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Western Alliance Bancorp (WAL) Q4 2021 Earnings Call Transcript

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Western Alliance Bancorp (NYSE:WAL)
Q4 2021 Earnings Call
Jan 28, 2022, 12:00 p.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Good day, everyone. Welcome to Western Alliance Bancorp’s fourth quarter 2021 earnings call. All lines have been placed on mute to prevent any background noise. [Operator instructions] You may also view the presentation today via webcast through the company’s website at

I would now like to turn the call over to Miles Pondelik, director of investor relations and corporate development. Please go ahead.

Miles Pondelik

Thank you and welcome to Western Alliance Bank’s fourth quarter 2021 conference call. Our speakers today are Ken Vecchione, president and chief executive officer; 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 8-K filed yesterday, which are available on the company’s website. Now for opening remarks, I’d like to turn the call over to Ken Vecchione.

Ken VecchionePresident and Chief Executive Officer

OK. Good afternoon everyone. 2021 was a watershed year for Western alliance as it drove many of our own records for balance sheet growth, total net revenue and earnings while slightly expanding into new business lines and geographies that will make us an even stronger, more diversified bank . For the year, total assets ended just shy of $56 billion, with loans growing 44% over year to $39.1 billion and deposits rising 49% to $47.6 billion.

This strong balance sheet momentum propelled record net revenues of $2 billion net income of $899 million and EPS of $8.67, which is our 12th consecutive year of rising earnings. Turning to the fourth quarter results. WAL earned total net revenues of $561 million, net income of $246 million and EPS of $2.32. Strong balance sheet expansion continued with auto loan growth of $4.3 billion or 49% on a linked quarter annualized basis.

And deposits rose by $2.3 billion or 20% annualized. Loan demand continued to grow across our business lines, with C&I loans increasing by $1.8 billion, inclusive of $200 million of CCC runoff along with a $1.8 billion growth in our residential portfolio and $584 million dollars in CRE. One of the hallmarks of our national commercial business strategy is the ability to develop niche specialty banking business and to attract qualified talent to thoughtfully scale new business lines with superior risk adjusted returns. As an example, since joining in June, our restaurant franchise finance team had $151 million in outstanding and as a positive contributor to earnings.

Similarly, our Texas-based-single-family home construction CRE team has $235 million in approved commitments. Our loan pipeline and channel checks continue to show a burning of loan growth in our traditional commercial loan businesses. Attracting senior teams to WAL provides the opportunity to establish new business lines that ramp up quickly due to their existing client relationships. A $6.2 billion increase in average earning assets drove net interest income growth of $40 million, or 39% annualized to $450 million as excess liquidity deployment for loans and loans held for sale contributed significantly to earnings.

Fee income was $110 million, representing 20%of total net revenue, a decline of $28 million over prior quarter, as mortgage banking-related income was impacted by seasonal fourth quarter weakness and the mortgage sectors transitioned to a rising rate environment, which comprise gain-on-sale margins. I would like to reiterate that AmeriHome is fully integrated into the strategic fabric of Western Alliance and is thoughtfully managed to maximize value for the entire bank through loans, deposit and net interest income growth, not just gain-on-sale launch. The B2B correspond to business inside of Western Alliance has several business levers which can be repositioned to sustain earnings throughout rate and economic cycles. Given the flexibility of the AmeriHome’s business model, ongoing mortgage operations can provide multiple revenue opportunities which serve to offset lower gain-on-sale recognition.

Western Alliance’s, branch like, flexible business model provides us a competitive advantage to leverage operating efficiencies to enhance financial results while investing in business initiatives to drive future growth. Quarterly adjusted non-interest expenses grew $4 million to $235 million, producing an efficiency ratio of 41.3%. To put this in perspective, over the last five years, total loans and deposits have grown two and a half times the rate of operating, excluding AmeriHome. Productivity improvements, provide us with the capability to absorb higher labor costs while continuing to fund products and technology investments.

Total adversely graded assets were flat and quarterly net loan charge offs were just two basis points. Western Alliance is one of the most profitable banks in the industry with a return on average assets and return on average tangible common equity of 1.65% and 25.8%, respectively, which will continue to support capital accumulation and strong capital levels. Finally, what excites me most are the differentiated technology and banking services that Western Alliance is increasingly delivering to our clients to solve unique pain points and facilitate transactions. We recently announced a partnership with Tassat Group to deliver blockchain-based payments to our clients using their TassatPay platform.

The launch of this program scheduled for early second quarter will allow Western Alliance Bank clients to transfer funds continuously to one another 24/7. Additionally, yesterday, we announced the acquisition of digital disbursements, a leading digital payment platform for the class action legal industry that integrates legal settlement claim process with a multiproduct payment portal. This differentiated technology solution enhances the capabilities of Western Alliance settlement services team and solidifies the bank as an initial leader in the $15 billion legal class action model. Our national settlement services business, developed in 2019 and launched in 2020, has been described on previous earnings calls as deposit initiative one.

This business has successfully generated $2.3 billion deposits as of year-end, and we are thrilled to welcome the new team from digital disbursements to help the bank continue to produce unique value-added solutions to the legal service sector. Dale will now take you through our financial performance.

Dale GibbonsChief Financial Officer

Thank you, Ken. For the quarter, Western Alliance generated adjusted net income to common shareholders of $242.5 million and earnings per share of $2.32. Pre-provision net revenue was $326 million. Total revenue grew $12 million during the quarter to $561 million, and net interest income grew $40 million during the quarter to $450 million, an increase of 10% primarily as a result of significant balance sheet growth and deployment of liquidity into higher-yielding assets.

Average interest-earning assets increased $6.2 billion while the lower yielding cash position held at the [inaudible] fell to 2.3% and 3.9% of interest-earning assets. Although not annotated on this page, I want to address the characterization of two items in noninterest income. Regarding the $8 million of securities gains we reported in the second quarter of 2020, we purchased over $100 million of term leasable bonds that were in sectors hard hit by the pandemic, most notably airports. In the fourth quarter, we sold those bonds as they had recovery in value, and the velocity of rate expectations changed.

I know securities gains are often excluded from core analysis, but this seems more like a trading gain to us. Regarding the $7 million credit guarantee revenue, during the quarter, we sold a credit-linked note in which the buyer of the note assumes a first loss position of the $4.5 billion residential portfolio. This $7 million in revenue is the currently expected credit losses avoided by selling these bonds. I had CECL [inaudible] since before it was born.

I don’t think it’s remotely helpful to investors in understanding bank financials, and it certainly doesn’t improve comparability. But I don’t know anyone who is taking CECL-based credit provisions and excluding them from core, which is the same principle here. It doesn’t make sense to us that if we increase residential loans in both a day one cumulative loss expectation charge and the next day, we sell a credit-linked note to put that exact same loss expectation to another party that we should be stuck with a debit in core income before the insurance credit for determining earning power. Overall, noninterest income decreased $28 million to $110 million from the prior quarter driven primarily by industry wide gain-on-sale margin compression.

As Ken noted, in anticipation of margin compression, we are implementing several initiatives to bridge the gain-on-sale earnings slowdown with predictable and stable net interest income revenue streams. Noninterest expense, excluding merger and restructuring recoveries and loss on extinguishment of debt, increased to modest 1.6% or $4 million, resulting in an efficiency ratio of 41.3%. For the year, Western Alliance recorded net income of $899 million or $8.67 per share, a 72% increase over EPS for 2020. Net interest income grew $382 million during the year to $1.5 billion, an increase of 33% year over year mainly attributable to increased loan balances and PPP loan fees.

Noninterest income increased $333 million to $404 million in the prior year as the AmeriHome transaction closed early in the second quarter and contributed significantly to fee grab. Finally, noninterest expense increased $360 million or 73% year over year as 950 AmeriHome employees joined WAL in the second quarter. Turning now to our net interest drivers. Investment yields increased five basis points from the prior quarter to 2.51%.

While on a linked-quarter basis, loan yields declined 25 basis points following continued strong growth in low to no-loss assets such as residential loans and capital call lines and modest yield compression across other loan categories. We continue to optimize the deployment of excess liquidity into higher-yielding assets and allocated cash yielding 10 basis points [inaudible] loans held for sale yielding 3.04%. Funding costs were slightly lower from the prior quarter due to the redemption of $175 million subordinated debt with increased interest-bearing deposit cost of 20 basis points and total cost of funds at 25 basis points. The spot rate for total deposits, which includes noninterest-bearing, was 11 basis points.

We expect funding costs to bonds at these levels as rate hikes are forthcoming. Overall, net interest income grew $40 million to $450 million during the quarter or 43% year over year as average interest-earning assets increased $6.2 billion or 13% during the quarter. Liquidity deployment continues, and cash balances were optimized with cash as a portion of average earning assets of 2.3%, a decline from 3.9% in the prior quarter, resulting in a loan-to-deposit ratio of 82%, an improvement from 77% prior. The net interest margin increased 10 basis points to 3.33% mainly driven by lower yields on our commercial real estate portfolio and strong growth in low loss but lower yielding residential loans and capital call lines.

With regards to our asset sensitivity, our rate risk profile has been reduced over the last two years as we’ve added fixed-rate residential mortgages, and the yield on the majority of our available rate commercial loans have bottomed out at their contractual floors. We are poised to recognize significant increases in net interest income in a rising rate environment once these floors are no longer inhibiting loan yield escalation and with ongoing balance sheet growth. Consequently, this asset sensitivity is more muted initially, but accelerates as interest rates normalize. Currently, $16 billion or 94% of our variable rate loans with floors are after contractual floors.

With 25 basis point rise in rates, 25% of these loans will rise off the floors. And with 100 basis point rise in rates, 75% cumulatively will return to variable rate. In a rate shock scenario of plus 100 basis points on a static balance sheet, net interest income will rise $73 million or 4.6%. Using a ramp scenario on a dynamic balance sheet, we expect net interest income to increase $62 million in the next 12 months after quarterly rate increases are initiated.

And given the dynamics of our loan floors, a $257 million increase over a two-year time frame if only floor rate hikes are accomplished through 2023. In a rising rate environment, other areas of Western Alliance’s income statement may also be influenced. Mortgage sector volumes and profitability are expected to be reduced with lower refinance volumes, partially offset by increased servicing revenue if the life of mortgage servicing rights are extended. These factors may be partially mitigated as we expect deposit betas and earnings credits on $10.8 billion of deposits to be lower than in the previous rising rate periods and to have longer lag times, but could give back collectively about half of the potential net interest income improvement for our interest rate sensitivity.

AmeriHome is now fully integrated into WAL. And gain-on-sale volume and margin contraction can be minimized by accelerating loan, deposit, EBO and product channel diversification, none of which are available to stand-alone mortgage operators but are available within a bank-owned company. We expect net interest income sourced through AmeriHome relationships to rise throughout the year, countering reductions in traditional mortgage banking income and growing total revenue in net. Our efficiency ratio improved modestly to 41.3% from 41.5% in Q3 as our net revenue growth exceeded that of our expense growth.

One of the key characteristics of our national business line approaches is high operating leverage. As mentioned in our prior calls, we expect the efficiency ratio to remain in the lower 40s for the year, inclusive of planned technology investments, new product development expenses and the absorption of higher compensation costs supporting rising rates and deposit account relationships. Pre-provision net revenue increased $9 million or 2.8% from the prior quarter and 58% from the same period last year. This resulted in PPNR ROA of 2.24% for the quarter, a decrease of 21 basis points compared to 2.45% primarily driven by balance sheet growth outpacing [inaudible] increases.

This continued strong performance in leading capital generation provides us with significant flexibility to fund ongoing balance sheet growth, manage capital actions in the credit demands. Robust balance sheet momentum continued during the quarter as loans held for investment increased $4.3 billion or 12% to $39 billion, deposit growth of $2.3 billion brought balances to $47.6 billion at year-end. On a quarterly average basis, loans held for investment grew 16% in deposits remaining. In all, total assets grew 53% year over year.

Total borrowings increased $330 million over the prior quarter to $2.4 billion primarily due to an increase in overnight borrowings of $275 million and the issuance of $228 million in credit-linked notes, partially offset by the redemption of $175 million on acceptance of debt. Finally, TBV per share increased $3.17 over the prior quarter to $37.84 and is up 22% year over year. We continue to generate consistent organic loan growth from our flexible national business banking strategy and are seeing broad-based demand. Loans held for investment grew $4.3 billion in the quarter.

Quarterly loan growth was split almost evenly by an increase in residential real estate loans of 1.8, which now comprise 24% of loans and $1.8 billion also in C&I loans as demand for capital call lines and mortgage warehouse lines remained strong. And we saw an acceleration of demand for broader business lending nationwide. Including early success in our new restaurant franchise finance team, CRE loans grew $534 million predominantly as a result of demand in our hotel franchise finance that bounced back as we expanded relationships with proven clients and sponsors while also obtaining tighter overwriting. Additionally, construction & land loans at $79 million.

Turning to deposits. We continue to see broad-based core deposit growth across our business channels. Deposits were $2.3 billion or 20% annualized in the fourth quarter driven by increases in interest-bearing DDA of $2 billion, noninterest-bearing DDA of $295 million and CDs of 226, partially offset by a reduction in savings and money market funds of $162 million. Robust fundraising activity and tech innovation, coupled with market share expansion of HOA banking relationships, contributed significantly to quarterly deposit growth.

We also saw strong performance in regional commercial products. To highlight one of our growing national deposit businesses, business escrow services, previously called deposit initiative two, provides escrow payments and administrative services for M&A transactions. This initiative launched in 2021 with a new senior leader and has recruited a highly effective team and has established offices in New York City and Minneapolis. The team has formed strong relationships with serial acquirers and successfully facilitated over 100 acquisitions, which quadrupled our deposit balances in the fourth quarter in this business line of $600 million.

We now have established ourselves as a formidable market competitor in this space. Our asset quality remained stable after the significant improvement seen in the prior quarter. Total classified assets rose $36 million in Q4 to $301 million or 54 basis points of total assets. Special mention loans declined $33 million during the quarter to 0.85% of funded loans, greater than 30% reduction from the prior level seen in September 2020.

Total classified assets in special mention loans as a percentage of total assets and funded loans are now lower than in 2019. Quarterly net credit losses were $1.4 million or two basis points of average loans compared to $3 million in Q3. Our total loan ACL increased to $11 million from the prior quarter to $290 million due to significant loan growth in low loss segments. In all, total loan ACL and funded loans declined six basis points to 74 basis points.

Adjusting for the $1.8 billion of mortgage warehouse lines and $4.6 billion of residential loans covered by the credit-linked notes were ample with first loss coverage as assumed by a third party. The ACL ratio is 89 basis points. Finally, given our industry-leading return on equity and assets, we continue to generate significant capital to fund organic growth and maintain healthy regulatory capital ratios. Our tangible common equity to total assets of 7.3% and common equity Tier One of 9.1% were both bolstered by net income and the common stock offering under the ATM but were impacted this quarter by higher asset growth.

Inclusive of our quarterly cash dividend payment of $0.35, our TBV per share increased $3.17 to $37.84. I’ll now hand the call back over to Ken to conclude with closing comments.

Ken VecchionePresident and Chief Executive Officer

Thanks, Dale. 2021 really was an…

Read More: Western Alliance Bancorp (WAL) Q4 2021 Earnings Call Transcript

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