 7 basis points to 440. The graph on the right shows that we expect stable accretion from purchase accounting margin throughout this year. Actual accretion is likely be higher than what is shown here due to loan prepayment activity. Revenue growth, a bit above the rate of expense increase took our efficiency ratio down to 42.4, down about 3 points as I discussed earlier from the last year. Our branch like commercial banking focused model contributes to our low efficiency ratio and results in compensation costs continue to climb faster than total expenses rising from 56% in the fourth quarter of 2015 to 60% last quarter. The consistency of our performance shows up on our PPNR ROA of 2.4% and a 160 ROA. Both measures in the top docile performance compared to peers. Let me talk a minute for the balance sheet. Balance sheet was stable during the quarter as increase in loans was partially offset by a reduction in cash. 1% increase in total assets was funded by higher deposits as well as an increase in short-term borrowings, which remain at very low levels of less than one half of 1% of total assets. For the year 2016, assets grew 20% while our tangible book value per share grew 21%. Loan growth for the quarter was modest at a $175 million for the quarter and contributing to that was really three things; one, we were undergrowing our system conversion during the quarter which had a little bit of distraction. We had a number of people focused on that. Second thing is, we were digesting the $2.1 billion growth for the year, which included the GE purchase and then thirdly, to some degree, credit conditions across our industry and competitive pressures in our industry based on competition had to be a little more cautious in certain areas given where we are in the cycle and given some of the frothy asset valuations. So we are going to continue to focus on good solid loan growth, but also going to be very prudent in looking at generating the best risk-adjusted returns for our loan portfolio. We remain well within the 100% and 300% regulatory capital guidelines for construction investor commercial real estate loans at 70% in 244. Our deposits increased $170 million during the quarter mainly money market accounts and for the year, we had outstanding deposit growth, $2.5 billion of organic deposit growth with non-interest bearing DDA increasing $1.5 billion of that. Dale, do you want to step in and talk about the loan portfolio and capital?

[Dale Gibbons:]

Sure, sure. So, adversely graded assets remained strong with only NPAs of $98 million, 51 basis points of total assets on a dollar basis. Other adversely graded loans rose modestly during the quarter to $255 million, but it’s still lower than they were a year ago. Total adversely graded assets as a percentage of the balance sheet fell 19% to 2.07% during 2016. These figures are net of $28 million of purchase accounting discounts to unpaid principal balance on notes acquired. Gross credit losses of $1.4 million during the quarter were more than offset by $2.2 million of recoveries of prior charge-offs. Net loan losses hovered near 2 basis points, hovering near zero for the entire year. The loan loss reserve rose to $125 million at year end and is enough to cover eight years of gross loan losses at our 2016 runrate. Eight year reserve coverage is double the four year duration of our loan book. In addition to the $125 million reserve, our acquired loan portfolio was held at a $47 million credit discount to the unpaid principal balance of these borrowers. As a number of these loans may pay-off as agreed, at least a portion of this discount may also be used to cover credit charges. Together, it results in a reserve ratio of 1.3% of total loans. Each of the four major capital ratios rose during the quarter as our 17% plus return on tangible common equity exceeded our balance sheet growth. All have also planned from a year ago, particularly our total capital ratio which was up 1% to 13.2 as it was also augmented by our subordinated debt issuance last summer. While our return on tangible common equity remained above 17%, tangible book value per share rose 21% last year despite more sluggish growth in the fourth quarter from the revaluation of our available for sale securities in light of rising rates near the end of 2016. In our view, the market value reduction in the investment portfolio that is included on the balance sheet is a component of equity was easily dwarfed by the value increase on our core deposit base. As you know mark-to-market valuations of deposits remain off-balance sheet and do not affect of the comprehensive income.

[Robert Sarver:]

So, looking forward to this year 2017, Western Alliance remains asset-sensitive. We expect yields on our investment and loan portfolios decline in the first quarter of 2017 is primarily an increase in mid-December is reflected for the full quarter. However, as we usually warn, this increase will be tampered by 2% reduction of income earning days during the quarter from 92 to 90. Our days-adjusted margin should rise in the first quarter as increase in cost on non-maturity deposit accounts have been muted relative to prime rate increases. Given our asset-sensitive balance sheet, rising rate environment bodes well for net revenue increases while distribution-light delivery model helps contain expense growth. This should lead to continued improvement in operating efficiency over time. However, during the first quarter, revenues crimped by the reduction in days, while almost all expenses are driven on a monthly basis. This will likely differ in any efficiency benefit until the second quarter. In terms of asset quality, asset quality remained very strong during 2016 with an improving economic backdrop. We don’t currently perceive changes that would increase non-performing assets as gross charge-offs substantially. However, our long-running tale of recoveries is beginning to fade and result in modestly rising net loan losses this year. In terms of our balance sheet, we are budgeting a 12% organic growth for loans and deposits for this year. So we have pretty good pipelines and we’ll continue to, to be able to have good positive operating leverage in 2017 on an organic basis. Our capital accounts will continue to rise a little bit as our return on equity will exceed that 12% and that will put us in a good position to be not only defensive in terms of if the economy were to change with strong capital and liquidity but also to be opportunistic in terms of evaluating potential acquisition, loan and bank acquisitions for 2017. So with that, I would like to open it up for any questions that you have for Dale or I.

[Operator:]

Thank you. [Operator Instructions] And our first question comes from Casey Haire of Jefferies

[Casey Haire:]

Thanks. Good morning, guys.

[Robert Sarver:]

Good morning.

[Casey Haire:]

Rob, wanted to started on the loan growth outlook. If I grow the loan book 12%, that implies a decent acceleration in loan volume this year of roughly $1.6 billion or so, if my math is right versus $800 million organically in 2016. So, given your comments that, it’s getting more competitive out there. How do you - what categories are driving this growth?

[Robert Sarver:]

Well, we have to manage our business holistically and so, if you look at last year, we had a large acquisition $1.3 billion portfolio acquisition. And so we have to factor that in into how we manage the bank. And so I think you can’t really just look at the organic by itself. Had we not done the GE acquisition, our organic loan growth would have been larger. And we have some limits as to how fast we can grow this business. We are focused on strong risk management, asset quality, loan oversight, capital planning, forecasting, whatever. For us, the $2.5 billion growth in loans and deposits for 2016 is what we are comfortable with. So, I wouldn’t read too much into the organic growth for the year. I think you got to take into account the acquired growth with it.

[Casey Haire:]

Okay, so it’s holistic. It’s also factoring a potential M&A.

[Robert Sarver:]

Well, the 12% I gave you isn’t factoring M&A. But if we were to do acquire another loan book, then it’s very likely that organic growth would back off a little bit too.

[Casey Haire:]

Okay understood. And just maybe switching topics to the M&A front. How – what is the update there? Are loan portfolio opportunities – are you still coming across them? And what about on the whole bank front M&A?

[Robert Sarver:]

Yes, I mean, I think for us, for this quarter, on kind of finishing out the year is very important to really make sure we have the GE portfolio fully digest, had our arms around all the credits , the relationships, the people, the integration and then the computer conversion. And I think we’ve done that, feel pretty good about that. Then in terms of our system conversion, as it relates to our main systems converting on to the system bridge was on, that was the big undertaking for us. So we are in the process of kind of finishing to digest all that as well as enhancing some of the areas – other areas within the company and that will put us in a good position to be kind of have a fresh plate and start looking at opportunities. And we’ll see where we go from there. But it’s – there is definitely more sellers today than there was a year ago as prices have gone up. But as you know, we are pretty selective at looking at transactions that really make money for our shareholders. So, we have a history of not wanting to get big, be get big, and in our investor presentation, we got a great slide that shows loan and deposits as they’ve grown over time divided by shares outstanding and that’s one of the differentiators and why our stock does so well is, our growth tends to have neared our shareholders rather than just bigger balance sheet numbers and higher compensation numbers for the presenter. So, we are looking at a bunch of those opportunities and I think, 2017 will be interesting and I think there will be some opportunities, but I can’t tell you when or what.

[Casey Haire:]

Okay understood. And just lastly, just some housekeeping items. The tax rate, Dale, what can we expect going forward and the FHLB special dividends – sorry if I missed it, but what was that amounts benefiting the quarter?

[Dale Gibbons:]

We said it was about $400,000 additional. So, in terms of the tax rate, so we are looking for about a 28% average for 2017. That’s pretty close to where we were in 2016. If I recall, in the last earnings discussion that we had, I mentioned that that was our high watermark in about five years and that was driven by the significant increase we had and a fully taxable income from the GE transaction. We’ve put in place some elements that will push that rate back down and you saw part of that certainly in the fourth quarter. So we look for 28% in 2017. That will be skewed lower in Q1. So, it will be a bit – a couple points lower in the first quarter, but averaging for the year.

[Casey Haire:]

Okay, great. And then, we’ll see where we get from Washington in tax reform, but if assuming all else equal, is that 28% hold in the 2018?

[Dale Gibbons:]

Yes, I think that’s reasonable number for 2018. Yes, this doesn’t include anything regarding tax rate changes or anything like that.

[Casey Haire:]

Great, thank you.

[Robert Sarver:]

Thanks.

[Operator:]

And the next question will come from Timur Braziler of Wells Fargo.

[Timur Braziler:]

Hi, good afternoon. Just following up on the loan trends for the quarter. Was there any elevated levels of pay-off activity this quarter with the sharp rise in rates? And then, subsequent to that, what was the level of prepayment penalty fees or loan fees that were incurred during the quarter?

[Robert Sarver:]

Yes, we did have an increase in prepayment activity during Q4. It was about $500 million. And which maybe reflects some of the things you are talking about. But in terms of our loan yields for new credit, they were right on top of our average yield for our portfolio. So we don’t really see much change there.

[Timur Braziler:]

Okay, great. And then, just looking at the outlook for 2017, how much of that 12% organic loan growth is expected to come from the national businesses versus the regional banks?

[Robert Sarver:]

Only about half and half. But, about two-thirds of our national business is done within our core markets. So, you can look at a couple of different ways.

[Timur Braziler:]

Okay, that’s helpful. And then the commentary surrounding tougher credit and competitive pressures in some of your markets, this does still primarily reflecting commercial real estate in Northern California and I guess just more broadly on commercial real estate given your aptitude or your ability to put on additional growth and that really reaching that 300% level. Are you seeing any opportunities from others maybe stepping back in that space or is that still ultra competitive?

[Robert Sarver:]

That’s a good question. I mean, to a certain degree, there are some that are stepping back a little bit. A number of the community banks are above that – those numbers and so their business models kind of getting whacked right now and are out of the market. So we are seeing a little bit impact from that, but for us, it’s mainly looking across – let’s say, we got twenty different products that we have to offer and at different times, some of those products become a little more competitive from other banks and so the pricing gets kind of bad. Or perhaps there is a little deterioration in some of the terms and so we make adjustments and so, like one of my main jobs along with our Chief Credit Officer is to figure out where we should be more conservative, more aggressive in terms of how we are underwriting credit. That doesn’t necessarily means, we kind of say we are going to do more of this or less of this by saying we are not doing things, it means we adjust our underwriting. And so, as it comes to commercial real estate is a big example, type of transactions we are looking more today require, evolve around institutional type equity, where the loan to cost numbers have come down. So, the type of commercial real estate we are doing now is at a lower loan to cost than it was three or four years ago. So, commercial real estate would be one example where you have asset values that are at pretty high levels and when we underwrite that real estate, we look more at construction cost and want to be cautious in terms of the advance rates. So, that’s an example. We got other areas throughout the company where we find opportunities to do more and opportunities to do less. So, right now, some of the municipal stuff, there is opportunities to more. That market is little disruptive, people on churn rates and there is few uncertainties in the market and so we are picking up some good near investment or investment-grade credits that ordinarily would go into the public markets. And then there is other areas throughout the company where maybe our competition is a little stiff in some areas like on $2 million in under owner occupied commercial real estate. Seen spreads in there at 250 and under we are not doing that. So, it’s kind of – it changes from time-to-time, but I think, part of our secret sauce is to make sure we can book good risk-adjusted returns and are not just stuff doing traditional commercial real estate and C&I loans like most community banks. And so that diversification allows us to continue with good growth and also continue with the pretty good loan yield.

[Timur Braziler:]

Okay, great. Thanks for the color. Nice quarter.

[Operator:]

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

[Brad Milsaps:]

Hey guys.

[Robert Sarver:]

Hey, Brad.

[Brad Milsaps:]

Hey, Robert, just curious if you had the number of new lending hires you made in the fourth quarter and maybe in total for 2016 and if you would expect a similar number in 2017?

[Robert Sarver:]

I think we hired seven in the fourth quarter. I don’t know the number for the year. Obviously, that would include about eight from the GE hotel acquisition. But, yes, I see that continuing. And if anything maybe even picking up a little bit, given a little uncertainty in a few areas in California with some competitors and some of the landscape changes.

[Brad Milsaps:]

Sure. Any new niches or anything or any additional color there?

[Robert Sarver:]

Nothing new on the board right now, in terms of new niches, but always looking.

[Brad Milsaps:]

Okay. And I know fee income is a pretty small number. We’ve talked about a lot. I know you are not interested in trusts or anything like that. But is it more just kind of building on some of the FX products you have and things like that in terms of fees?

[Robert Sarver:]

Yes, we actually increased for our budgets, our bonus goals for 2017 for all our staff. We kind of tweak that number up a little bit on the fee income. So we are putting a little more effort on that. We’ve got a goal to grow our fee income by over $4 million this year. And so, that’s a point of emphasis.

[Dale Gibbons:]

And that’s core fee income sort of excludes things like bank owned life insurance. So that’s a double-digit growth rate.

[Brad Milsaps:]

Got it. Thank you guys.

[Operator:]

And the next question is from Brett Rabatin of Piper Jaffray.

[Brett Rabatin:]

Hi guys. Good morning.

[Robert Sarver:]

Hey, good morning.

[Brett Rabatin:]

Want to ask on the deposit side, thinking about 2017 in deposit growth and if you look at 4Q DDA was flat in the period, but averages were up nicely. Can you talk maybe about the seasonality in 4Q? And then, what you are doing to grow deposits in 2017 in terms of business lines?

[Robert Sarver:]

I don’t know if it’s so much seasonality as it is just a little volatility in terms of some of our deposit relationships that are sizable or in areas where especially like in technology and stuff and fund services where kind of money is coming in and out. So I wouldn’t necessarily call it seasonal, but, but our deposit pipelines are good. And we are – I guess, kind of telling me what we’ve been saying for several years in terms of roughly around that $300 million to $400 million a quarter organic growth rate.

[Brett Rabatin:]

Okay. And then, the other thing, I know at one point when you thought rates weren’t going to go up and you were reducing your asset sensitivity increases. I was just curious about your thoughts on rates this year and if you are doing anything or planning anything to increase your asset sensitivity?

[Dale Gibbons:]

We feel great. So, we’ve dialed in two increases in 2017. I think, maybe if anything happens, it might have been more than two based upon – relative strength in the economy, not just in our markets, but…

[Robert Sarver:]

It’s just where we got one of those disclosures on that people say that the…

[Dale Gibbons:]

Yes.

[Robert Sarver:]

Economic assumptions and forecast or as views and not necessarily the views of the corporate governance committee Western Alliance Bancorporation. As our C&I book has climbed at a faster rate than CRE that tends to make us more asset-sensitive. In 2016, as you know, we had a significant growth in our DDA, that would also tend to put it with a more asset-sensitive bias which we still retain. So we are looking for some NIM expansion based upon kind of the rate environment. But again, we are not going to bet heavily one way or the other. And so, we did a little bit of extension in the securities book. We are not really doing that now. But, we are poised for higher rates.

[Brett Rabatin:]

Okay. Thanks for the color.

[Operator:]

The next question comes from John Moran of Macquarie.

[John Moran:]

Hey, how is it going? Maybe just a quick follow-up on that, Dale, if you could help maybe to mention that for us, it maybe dollars or basis points for 25 movement and do the two increases in 2017 that you guys are looking for, does that include the one that we already got?

[Dale Gibbons:]

Right, when we got within 2016, I agree, the effect of that is 2017. So, no, I am looking for two changes from the FOMC in calendar year 2017.

[John Moran:]

Okay.

[Dale Gibbons:]

In terms of – yes, a rule of thumb is, if you just take per 25 basis points, everything else being equal, that would add about 20% of that number or a nickel to our margin.

[John Moran:]

Okay.

[Dale Gibbons:]

Do you major in economics?

[John Moran:]

Psychology.

[Dale Gibbons:]

Okay, so you are full qualified to pine on where rates are going. Although it’s pretty smart, so I may be right.

[John Moran:]

Okay. The other one I have was just on the OpEx run rate. I think last quarter we were talking about normalizing kind of mid-single-digit in terms of growth and then I am wondering if there was anything else that dropped out from the system conversion and how we ought to be thinking about that kind of in the 1Q here?

[Robert Sarver:]

Let me just say in general. We are going to get some economies of scale on the system side. And I think, that just where life is right now when it comes to technology, no matter what you are talking about technology. Things are cheaper, things that run now it’s also helped in areas throughout the bank to use technology as a way to become more efficient at doing certain things. On the flip side, we need some more higher level smart people to help us manage this company as we become bigger and more sophisticated. And so you are going to see some expense out at in that. You will see some efficiencies in technology, but most of all, you are going to see a growth in net interest income that’s going to more than offset all that and that’s probably one of the key differentiators us with a lot of our peers that’s our ability to consistently grow revenue with quality assets.

[Dale Gibbons:]

So, all these efficiency improvements that we make don’t actually reduce expenses on a dollar basis. But as I mentioned, the guidance that you’ve cited from before, yes, kind of mid-single-digits in terms of expense growth, we think is probably reasonable and that would be matched with a stronger performance in terms of net interest income given the balance sheet growth metrics that Robert outlined earlier. So we are looking for efficiency to continue to gradually improve, but expenses to continue to decline.

[John Moran:]

Okay, understood. With positive operating leverage and continued improvement in the efficiency ratio. Okay, great. Then, the other one I had, Robert, you are saying kind of focusing obviously at where do you guys see best risk-adjusted returns? I guess, in the national business lines you referenced municipal finance as a place with some uncertainty in opportunity there? If there is other areas in NBL that you’d feel kind of relatively more excited about today and then if you could give us a quick rundown on what you are seeing sort of in the regional banks by geography?

[Robert Sarver:]

Yes, we are, whole in smokes, kind of the state of the union? Okay, well, in terms of our specialty of our specialty groups I’d just point out a few broad examples, high level or just in other areas. In terms of medical and healthcare, lot of opportunities, lot of growth. In terms of technology and our business in technology, lot of growth opportunities in terms of those industries however I think you are going to see the banking industry probably have to look at that market a little more cautiously, looking at some of the regulatory guidance coming down the line. In terms of our hotel finance loans, our book is about where we want it to be, given this stage of cycle in the hotel business. So we are underwriting deals more cautiously, because next year, you are probably going to see a little bit of a flip in terms of absorption out – in terms of new rooms outpacing absorption. So we are a little more cautious there. We are looking at 40% downpayments on a lot of deals. So that book is probably going to just kind of stay about the same and will be replacing things. In terms of our mortgage warehouse business, you will see us probably do a little more mortgage servicing, financing. We’ve got opportunities with large customers with strong balance sheets, but you may see the overall volume in the mortgage warehouse business kind of flat to down a little bit with the rates going up. And so, it just kind of varies from place-to-place. But that’s kind of my high level view on the – on some of our specialty units and kind of where I think some of that’s going. In terms of our core business, we are fortunate now and that really all the markets we are in are pretty healthy and they also haven’t had recoveries that have been super strong. So I think there is some lags to it. So I continue to be bullish on Phoenix, San Diego, obviously, Los Angeles, but we are pretty small there. The Bay Area, on a commercial side it’s very strong, but we are not a big player in CRE in the Bay Area. So, it’s kind of more steady as you go in the different geographic regions and then our specialty units, it’s adjusting to the economy, our risk management appetite and regulatory guidance. I’d say Nevada looks good as well. Southern Nevada, and you can triangulate on that by listening to some of the large gaming enterprises there and how they look at what happened to tourists, I mean, everything else which is looking pretty strong.

[John Moran:]

Great, yes. I appreciate it. Thanks guys.

[Operator:]

The next question is from Gary Tenner of D.A. Davidson.

[Gary Tenner:]

Thanks, good morning. Just wanted to follow-up on John’s question regarding the regional segments, particularly Southern California, I think that was the one segment among the regions that had loan run-off and your growth in the other. So, could you just – as you have talked about the competitive dynamics in credit conditions maybe where that particular market differed from the others?

[Robert Sarver:]

I don’t know that it differed too much. We got one competitor in that market that’s pretty big, that’s not in the other markets, that’s a union. And there is some products that are pretty aggressive in, in terms of pricing owner occupied commercial real estate, that’s been a real struggle for us in Southern California. We haven’t really made the inroads we need to in the Los Angeles market and I think there is some opportunity. And quite frankly, we are a little disappointed in some of the loan growth there in San Diego, which I think we can do better on this year, but overall, I think the opportunities are pretty much about the same. We just did maybe execute as well last year.

[Gary Tenner:]

Okay, so as you look at new lenders or hires of that particularly a market that you would be focused on?

[Robert Sarver:]

It is, yes. Yes, it is. And our biggest opportunity is to really figure out that LA market in a way that we can have a meaningful impact with the right people. And so that’s kind of towards the top of the strategic planning agenda.

[Gary Tenner:]

Okay. Thanks for that. And then, Dale, when you were just commenting on – earlier on FHLB special dividend, you broke up a little bit. I didn’t catch the number.

[Robert Sarver:]

Yes, I believe we were at $400,000.

[Gary Tenner:]

$400,000, okay. Thanks guys.

[Operator:]

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

[Brian Klock:]

Hey, good morning guys.

[Robert Sarver:]

Hey.

[Brian Klock:]

So, Dale, could you tell us what – remind us what the size of the mortgage warehouse book is and what was the decline like in the fourth quarter?

[Dale Gibbons:]

It was about, let’s see here, $800 million and it was up about $70 million during the quarter.

[Brian Klock:]

Okay, gotcha. Gotcha, and Robert…

[Dale Gibbons:]

And my point on that, Brian, was I think there was a fair amount of business that got done in the fourth quarter. Rates start going up and people kind of got off the dime to do things. But I think, looking into the first half of this year, you are going to see probably a slowdown in terms of the refinance business which is obviously one component.

[Brian Klock:]

Got it, okay. That makes sense. And then, Dale, just wanted to follow-up, when you talked about the impact from the 25 basis point hike and you mentioned a nickel. So are you actually saying earnings per share, you are trying to say that’s the NIM impact is 5 basis points?

[Dale Gibbons:]

Well, it’s kind of both actually, so.

[Brian Klock:]

Okay, okay.

[Dale Gibbons:]

So, 5 basis points on the NIM given our earning assets and then you take that after-tax, you kind of get a nickel as well.

[Brian Klock:]

Gotcha, gotcha, And Robert, just maybe just follow-up I know you talked about some of the different things and thinking about the HFS portfolio and it’s where you want it to be and you’ve continued as you grow capital, you are seeing that concentration go down. I mean, is there any reason you are thinking about maybe taking that down lower from 280 now 260 to 240 now. Is there any point where you think you would turnaround and start growing again? Or it’s more just a risk-adjusted return you are focused on?

[Robert Sarver:]

What do you mean about the 240?

[Brian Klock:]

The 240% to concentration of your commercial real estate.

[Robert Sarver:]

Okay, yes, yes. We are – I mean, for one, we are going to stay within our policy in our guidance and regulatory expectations. So that just – that’s a fact. Now, below that, it depends on what the market gives us in terms of how we view underwriting. So we have ways based on different products in different markets, at looking at debt yields, looking at loan to cost of construction, looking at what future products are coming online, but absorption is and we are going to be sticky to our credit quality criteria. And if that credit quality criteria brings us in credit, that takes that number to 260 or takes it down to 220, so be it that’s so it will be. We just don’t see the policy limits here, as it’s really being restrictive at all in terms of what we are going to be doing. So, for example, if – let’s say our capital grows $75 million per quarter, roughly based upon earnings, or if we have a 100% retention of that, that’s $300 million a year. Multiply that by 3, the 300% tax, that means that with …

[Dale Gibbons:]

In quarter. $3 million for the year, 75 times then. So, if we make $75 million a quarter, 300%.

[Robert Sarver:]

Right, yes, so it’s $225 million per quarter, right.

[Dale Gibbons:]

It’s above $900 million a year.

[Robert Sarver:]

Yes, yes. And then if you, today only 38% of our loan book is actually in the 300% bucket. So if we say proportional to where we are, 38% of the 12% number that Robert mentioned on loans is significantly lower than what just our internal capital generation would allow us to provide. So we just don’t see the – any type of ceiling there. It’s really being relevant or restrictive.

[Brian Klock:]

That makes sense. Right, there is a lot of capacity to add with your earnings power.

[Robert Sarver:]

Capacity is not going to be – I don’t want to be redundant here, but the capacity is not going to be driven by how close we can get to those numbers, that without going over it will be driven by the market and what we think our prudent underwriting standards and where we think we should be lending money.

[Brian Klock:]

Got it. And just last question, if you think about that from origination of your own new credits, I guess, if you are looking at targets, is that any deterrent if there is a potential target out there that may have maybe too much commercial real estate?

[Robert Sarver:]

Yes.

[Brian Klock:]

Okay, okay.

[Robert Sarver:]

Yes. I mean, in two ways. One, what’s the absolute dollar that the target has and two, how well underwritten is the portfolio, compared to where we are in the cycle. I mean, so both, yes.

[Brian Klock:]

Great. Okay, thanks for taking the time. I appreciate it.

[Operator:]

The next question is from John Jones of RBC.

[Jon Arfstrom:]

Hi, Jon Arfstrom from RBC.

[Robert Sarver:]

Hey, good morning.

[Jon Arfstrom:]

Good morning. Most of my questions have been asked, in fact, I think, John Moran actually majored in clairvoyance. He took every single one of my questions. Yes, I’ve got a couple though I want to follow-up on the higher note yields you talked about, Robert, is that just a function of higher rates or are you actually seen spreads widen in certain areas of the loan portfolio?

[Robert Sarver:]

In some areas we are seeing it widen, in some we are seeing it shrink.

[Jon Arfstrom:]

Okay. All right. Can you give a little more detail?

[Robert Sarver:]

Yes, CRE is widening.

[Jon Arfstrom:]

Okay.

[Robert Sarver:]

Some of the more commodity-based products that are kind of cookie cutter and easy to do continue to be narrowing.

[Jon Arfstrom:]

Okay. And then, but you are expecting loan yields to generally rise in Q1? I know you talked about the day count, everything but loan yields are generally going up?

[Robert Sarver:]

Yes, yes, so, I mean, LIBOR rose throughout the fourth quarter. So you don’t necessarily see a lot more there, although I think the expectation is, again a rising rate environment starts to continue to climb. We’ve got north of $3 billion of LIBOR tied to pricing. The prime rate didn’t increase until mid-December. And that’s even a larger number in terms of repricing effect, in terms or tied to prime loan. So you are absolutely going to see that number in Q1.

[Dale Gibbons:]

Plus we do a lot of five - three, five and seven year fixed rate loans and those spreads rose 50 – 40, 50 BIPS too. So, that’s good.

[Jon Arfstrom:]

Seen any pressure at all in deposit pricing so far?

[Dale Gibbons:]

Selective, we have not changed our posted deposit rates, but there have been some kind of one-off types of things that we’ve done. We elevated our pricing and you can see that when we got the GE deal and then eased it off in the third and fourth quarter. So we are – overall, for the most part, the increase that we saw in the prime rate is not going to be spent on non-interest – on interest expense.

[Robert Sarver:]

Yes, the majority of our deposits come from Arizona, California and Nevada. We do have now about $2 billion in our Community Association Bank, Homeowner Association Bank that which, own maybe $1.3 billion or $1.4 billion outside of those three states, but aside from that, most of our deposit generation really comes from these three states and the beauty about most of those markets we are in, like San Diego, Phoenix, Tucson, Vegas, Reno, is that 80% of the deposit share in those markets is from three or four large national banks. So, our cost of funding is pretty closely related to how quick BoFA, Wells and Chase raise their interest rates on deposits.

[Jon Arfstrom:]

Okay, okay, good. Good, thank you and then just last question on the provision. I think, the message is, there is really nothing changing or going on in credit, but the provisions are likely to rise modestly and that’s just a function of less recoveries. Is that fair or is there anything going on in credit?

[Robert Sarver:]

No, that’s what it will be. I mean, we are going to have less recoveries and so, depending on what the charge-offs are, that will depend on the recoveries. So, if you want to just like figure about 1% for loan growth and the rest were charge-offs.

[Jon Arfstrom:]

Okay, okay. Thanks for the time.

[Robert Sarver:]

Okay, thanks.

[Operator:]

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

[Robert Sarver:]

Nothing other than thanks for joining us and we’ll be back in touch in 90 days to update you on the first quarter.

[Operator:]

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