Western Alliance Bancorporation Common Stock (DE)

Good day, everyone. Welcome to Western Alliance Bank Corporation's first quarter 2023 earnings call. You may also view the presentation today via webcast through the company's website at www.westernalliancebankcorporation.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 2023 conference call. Our speakers today are Ken Vecchione, President and Chief Executive Officer, and Dale Gibbons, Chief Financial Officer, and Tim Bruckner, Chief Credit Officer. Before I hand the call over to Ken, please note that today's presentation contains forward-looking statements which are subject to risk, uncertainties, and assumptions. Except as required by law, the company does not undertake any obligation to update any forward-looking statements. For more complete discussion of the risks and uncertainties at Could cause actual results to differ materially from any forward-looking statements. Please refer to the company's SEC filings, including the form it came out yesterday, which are available on the company's website. Now for opening remarks, I'd like to turn the call over to Ken Vecchione.

Thank you, Miles. I would like to start by thanking our clients for the trust they place in Western Alliance and to the people of Western Alliance for their extraordinary efforts over the last month. Since the collapse of three competitor banks in mid-March, Our team has worked relentlessly to meet our clients' banking needs. Flexibility of our diversified national commercial banking strategy with a broad range of value-added deposit channels and deep commercial customer relationships in a wide variety of sectors and geographies all contributed to our firm's resilience in the face of recent turbulence in the banking industry. We believe our focus on sound financial fundamentals, stable asset quality, and rebuilding capital and liquidity levels over the past several quarters have all helped us navigate through this challenging time. As we move forward with a renewed perspective, we are well-positioned to expand our client relationships and continue to achieve strong return profiles. Balanchine repositioning, which included surgical sales of assets and loan reclassifications, resulted in after-tax net non-operating charges of $110 million. but will have an immediate accretive impact on regulatory capital and allow us to prioritize core client relationships with holistic lending, deposit, and treasury management needs. The company earned through these charges and achieved net income of $142 million and earnings per share of $1.28 for the quarter, increasing tangible book value per share 3.3% to $41.56 from year end, with a CET ratio of 9.4%. Immediately after the exogenous events of mid-March, Wall experienced elevated net deposit outflows that soon returned to normalized levels. Outflows were concentrated in a few key client groups that will inform our funding strategy going forward. Suffering from the taint of SBB's failure, approximately $3.3 billion, or 43%, of our technology and innovation deposits were withdrawn but less than anticipated given that 50% also had lending relationships. Our mortgage warehouse business remained fairly stable on a net basis with only the loss of a single customer that we expect to return to Western Alliance with more stable deposits. Although settlement services experienced some initial volatility from very recently acquired clients, lows normalized quickly. Balances were stable quarter over quarter. Our regional divisions, Strong local brands and small to mid-sized metro business relationships acted as a core source of strength and saw only modest deposit attrition. Non-core regions, which included title companies and other fiduciaries, reacted more reflexively to stock market volatility and withdrew approximately $2.6 billion. These are not deposit channels that we are prioritizing going forward. Since March 20th, our deposit flow has stabilized, and returned to a healthy growth trajectory with deposits up $2.9 billion to $49.6 billion as of April 14th. Some business lines were never impacted, including HOA, with deposits higher by $900 million since the beginning of the year to April 14th. Our flexible, diversified business model proved its worth in Q1, while monoline banking models dependent on single industries or concentrated customer types failed. 85% of our customers already have more than one product or service with us and we will continue to prioritize client segments with awesome banking service needs that include credit and treasury management while de-emphasizing credit-only relationships. Overall, we'll successfully retain deep-rooted relationships and those for which we offer proprietary integrated treasury management technology solutions like HOA and we'll continue to do more of these. It is also worth mentioning that not a single deposit channel of ours represented greater than 60% of total deposits at the onset of the deposit crisis. We responded to our client's desire for and the market scrutiny surrounding enhanced deposit protection. Since year end, we have taken concrete steps to dramatically grow our insured deposits from approximately 45% of total deposits to 73% as of April 14th. This places war on the top decile among the 50 largest U.S. banks. Also as of April 14th, uninsured deposit coverage now stands at 158%. This resulted from the shift towards insured deposits to accommodate depositors' desires to have their funds safe and protected. We will continue to provide clients deposit alternatives that accentuate safety in these uneasy times. I think it's important to offer some thoughts on the volatility experience in our industry since mid-March. We'll navigate through these developments through strategies initiated in 2022 and initially described in our Q3 and Q4 earnings polls, such as deemphasizing loan growth in advance of an economic slowdown, growing deposits on liquidity faster than loan growth, and achieving a greater than 10% CET1 ratio. Formed by lessons learned and the recent stress of the banking system, We have moved up our medium-term CET1 goal to 11%, and we are targeting a mid-80s loan-to-deposit ratio. At the onset of this tumult, we acted decisively to tap various sources to enhance our liquidity position, engage with stakeholders through measured but impactful financial updates, and maintain normal business operations. Looking forward, we will remain focused on building additional liquidity and capital while reaffirming our deposit-led growth strategy. Driving increased diversification and additional deposit streams are also our top strategic goals. To ensure adequate liquidity over the medium term, we will aim to drive our loan-to-deposit ratio to the mid-80s by cultivating deeper client relationships. We look to organically, but expeditiously, rebuild capital to greater than 10% before the end of the second quarter. Our medium-term CET1 target is 11%. Simulating larger banks that typically have larger capital cushions will be an important step to drive sustained core deposit growth against a regulatory environment that will likely become stricter in response to recent industry turmoil. Higher capital, higher liquidity, and lower dependence on moderate rate funding should attract more core deposits and hopefully lead to higher investment grade rates. Accelerating HQA growth and securities book. also something that we plan to do. Also, liquidity and capital. We chose to reposition our balance sheet to very targeted reclassification of certain loans and assets from held for investment to held for sale and specific non-core asset sales. We reclassified approximately $6 billion of HFI loans, recognizing an approximately 2% fair value adjustment of $92.2 million after tax. that includes expected future P&L and capital impacts. Every tax charge will be immediately accretive to regulatory capital as the loans are liquidated and allows us to devote efforts to full client relationships with lending, deposit, and treasury management needs. We've already made significant progress in executing this strategy with actions that adds 51 basis points to CEP1. CEP1, $920 million of loan sales were executed four-quarter end with another $3 billion already under contract, but not closed by 3-31. MSR sales of $360 million, select security sales of $460 million, and the unwind of high-cost mortgage warehouse equity fund resource CLMs all contributed to help offset the HFI reclassification on time charge. In addition, we are moving expeditiously to execute the remaining $3 billion of HFS loan sales. Once sales realize smaller losses than we expected, note the marks that on the remaining HFS loans are incorporated into our Q1 numbers. These actions reaffirmed our plans to surpass 10% CET1 capital by June 30th. Even with the marked market adjustments from balance sheet repositioning, we still advanced our CET1 ratio six basis points to 9.38. When considering the contracted loan sales for this month and the unwind of our EFR, CLN, capital call, and subscription lines, we already locked in CET1 ratio above 9.71% before considering our organic capital generation or completing sales of the remainder of the HFS loans. which should ultimately push CET1 above 10%. Finally, West Alliance has significantly accessed to more than $21 billion in contingent sources of liquidity to meet customer and operating needs. Access to on-balancing cash and unused borrowing capacity increases to greater than $26 billion with the near-term completion of HFS asset sales, $3 billion of which are contractually agreed to, and will be used to pay down higher-cost BTFP and SHLB short-term borrowings and return to more normal sources of financing. Continue to evaluate additional opportunities to establish secured borrowing facilities from other sources. At this time, I'll let Dale take you through the financial results.