Western Alliance Bancorporation(WAL)2024-04-20 00:14Financial Data and Key Metrics - The company reported pre-provision net revenue (PPNR) of $247 million, net income of $177 million, and earnings per share (EPS) of $1.60 for Q1 2024. Excluding the $18 million FDIC special assessment charge, PPNR was $265 million, net income was $191 million, and EPS was $1.72 [14] - Net interest income increased by $7 million from Q4 2023 to $599 million, driven by higher average earning asset balances and lower average borrowings [14] - Non-interest income rose by $39 million quarter-over-quarter to $130 million, primarily due to improved mortgage servicing rights (MSR) valuation [15] - Tangible book value per share increased by $0.58 to $47.30, driven by retained earnings growth [16] - The CET1 capital ratio reached 11%, and the loan-to-deposit ratio decreased by 10 points to 81% [10] Business Line Performance - Held-for-investment (HFI) loan growth was $403 million, predominantly in commercial and industrial (C&I) categories, with C&I growth of $646 million [16] - Deposit growth was $6.9 billion, driven by regional commercial banking, mortgage warehouse, and digital consumer channels [17] - Mortgage warehouse deposits rebounded by $3.5 billion, fully replacing Q4 outflows [21] Market Performance - The company experienced broad-based deposit growth across regions, with HOA and digital consumer channels contributing over $800 million each, and Juris Banking adding over $400 million [21] - The yield on total securities decreased by 33 basis points to 4.66%, reflecting efforts to enhance liquidity [22] Strategy and Industry Competition - The company has repositioned its balance sheet to optimize funding structure, increase capital, and enhance liquidity, aiming to mitigate future industry volatility [8][9] - The company plans to focus on deploying incremental liquidity into safe and thoughtful loans, with expected loan growth of $4 billion for the full year, up from the previous $2 billion guidance [35] - The company expects to maintain a CET1 ratio of around 11% and anticipates net interest income growth of 5% to 10% for 2024 [36] Management Commentary on Operating Environment and Future Outlook - Management highlighted the completion of the balance sheet repositioning, which has fortified the company's liquidity and capital position, enabling stronger loan growth starting in Q2 [10][12] - The company expects net interest margin (NIM) to trough in Q2 but anticipates NIM expansion in the second half of the year due to loan repricing and new originations [37] - Management remains cautious about the economic environment but is optimistic about the resilience of the mortgage banking business and the potential for growth in non-interest income [37] Other Important Information - Asset quality remained steady, with special mention loans and classified assets declining by $139 million from Q4 2023 [11] - Net charge-offs were $9.8 million, or 8 basis points of average loans, with provision expense of $15.2 million covering net charge-offs and supporting loan growth [27] - The company's effective tax rate decreased to 23.5% from a temporarily elevated rate in the previous quarter [19] Q&A Session Summary Question: Expense growth and NII expectations - The expense growth is primarily driven by ECR-related deposit costs, but it will also help drive net interest income (NII) as the company deploys additional funds into higher-yielding assets [45] - The company revised its loan growth guidance from $500 million per quarter to $1 billion per quarter, which will support NII growth throughout the year [46] Question: Capital and credit-linked notes (CLNs) - The company expects to maintain a CET1 ratio at or above 11% for the remainder of the year, with excess capital absorbed by increasing loan growth [47] - The runoff of CLNs is expected to contribute 40 to 50 basis points to the CET1 ratio [48] Question: Loan and deposit growth guidance - The company expects to grow deposits by $2 billion per quarter, with total deposit growth of $11 billion for the year, driven by strong performance in HOA, corporate trust, and regional banking [51][52] - Loan growth is expected to be $1 billion per quarter, with a focus on C&I, warehouse lending, and tech and innovation sectors [54][55] Question: Expense guidance and efficiency ratio - The expense guidance includes ECR-related deposit costs but excludes the $17 million FDIC special assessment. The company expects the efficiency ratio to trend towards the mid-50s [56][58] Question: Asset quality and non-performing loans (NPLs) - The increase in NPLs is primarily due to the company's strategy to accelerate resolution for certain loans. Two-thirds of NPLs are paying as agreed, and the company maintains a strong collateral position [96][97] Question: Deposit mix and cost outlook - The company expects minimal deposit mix shift, with growth primarily in money market accounts and a tapering off of higher-cost CDs [90] - Deposit costs increased by 11 basis points in Q1, but the overall cost of funds remained flat at 2.82% [23] Question: Net interest margin (NIM) outlook - NIM is expected to trough in Q2, with mid-single-digit basis points expansion in the second half of the year due to loan repricing and new originations [125][126] Question: M&A and capital deployment - The company is focused on organic growth and does not currently have plans for M&A, preferring to deploy excess capital into internal growth opportunities [101] Question: Asset sensitivity and NII impact - The company is asset-sensitive, with a 100 basis point rate increase expected to boost NII by 3%. The NII guide remains at the upper end of the range despite fewer rate cuts due to better loan growth [122][129]