Western Alliance Bancorporation Common Stock (DE)

Good day, everyone. Welcome to Western Alliance Bond Corporation's first quarter 2022 earnings call. You may also view the presentation today via webcast through the company's website at www.westernalliancebondcorporation.com. I would now like to turn the call over to Myles Pondelik, Director of Investor Relations and Corporate Development. Please go ahead.

Thank you and welcome to Western Alliance Bank's first quarter 2022 conference call. Your speakers today are Ken Vecchione, President and CEO, and Dale Gibbons, Chief Financial Officer. Before I hand the call over to Ken, please note that today's presentation contains forward-looking statements which are subject to risks, uncertainties, and assumptions. Except as required by law, the company does not undertake any obligation to update any forward-looking statements. For a more complete discussion of the risks and uncertainties that could cause actual results to differ, Materially, from any forward-looking statements, please refer to the company's SEC filings, including the Form 8K filed yesterday, which are available on the company's website. Now, for opening remarks, I'd like to turn the call over to Ken Beccione. Good morning, everyone. Besides Dale sitting alongside of me, Tim Bruckner, our chief credit officer, is also here today as well. So we had solid performance this quarter as the company passed the $60 billion asset milestone and were excited by the business opportunities before us. For the first quarter, Wall generated total net revenues of $555 million, net income of $240 million, and EPS of $2.22. We remain one of the most profitable banks in the industry with return on average assets and return on average tangible common equity of 1.64% and 23.9% respectively, which will continue to support capital accumulation and strong capital levels in the quarters to come. Balance sheet expansion continued with quarterly loan growth of $2 billion, or 21.2% annualized, and deposits rose by $4.5 billion, or 38.7% annualized, as we continue to effectively attract and deploy liquidity. Excluding Triple P runoff, loans grew $2.2 billion in the first quarter, with residential loans increasing $2 billion. Healthy commercial loan demand continued, but this quarter witnessed seasonal runoff of our warehouse lending loans by $640 million, caused by mortgage supply constraints associated with lower inventories industry-wide. Western Alliance Diverse loan drivers continue to propel growth in the regional banking divisions, up $533 million, tech and innovation up $131 million, and hotel franchise finance up $158 million. The flexibility of our national commercial bank franchise provides material opportunities to grow both sides of the balance sheet, and in the event of an economic slowdown, allows for alternative growth avenues by product, and geographic mix, unlike many of our competitors. Asset quality continues to remain stable as total non-performing assets modestly increase $19 million to 17 basis points of total assets and net charge-offs for only $200,000. As the economic environment continues to evolve, we believe that our deliberate strategy to responsibly grow in the national business lines where we possess specialized sector and underwriting expertise and in low to no-loss loan categories, which now comprise 53% of total loans, will allow us to maintain a superior credit risk profile to the overall commercial banking sector. Regarding AmeriHome, mortgage banking revenue increased $2.5 million quarterly to $78 million as gain-on-sale margin compression and lower production volumes were offset by a rise in loan servicing revenue. As discussed at the time of acquisition, the natural macro hedge between servicing income, rising MSR valuations, and declining gain on sale margins was on display this quarter. Additionally, AMH continues to unlock value as an emerging commercial bank, leveraging our ability to efficiently deploy liquidity into low credit risk, helper investment assets with attractive yields. AmeriHome continues to demonstrate the unique opportunities to unlock value as a bank-owned mortgage business, such as $4.9 billion in low-cost custodial deposits, $2.5 billion in EBO loan purchases, $370 million in warehouse referral loans already generated to date, and residential loans purchased through their correspondent loan business. These opportunities drive additional value from AmeriHome that cannot be matched by other stand-alone mortgage companies. Gail will now take you through the financial performance. For the quarter, Western Alliance generated net income of $240 million, EPS of $222 million, and preprovision net revenue of $307 million. Total net revenue of $555 million has increased 65% year-over-year, but declined $5 million during the quarter, primarily due to certain non-interest income items. Net interest income modestly declined $1 million during the quarter to $449 million. A strong health for investment loan growth of $2 billion was impacted by two fewer business days in the quarter and interest expense on our credit link notes issued in late December. Overall, non-interest income increased $4 million to $106 million from the prior quarter, driven primarily by $6.6 million mark-to-market losses on equity securities and a smaller benefit from credit guarantees of $4.9 million from the prior quarter. which was partially offset by a gain on sale of municipal investment securities. As Ken noted, mortgage banking-related income increased 2.5 million quarterly as lower production volume and a decline in net gain on loans originated and sold was offset by a rise in loan servicing revenue as rising interest rates and voluntary payment speeds benefit MSR valuations, net of hedges, and servicing income. Gain and sale revenue fell by half to $37 million, while servicing revenue jumped to $41 million. Mortgage prepayment speeds fell as new mortgage rates rose at the fastest rate in 40 years, making refinancing uneconomic and thereby extending the lives of our servicing assets. This is the natural hedge of the mortgage business and why we manage the business for total mortgage revenue. If we had rapidly increased the value of our servicing rights we manufactured in the quarter, we would have booked a higher gain on sale and lower servicing income in lockstep. Finally, non-interest expense increased $10.8 million in the quarter, resulting in an efficiency ratio of 44.1%. Q1 expenses have historically run modestly higher, and we expect this is the high watermark for this ratio in declining in 2022. Turning to our net interest drivers, investment yields increased 26 basis points from the prior quarter to 2.77%, As rates rose and as prepayments fell on residential mortgage-backed securities, reducing purchase price, premium amortization. Near quarter end, through the security sales and reinvesting, we moved over $1 billion of securities to 100% repricing beta without a give-up in yield that will increase sensitivity in the current quarter. On a late quarter basis, home yields declined by basis points driven by a greater proportion of residential loans and north repayment and triple PDs. yields on loans held for sale benefited from rising mortgage rates and increased 10 basis points to 3.14%. The end of quarter spot rate for HFS loans was 373. Total cost of funds increased by two basis points from the prior quarter to 27, primarily due to the credit and note transaction entered into in December, demonstrating the strength of our deposit franchise to raise low cost to key sources of funding Interest-bearing deposit costs remained fairly flat at 21 basis points, while the balances grew $2.3 billion during the quarter. Net interest income of $450 million is 42% higher year over year, but declined slightly from the prior quarter. Overall, average earning assets increased $1.2 billion, or 8.5% annualized. Net interest margin was relatively stable at 3.32%, down one basis point from the prior quarter, as our strong deposit growth led to a greater proportion of earning assets being held in cash and lower loan yields due to residential loan growth. This excess cash provides us with optionality to deploy into higher-yielding loans in future periods. After the recent 25 basis point move by the Fed, our asset sensitivity has increased from last quarter, driven by increased liquidity as deposit growth exceeded loan growth by $2.5 billion. and variable rate loans move above their floors. In a rate shock scenario, plus 100 basis points for the next 12 months, and on a static balance sheet, net interest income is expected to rise 6.8%. Using the same scenario on a growth balance sheet, we expect net interest income to grow over 25% over the base rate. Under a 200 basis point rate shock scenario on a static balance sheet, net interest income is expected to rise 15.4% and a multiple of this impact when balance sheet growth expectations are also incorporated. Given our first quarter net interest income run rate of $450 million, or $1.8 billion per year, we should see at least a 40% increase in net interest income in the shock plus 200 scenario for $720 million annually. which the market projects we'll see on an accelerated rate increase trajectory later this year. An important driver of this projected increase in net interest income is due to moving off of our rate floors. The rate floor schedule shows that 84% of our loans will be off their floor with a 100 basis point increase in rates, which should happen by the second FOMC meeting to be held in mid-June. then they become completely irrelevant in the third quarter. I would note that these four serve as well to sustaining that interest income for two years during the pandemic. Our efficiency ratio increased to 44% from 41.8% in Q4, certain seasonal expenses outpacing that revenue growth. Non-interest expense rose $11 million from last quarter due to lower loan origination cost referrals and higher seasonal expenses in Q1. Again, at 44%, we believe the efficiency ratio will decrease through successive quarters this year. Pre-provision net revenue was $307 million for the quarter, a 52% increase from the same period last year. This resulted in a PPNR ROA of 2.1%, a decline of 13 basis points compared to last quarter, primarily driven by balance sheet growth outpacing PPNR. This continued strong performance and leading capital generation provides us with significant flexibility to fund ongoing balance sheet growth, manage capital actions, and meet credit demand. Balance sheet momentum continued during the quarter as loans held for investment increased $2 billion, or 5.2%, to $41 billion, and deposit growth of $4.5 billion brought balances to $52 billion a quarter end. Mortgage servicing rights balances grew $250 million in the quarter to $950 million, as no MSR sales were completed during Q1, as we expect this asset will continue to benefit from a rising rate environment. Goodwill and intangibles increased $63 million, primarily due to our acquisition of digital disbursements in January. Tangible book value per share decreased 71 cents, or 1.9 percent, over the prior quarter to $37.13, primarily due to fair value losses on available-for-sale securities reported in all of the comprehensive income. TANF will book value entries 12.4% over the prior year. We continue to generate consistent organic loan growth from our national commercial business strategy and are seeing balanced demand between regional banking divisions and national business lines. Loans held for investment grew $2 billion in the quarter with continued strong growth in residential real estate. However, drivers of loan growth this quarter, in particular net CNI growth, was negatively impacted by $228 million in Triple P loan payoffs and a $640 million decline in mortgage warehouse balances, where lower housing inventory or higher rates held back the typical seasonal upturn in purchase home volume. Given current pipeline strength, especially in no finance and MSR lending businesses where the team is onboarding new AmeriHome clients, we still expect mortgage warehouse balances in aggregate to be flat year-over-year for 2022. Mortgage warehouses already rebounded $270 million quarter-year-date. C&I growth benefited from healthy contributions of our regional banking divisions of $209 million and other national business lines of $223 million, especially in tech and innovation, restaurant franchise demands, CRE A CRE investor in construction and land also contributed $320 million and $250 million in net loan growth, respectively. Our national commercial franchise provides optionality to deploy liquidity by business mix and geography. Turning to deposits, we continue to see broad-based core deposit growth across our diversified channels that will generate stable, low-cost funding in different rate environments. Deposits grew $4.5 billion or 38.7% annualized in the first quarter driven by increases in non-interest-bearing DDA of $2.2 billion, interest-bearing DDA of $1.3 billion, and savings in money market of $1.3 billion. These are partially offset by a decrease in the most expensive category of CDs, $238 million. Non-interest-bearing DDAs comprise 45% of our total deposit mix. Our specialty deposit franchise continue to provide ample opportunities to generate attractive funding to support loan growth with deposits from HOA up by $632 million, settlement services increased to $308 million, and tech innovation up by $158 million. Settlement services have successfully incorporated digital disbursements into the franchise and has already begun benefiting from synergies through expanded relationships and new affiliations with claims administrators and law firms. Our asset quality continues to remain stable and total classified assets and special mention loans as a percentage of total loans are lower than they were in 2019. As the economic environment continues to evolve, we believe our deliberate strategy to responsibly grow national business lines where we possess specialized sector and underwriting expertise and in low to no loss categories, which now comprose 53% of total loans, will allow us to maintain superior credit risk profile through the overall commercial banking sector. Special mention loans remain relatively stable on a proportion of total funds of loans at 85 basis points. Total classified assets rose 64 million Q1 to 365 million, or 60 basis points of total assets due to the temporary impact of the Omicron variant. Quarterly net losses were negligible for the first quarter. Our total loan ACL increased 11 million from the prior quarter to 301 million as the provision exceeded losses. In all, total loan ACL for funded loans declined one basis point to 73 at quarter end. Adjusting for the $5.4 billion loans that are covered by credit-linked notes where ample first loss coverage is assumed by a third party, the ACL coverage ratio rises to 84 basis points. Given our industry's leading return on equity and assets, We continue to generate significant capital to fund organic growth and maintain well-capitalized regulatory ratios. Our tangible common equity to total assets of 6.7% was bolstered by net income and 1.3 million shares issued at 408 million in proceeds under the ATM, but also affected this quarter by negative fair value marks on available for sale debt securities. Our CET1 ratio was essentially flat at 9%. Inclusive of our quarterly cash dividend of $0.35 per share, our tangible book value per share declined $0.71 to $37, primarily reflecting the adverse AFS market quarter end. While rates have continued to rise in April, the rate of increase we witnessed in the term structure in the first quarter of the yield curve shifts inside later this year. Given our robust capital generation, we still expect that 2022 will again be a year of tangible book value growth. I'll now hand the call back to Ken to conclude his closing comments. I was very pleased with Q1 results and the management team's ability to adapt to the changing interest rate and economic environments. Loan growth was strong, deposits grew more than double that amount, credit remained solid and clean, expenses were balanced for both near-term efficiency and long-term investments, and net interest income sensitivity increased as variable rate loans are projected to rise above their floors. AmeriHome's first quarter results remain consistent with our overall pro forma guidance that we gave at the time of acquisition, which was $2.02, and we are tracking above this. The composition of that performance is more skewed towards net interest income, which is consistent with our expectations, but more pronounced with rising rates. Deposit growth and loan growth on Merihome have both exceeded our expectations and taken on greater significance in this rapidly rising rate environment. Going forward, we expect mortgage banking revenues to be in line with Q1 levels, and any disruption to this may be made up with balance sheet growth. For the remainder of the year, we continue to support our full-year $9.80 EPS floor, Loan and deposit growth expectations remain at $2 billion per quarter with a bias to the upside. Our loan and deposit pipelines, bolstered by client confidence, gives us reassurance that our balance sheet will continue to grow in a safe, sound, and thoughtful manner. We have modeled six rate hikes in 2022, starting with 50 basis points in May and then 25 basis points in June, July, September, and December. Admittedly, this is conservative. Netager's margin is expected to grow throughout the year, lifting Netager's income sequentially as loan growth provides incremental revenue support. Netager's income sensitivity has climbed substantially from the prior quarter. It is our expectation, based upon the projected forward yield curve, that nearly all of our variable rate loans with floors will be in the money next quarter, further giving support to PPNR progressively increasing throughout the year as our efficiency ratio declines. The bank asset quality remains solid. We've not seen emerging delinquencies or defaults within any segment. Our base economic model is for a slowdown, but not a recession. And then lastly, capital. We believe our internal capital generation can support up to $4 billion of loan growth without returning to the equity markets. At this time, Dale, Tim, and I would be happy to take your questions.

Thank you. We will now open up the lines for questions. And to ask a question, simply press the star, then the number one on your telephone keypad. To withdraw your question, simply press the pound key. One moment, please, for our first question. And your first question comes from the lineup. Abraham Ponoella from Bank of America, your line is open. Good morning.