Western Alliance Bancorporation Common Stock (DE)

Good day, everyone. Welcome to the earnings call for Western Alliance Band Corporation for the fourth quarter 2020. Our speakers today are Ken Vicchione, President and Chief Executive Officer, and Dale Gibbons, Chief Financial Officer. You may also view the presentation today via webcast through the company's website at www.westernalliancebandcorporation.com. The call will be recorded and made available for replay after 3 p.m. Eastern time January 22nd, 2021 through February 22nd, 2021 at 11 p.m. Eastern time by dialing 1-800-585-8367 using conference ID 909-0267. The discussion during this call may contain forward-looking statements that relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. The forward-looking statements contained herein reflect our current views about future events and financial performance and are subject to risks, uncertainties, assumptions and changes in circumstances that may cause our actual results to differ significantly from historical results and those expressed in any forward-looking statements. Factors that could cause actual results to differ materially from historical or expected results are included in this presentation. The related earnings release and our 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 Ken Vignone. Please go ahead.

Good afternoon, and welcome to Western Alliance's fourth quarter earnings call. Joining me on the call today is Dale Gibbons and Tim Bruckner, our chief financial officer and chief credit officer. I will first provide an overview of our quarterly results and how we are managing business in this current economic environment, and then Dale will walk you through the bank's financial performance. Afterwards, we will open the line to take your questions. In 2020, Western Alliance broke many of our own records for balance sheet growth, net interest income, and earnings, all the while fortifying our balance sheet position. Our strategy to align the company with strong borrowers nationwide provided us the strength and flexibility to navigate the economic volatility as we grew our balance sheet and income while simultaneously managing asset quality. Despite external challenges, financially, 2020 was a strong year and was our 11th consecutive of rising earnings. For the year, we produced record net revenues of $1.2 billion, net income of $506.6 billion, and EPS of $5.04, 4% greater than 2019, despite increasing the provision expense by $124 billion. Our focus continues to be on PPNR growth, which rose approximately 20%, $746 million, and net interest income increased $126.5 million, or 12%, while total expenses increased a modest $9.6 million. To put this in perspective, 2020 revenue expanded more than 13 times the rate of expenses in a difficult, uneven, and complex operating environment. Given all these actions, Ansible book value per share grew 16.4% year-over-year to $30.90. Turning to the fourth quarter results, we achieved a record $193.6 million in net income and EPS of $1.93 per quarter, an increase of 54% from prior year. These results benefited from a $34.2 million reversal credit loss provision consistent with our strong asset quality results. and improved go-forward consensus economic outlook. Outstanding quarterly loan and deposit growth of $1 billion and $3.1 billion respectively lifted total assets to $36.5 billion, which was driven by broad-based growth throughout our business lines and geographies as clients begin to plan their investments for future opportunities. Additionally, several of our internal business initiatives gained traction, For the full year, loans increased $4.5 billion, excluding Triple P program, by 21%, and deposits grew a record-shattering $9.1 billion, which we believe creates a strong funding foundation for ongoing loan and earnings growth as the economy continues to heal from COVID shutdowns. This balance sheet growth propels Medicare's income to climb $315 million for the quarter, or 16% on a year-over-year basis. Quarterly NAM was 3.84%, up 13 basis points from the third quarter as triple B income improved and CB costs fell. Fee income increased to $23.89 for the quarter, aided by $6.4 million of equity and warrant income. On a four-year basis, fee income grew a healthy 8.8%, $70.8 billion. Full-year operating non-interest expense grew $9.6 million to $491.6 million, reducing an efficiency ratio of 38.8%. In the fourth quarter, our efficiency ratio improved to 38.2% as revenue growth was four times non-interest expense growth and continues to provide incremental flexibility to grow PPNR. Asset quality continued to improve this quarter as our COVID remediation strategy produced increasingly positive results for our clients. Total classified assets declined $102 million in Q4, the 61 basis points of total assets, which is lower than Q1 2020 levels on both a relative and absolute dollar amount, just as the pandemic impact was being felt. At quarter end, total deferrals has fallen to $190 million of 70 basis points of total loans, including $77 million for low-LTV residential loans. As of today, there are less than $10 million of deferrals excluding the residential portfolio, and all of our hotel franchise finance loans are paid as agreed. These noticeably positive credit trends, the improved consensus economic outlook, and loan growth in the low-risk asset classes drove our $34.2 million release in loan loss reserves this quarter. Here we'll go into more detail on specific drivers of our provision, but our total loan ACL to funded loan ratio, excluding triple P loans, now stands at 1.24%, or $316 million. And total loan ACL to total classified assets is 142%. Charge-offs were $3.9 million in Q4, and full-year charge-offs were six basis points of loans. A robust PPNR generation continues to drive strong capital levels with a CDT loan ratio of 9.9%, supporting 28% year-over-year loan growth. Return on average assets and return on average tangible common equity were 161 basis points and 17.8% spectrum. we remain one of the most profitable banks in the industry. As we demonstrated throughout 2020, we will continue to support our clients and are encouraged by their participation in the Triple C program as the second round is rolling out. We have begun processing applications and are seeing steady volumes. But given the size constraints and other factors, we don't expect the total amount to rise to the levels we saw in round one. Finally, and most importantly, all of our accomplishments not be achieved without the immense efforts made by the people of Western Alliance to successfully respond to the challenging COVID-19 environment, which has strongly positioned and prepared the company for whatever may come our way as we enter 2021. We take pride in our peer-meeting performance in good times, but above all, during the challenging moments. Dan will now take you through our financial performance. Thanks, Gary. For the quarter, Western Alliance generated net income of $193.6 million, or $1.93 EPS, each at more than 40% on a linked quarter basis. As mentioned, net income benefited from a release of provision expense of $34.2 million, primarily driven by improvement in the economic outlook during the quarter and low growth and lower risk asset classes. Net income grew $30.1 million during the quarter to $314.8 million, an increase of 10.6% quarter over quarter and significantly above Q2's performance to which we guided. Non-interest income increased $3.2 million to $23.8 million for the prior quarter, supported by $5.1 million of warrant gains related to our technology lending. Non-interest expense increased $8.1 million, mainly driven by an increase in incentive accruals as our fourth quarter performance exceeded the original budget targets. which were established pre-pandemic. Continued balance sheet growth generating superior net interest income, growth pre-provision, net revenue of $206.4 million, up 30.4% year-over-year, and up substantially from the first and third quarters of 2020, as the second quarter benefited from one-time items of Triple B loan fee recognition and Banco Life Insurance restructuring. For the year, Western Alliance generated record net income of $506.6 million, or $504 per share, an increase over full year 2019, even when considering elevated provision expense of $124 million for the year. Net interest income grew $126.5 million during the year to $1.2 billion, an increase of 12.2% year over year, mainly attributable to increased loan balances triple P loan fees, and a 49% reduction in interest expense. Non-interest income increased $5.7 million to $70.8 million from the prior year. We recognize the one-time benefit of a fully restructuring during Q2 of $5.6 million. Finally, non-interest expense increased $9.6 million, or just 2% over the year, as increases in short-term incentive accruals and technology costs were offset by lower deposit costs. Turning out our net interest drivers, investment yields decreased 18 basis points from the prior quarter to 261 and fell 35 basis points from the prior year due to a lower rate environment. On a linked quarter basis, loan yields rose 20 basis points following increased yields across most loan types, mainly driven by a changing loan mix and higher PPP yields related to prepayment assumptions on forgivable amounts. 3P yield for the quarter was 3.67% compared to 1.76% for the third quarter. Interest-bearing deposit costs were reduced by 6 basis points in Q4 to 25, with an end-of-the-quarter spot rate of 23 basis points as higher-cost CDs rolled off. Spot rate for total deposits, which includes non-interest-bearing deposits, was 13 basis points. We expect funding costs have essentially stabilized at these levels. However, there could be marginal benefits as higher cost CDs continue to mature and are replaced at lower rates. Current spot rates indicate a relatively stable margin as we enter 2021. Some decline in loan yield is expected as the mix has changed to lower risk segments. With regards to our asset sensitivity, our rate risk profile has declined notably since the beginning of 2019. with 82% of our loans now behaving as fixed due to floors or variable rate loans and mixed shifts towards fixed rate residential loans. We continue to be asymmetrically positioned to benefit from any future rate increases with an estimated increase in net interest income of 5.7% from a 100 basis point rate increase in a parallel shock scenario versus a 0.9% contraction in net interest income if rates fell and flatlined at zero. As Ken mentioned, this year we demonstrated our ability to grow net interest income by 15.7% year-over-year despite the transition to a substantially lower rate environment. Net interest income increased 30.1 million or 10.6% during the quarter as net interest margin increased 3.84%. Margin benefited from both the true-up related to three triple P fee recognition favorable deposit mix shift can improve deposit rates. As mentioned earlier, during the fourth quarter, our extraordinary deposit growth and building liquidity continues to weigh on the margin and had a negative impact of nine basis points this quarter. Adjusting for this, the margin would have been slightly above the 3.9% guidance we gave during the last quarter recall. 3P loans increased our NIM during Q4 by 11 basis points as we trued up from the changes to prepayment assumptions made during Q3, resulting in a 3P loan yield of 3.67%. Notice the gold line on the bar chart showing NIM excluding volatility related to 3P. NIM was 3.8% for Q4 and essentially flat from the third quarter. Average excess liquidity relative the loans increased $467 million in the quarter, the majority of which is held at the FRB earning minimal returns, which reduced NIM by approximately nine basis points in aggregate. Given our healthy loan pipeline and ability to deploy these funds to higher-yielding earning assets, we expect margin drag to dissipate in coming quarters. Referring to the chart on the lower left section of the page of the $43 million in total triple fee loan fees net of origination costs, $11 million was recognized in the fourth quarter. We recognize the reversal of 3P loan fees in the third quarter of $6.4 million and expect fee recognition to be approximately $6.6 million in Q1 and taper off as prepayments and forgiveness are realized. As the second round of 3P is just underway, These fee accretion assumptions only apply to the initial round of funding. Turning now to efficiency, our efficiency ratio improved to 38.2% in Q4 as the increase in expenses was outweighed by revenue growth and only rose 2% from the fourth quarter of 2019. Excluding PPP net loan fees and interest, the efficiency ratio for the quarter would have been 39.9%. and as we indicated last quarter, should be returning to historical levels in the low 40s. Pre-provision net revenue increased 25.2 million or 13.9% from the prior quarter and 30.4% from the same period last year. This resulted in pre-provision net revenue ROA of 2.37 for the quarter, an increase of 15 basis points from Q3 and equal to the year-ago period. This strong performance in capital generation provides us significant flexibility to fund ongoing balance sheet growth, capital management actions, or meet credit demands from our clients. Our strong balance sheet momentum continued during the quarter as loans increased $1 billion net of $271 million of Triple P loan payoffs to $27.1 billion, and deposit growth of $3.1 billion brought our deposit balance to $31.9 billion at year end. Inclusive of 3B, loans grew 28% year-over-year, while deposits grew approximately 40% year-over-year with our focus on low-loss loan segments and DBA. The loan-to-deposit ratio decreased 84.7% from 90.2% in Q3 as our strong liquidity position continues to provide us with balance sheet capacity to meet funding needs. As deposit growth continues to outpace loan origination, our cash position remains elevated at $2.7 billion a year end. However, we believe it provides us inventory for selected credit growth as demand resumes. Finally, tangible book value per share increased $1.87 over the prior quarter to $30.90, with an increase of $4.36, or 16.4%, over the prior year. Our strong loan growth is a direct result of our flexible business model, which combines national commercial banking relationships with our regional footprint and enables thoughtful growth throughout economic cycles. The vast majority of the $1 billion in growth was driven by increases in C&I loans of $655 million, supplemented by CRE non-owner-occupied loans of $248 million. Residential and consumer loans now comprise 9.2% of our loan portfolios. while construction loan concentration increased modestly to 9% of total loans. Within the CNI growth for the quarter and highlighting our focus on low-risk assets, capital call lines grew $408 million, mortgage warehouse lines grew $413 million, and corporate finance loans decreased $122 million this quarter. Residential loan originations added $56 million to balances by quarter end net of refinance activities. We continue to believe our ability to profitably grow deposits is both a key differentiator and a core value driver to our firm's long-term value creation. Notably, year-over-year deposit growth of $9.1 billion is more than double the annual deposit growth of any previous calendar year. Deposits from $3.1 billion are 10.7% in the fourth quarter, driven by increases in savings and money market of $1.8 billion, interest-bearing DDA of $842 million, and non-interest-bearing DDA of $450 million, which comprises 42% of our deposit base. Robust activity in tech and innovation and market share gains in Mortgage Warehouse continue to be significant drivers of deposit growth during the quarter. Additionally, one of our deposit initiatives that is fully online contributed over $1 billion in deposit growth in 2020. Looking at asset quality, total classified assets decreased $102 million in Q4 due to credit upgrades, payoffs, and refinance activity away from wall. Our non-performing loans and ORE ratio decreased to 32 basis points to total assets, and total classified assets fell to 61 basis points of total assets at year-end, which was below the ratio at the end of 2019. Special mention loans decreased $26 million during the quarter to 1.67% of funded loans. As we've discussed before, special mention loans are a result of our credit mitigation strategy to early identify, elevate, and apply heightened monitoring to loans or segments impacted by the current COVID environment and fluctuate as credit migrates in and out. We do not see a risk of material losses coming from these credits. Regarding loan deferrals, as Ken mentioned, as of today, we have less than $10 million of deferrals, excluding approximately $77 million in low-LTV residential loans with a rated average loan-to-value of under 67%. All of our hotel franchise finance loans are paying as agreed, and our sophisticated hotel sponsors continue to confirm support for their projects. Net credit losses of $3.9 million per six basis points of average loans were recognized during the quarter, compared to $8.2 million in Q3. Our loan allowance for credit losses decreased $39 million from the prior quarter to $316 million due to improvement in economic forecasts and loan growth in portfolio segments with low expected loss rates. In all, the total ACL to funded loans declined 20 basis points to 1.7% or 1.24% when excluding Triple P loans. On a more granular level, our low-loss classes account for approximately 40% of our portfolio and include mortgage warehouse, residential and HOA lending, capital call lines, public finance, and resort lending. When excluding these components, the ACL for funds and loans under a major of the portfolio is 1.7%. We continue to generate significant capital and maintain strong regulatory capital ratios, with tangible common equity tangible assets of 8.6% and a common equity tier one ratio of 9.9, a decrease of 10 basis points during the quarter due to our strong loan growth. Inclusive of our quarterly cash dividend payment of 25 cents per share, our tangible book value per share rose $1.87 in the quarter to $30.90, an increase of 16% in the past year. We continue to grow our tangible book value per share rapidly as it increased at three times that of the peer group for the past six years. I'll now hand the call back over to Jim. Thanks, Dale. We believe that our fourth quarter performance is the baseline for future balance sheet and earnings growth. Building off the robust growth we had in the fourth quarter, our pipelines are strong, and we expect loan and deposit growth of $600 million to $800 million for the next several quarters. Both loans and deposits each have their own cyclical and seasonal behavior that are not aligned on a quarterly basis. As Dale mentioned, given our deposit growth and liquidity build, we expect there to be some downward pressure on NIM related to NICS changes and the deployment of liquidity into attractive asset classes. Additionally, we will continue to see NIM influence on a quarterly basis by the wave of Triple P loans being forgiven and the second round of Triple P loans coming online. Strong PPNR growth will continue as balance sheet momentum will drive higher net interest income, which more than offsets the planned increase in non-interest expense. Looking ahead, we will continue to invest in new product offerings and infrastructure to maintain operational efficiency. which will eventually push our efficiency ratio back to sustainable levels in the low 40s. Our long-term asset quality and loan loss reserves are informed by the economic consensus forecast, which, if consistent going forward, could imply a steady reserve ratio. Depending on the timing and pace of the recovery, there could be some loan migration into the special mention category, but we do not expect material migration into substandard, We believe that the provisions in excess of charge-offs since the pandemic began are more than sufficient to cover charge-offs through the cycle, as we do not see any indicators that apply material losses are on the horizon. Finally, Wall is one of the most prolific capital generators in the industry. Our strong capital base and access to ample equipment will allow us to take advantage of any market dislocations and any leading risk-adjusted returns, and to address any future credit all while maintaining flexibility to improve shareholder returns. At this time, Dale, Tim, and I are happy to take your questions.

Ladies and gentlemen, to ask a question, please press star, then the number one on your telephone keypad. We'll pause for just a moment. You can pause the Q&A roster. Your first question comes from Brad Millsaps with Piper Sandler. Your line is open.