Q4 2022 Western Alliance Bancorp Earnings Call
Speaker 2: So, and I think the larger ponderance is going to be in, you know, interest-bearing money market accounts. And those come in different varieties in terms of spreads that we offer, depending on the relationship and whether there's, you know, credit tied to it as well.
Speaker 3: I do think that the CD side is probably gonna increase a bit more than it has, but probably to a lesser at a lower rate than what we've grown recently. And then interest-bearing checking is where I think is also gonna be kind of a strong growth area. Much of our HOA deposits kind of flows into that category at this point in time. So at the end, the DDA, I think you're gonna see, is still gonna probably diminish as a proportion of total. The growth area is gonna be in ECR-related, big chunk in the money market accounts in a little bit.
Speaker 4: if I could put a deposit cost in there from ECR, you know, we grew during the during the fourth quarter and net interest income was up about 39 million if I add the interest expense plus the ECR charges gave up about three-quarters of that. I think that that range is probably going to more or less be intact so I think we're going to incrementally
Speaker 5: improve net interest income including ECR debits against it but at a diminished rate than what we saw the past couple of quarters.
Speaker 6: Okay.
Speaker 7: When I look at where some of your peer regional banks have come out this quarter in terms of what they're paying on deposits, many of them have barely budged on some of these categories. I'm curious, what's the conversation you're having with prospects, and is this just a massive opportunity for you to bring over new households, businesses?
Speaker 8: and UC is more of a consumer or business opportunity. Thanks.
Speaker 9: Well, you know, we're a commercial bank, so we don't have much in the way of consumer deposits. And so our deposits are going to be floating at the marginal higher end of interest expense, but we focus on net interest income and we have the ability to do that.
Speaker 10: to take those deposits and put them in 100% beta loans and hence make the spread on it. And so that's been the conversation. We're seeing larger clients move some of their money to us and having conversations about moving money to us.
Speaker 11: We like that and what's really a little bit different for us in terms of how we approach business, we started to change somewhere in the middle of Q3 of last year, is you know we used to lead with loans and now we lead with deposit conversation.
Speaker 12: we're very clear that there will be no credit extended unless there's a very strong deposit relationship.
Speaker 13: And that conversation has been well received by our client base.
Speaker 14: Thanks for taking my questions.
Speaker 15: Thank you.
Speaker 16: The next question is from the line of Ibram Pumwala with Bank of America. Please proceed.
Speaker 17: Thank you.
Speaker 18: Good morning.
Speaker 19: Yes, a few final questions. Maybe one, not sure if you already mentioned this, apologies. Just around the expense outlook, everything about core expenses. Just remind us in terms of the growth rate you are thinking about as part of your PPNR guidance.
Speaker 20: and also the one key seasonality that we should be thinking about.
Speaker 21: I'm assuming that first quarter historically is marked the high water mark for the efficiency.
Speaker 22: I'm just wondering if there should be a seasonal lift in expenses that we should be baking in.
Speaker 23: I'll take the second part of that first. The answer is yes, our expenses tend to pop up a little bit more in Q1. But overall, our efficiency ratio we're targeting is in the low 40s, which we've always targeted, and we have one of the leading efficiency ratios in the industry.
Speaker 24: We kind of feel that that's the right place to be. It allows us to continue to make the appropriate investments in the bank on both risk management and technology as we continue to get bigger and bigger. But it also allows us to invest in new products and new businesses.
Speaker 25: And, you know, many, for the last several years, we've been investing, as I said, in settlement services, in business escrow services. We've got a new initiative we just recently launched in deposits that we're not ready yet to talk about, but we built last year that's off to a good, strong start.
Speaker 26: So keeping the efficiency ratio in the low 40s allows us to generate the operating leverage we want, also invest
Speaker 27: today for future performance.
Speaker 28: What does that imply just in terms of how we think about just the expense growth for the year? Is it high single digits? Is it high single digits?
Speaker 29: It's going to be high single digits, might be low double. If you look at the PP&R element, 11 to 15, holding the efficiency ratio basically flat to where we are could provide for a little more room. But what we are going to do is, we are watching this closely, I mean,
Speaker 30: And so as things, you know, we authorize, you know, FTE as we continue to demonstrate performance on growth of the balance sheet, we're going to have revenue feed our expense expansion.
Speaker 31: I want to make sure we're not talking across each other. So my commentary was on the adjusted efficiency ratio without deposit costs, because Dale just talked about that, putting it towards net interest income. So on the adjusted efficiency ratio without the rise in deposit costs.
Speaker 32: That's what we think will be in the low 40s.
think will be in the low 40s. Noted. And just go ahead.
I guess maybe a separate question, going back to credit and I understand the macro uncertainty but when you look at your PPNR guidance that you have given, even assuming provisions near 2020 would imply earnings at about 10 bucks and 50 cents.
I'm just wondering is there anything around the loan book that causes that hesitation when you think about EPS outlook for this year relative to your guidance and obviously you expressed comfort with the asset quality of the book. I'm just wondering why you what would be the scenario in which that $10.50 EPS plus or minus would not be achievable.
So as you know how CECL works, it really comes down to the end of the year and then the outlook into 2024. So if Moody's should turn more bearish as we put on loans, your
you're increasing your provision for the life of that loan, not for the risk that's in the book. And so that's why we've been a little bit more reticent on...
voting where we think EPS numbers are, and then state more on the PP&R side. Those are the things that we can control. On asset quality, again, we're not seeing any issues at this moment. I would...
point you to a little bit the last two slides in the presentation where we think we've been able to grow in a long growth in a very prudent way and keep our charge offs down and I would remind you that you know 54% of the book is
either in short or resilient or resistant categories.
If I may just follow up, when we think about the loan growth 10 to 15% for this year, we
lot of macro uncertainty like should should we be worried in terms of the quality of loans that you're putting on the balance sheet right now at this point in the cycle like what how just from a client selection standpoint is there a risk of adverse selection
No, so we're not going to grow for growth's sake. So the asset quality is going to be incredibly important. In my opening comments, one of the things I want to get rid of is any connection to the GFC that is being used in the market.
2007 and 8, 9, I want no connection to that. We are a completely different company. So we want to grow above trend, yet at the same time, we want to have above trend asset quality, or best in class asset quality. We're working on doing both. So we're not going to sacrifice the asset quality.
for higher loan growth. Having said that, after going through our reviews, we think the range that we gave of 10 to 15 percent allows us to grow the loan book without growing into a recession and also protect or remain with stable and strong asset quality. We will pivot as necessary as new facts and situations.
to be nimble about using the flexibility of our business model to sustain earnings performance improvement over time.
Thank you for taking my questions.
Thank you.
The next question comes from Delana Brandon King with choice. Please proceed.
Hey, I wanted to touch on loan yields. I know, Ken, you mentioned last quarter.
and seeing loan committee turn down 31 loans initially and getting better pricing. So I want to get a sense of what the outlook was for loan spreads going into this year and if you're still getting the same reception from clients.
I'll give you another story to that too. So our loan yields are holding in from that last conversation we had when we did our Q3 earnings. Dale mentioned spreads are up about on average 50 basis points. And we're not getting a lot of pushback.
on pricing. I don't have any numbers for you but I can tell you when we say no to a loan that has good asset quality and good pricing we usually are saying no because it's not generating the deposits that we want to accompany that loan.
And what we're seeing is when we turn down those loans, those loans have been returning to the Senior Loan Committee now with greater deposits. So what we're encouraged about.
is that the pricing is holding and our determination to see more deposits accompany the loans has been following through from our credit committee.
That's helpful. And then as far as the risk weighted asset optimization, is that process complete or is there still some work to do?
going into this year.
All right, Tim.
I'm gonna take a shot of that one. He's been running the process. Thanks Ken. That is ongoing as and it's definitely a part of our our culture, so
will continue to do.
There's definitely remaining benefit to be achieved through optimization. Some of that's in the targeted growth portfolio mix and some of it is just structural with our clients. Some of it is ongoing and improvements still expected.
Thank you. Got it. Got it. And then just lastly, on the mortgage warehouse deposits, understanding the seasonality in the fourth quarter and that came back in this quarter to date. But should we expect a similar kind of magnitude as far as seasonality in the quarter quarter?
in the fourth quarter of this year and going forward? What is more pronounced in the fourth quarter of 22 than we've ever seen before? And I think some of the reasons for that are, so we have some of our accounts relate to taxes and insurance.
and others are principal interests. So the taxes and insurance we expected to decline, largely because of California property taxes, are due in 4Q. The P&I payments tend to have much more interim month ebb and flow, not so much kind of seasonal elements.
And that changed a bit this time. So from our view, I think there were very few refinancings and almost very few sales of residential real estate that took place in December . And so as a result of that, when somebody pays off, let's say somebody pays off a loan or has a refinance on, say, the 5th of December , and he's actually becoming a re and take a vote, then this was the point of the fourth
What will show up for us is we'll get a deposit including that principle of that of that loan and that that is remitted to one of the GSEs two weeks later.
Well that didn't happen and and and so I do think that you can make your own projection about what December of 23 is going to look like but but the dearth of Activity in the month of December which I don't see seasonal trough anyway But it was more it was certainly more significant than usual and that that contributed to this and that seems to be
turning even now. Now, I made this an early turn in terms of kind of the spring, you know, buying and selling season. I'm not sure.
Thanks for taking my questions.
Thank you.
The next question comes from the line.
Andrew Torrell Stevens, please proceed.
Hey, good morning.
Looking at the capital call loans down around a billion for this quarter, is that the pace of runoff we should expect out of the book over the next couple of quarters?
And I know there are some associated CLNs against the portfolio. I guess do those securities remain in place?
as the Capital Call portfolio comes down or would the CLN's fall commensurate with the reference pool?
Hey, Tim Bruckner again. I'll take the first...
Part of your question on the portfolio runoff Answer is no. That's not not to be expected that was driven by a handful of large transactions we elected to exit For return reasons
As we move into the coming quarters, we won't see...
similar dollar amounts of runoff at all.
We do have a CLN on the capital call and subscription lines. That CLN as opposed to the residential ones which are closed, so it's a specific pool of loans and as those loans pay off or whatever, that's done and the CLN runs down.
This one is a substitution ability, so it lasts for three years. So we have the ability to, if something comes out of that, we can put something else in it. That CLN is a fraction of our total capital call and subscription lines, so it doesn't really have much of an effect there. It was really done, as Tim indicated, for return purposes.
not so much for capital management because we've already taken a portion of those down to 20% through that process.
Okay, got it. And then, Dale, do you have what the MSR evaluation change was this quarter? And then any thoughts on just run rate for mortgage servicing and then gain on sale income?
Yeah, we had no change in the valuation of the MSR in Q4, so what that means is that the hedging basically...
very materially, you know, completely offset what was taking place in terms of market rate. So there wasn't any valuation adjustment that was that had happened. Kind of going forward, you know, I think there maybe is going to be some MSR dispositions that take place and so is that going to have an effect on the market but at the same time.
I think there's a little more stability in terms of what people expect around refinance behavior, and so that could kind of extend the lives and the confidence in terms of what those servicing rights are worth. I would add that as you look quarter to quarter, I would think about the total mortgage income being relatively flat.
to Q4. I think that was your specific question.
And while too early to call a trend.
I would say that the first 20 or so days into January , we are encouraged by margins rising in the business as that large money center bank has...
of the correspondent lending market. And so we got our fingers crossed that that continues to move forward. But at this point, such positive, that's an emerging opportunity we think. But right now I would keep Q1's mortgage income relatively flat to...
Q4.
Okay, got it. And then if I could just sneak one in. On that last point, just the competitive dynamics in the correspondent business.
perhaps that does create some tail end to the gale and sell margin, but does the exit of a large competitor give you greater opportunities to grow the balance sheet at all?
But we're going to still manage the balance sheet relative to our capital CT1.
of getting towards 975 to 10%. As you know, MSRs, if they grow in an outsized way, versus our internal capital generation become punitive. So, you know, we will be sellers of MSRs throughout the year and with that...
We also hope if we sell to non-banks that we keep deposits that are accompanied with these MSRs, as well as possibly even providing MSR financing to the buyers. And that was always our premise when we bought a Merrill home.
Okay, thanks for the questions.
Thank you.
The next question comes from the line of Chris McGrady with KBW. Please proceed.
Great, thanks. Hey Dale, the capital build in the quarter, I think the way I'm thinking about it, many thought you would build capital, some thought you'd build reserves. I'm interested kind of in your dynamic, how you're thinking about building one versus the other. And could you just remind us 10% is the target, I think prior comment.
and overlay that with what Moody says and our own interpretation of kind of market sentiment outlook. And we derive a GAAP compliant kind of seasonal number. And I realized that ratio is lower than some others in this space.
And I think you don't have to look any farther than our asset quality in terms of, you know, charge off behavior changes in terms of kind of what's transpired there. I mean, we have, you know, in the slide deck we have kind of our segmentation in terms of, you know, credit protected, resistant, resilient, and then the more sensitive piece. And that is just a small fraction, one-eighth of our
loan book is something that we think is going to have some, you know, perhaps volatility. You know, another measure that we look at is you take your ACL and divide that by annual charge-offs. And it's, you know, I mean, we had zero this year, but even if you took a couple of basis points on it and divide that into, you know,
you know, 60 basis points, you're going to get 30 years of charge-ups. I know this is a better than most years, but you know, the average duration of our loan book is under four. So, all sorts of ways we look at it and we think our reserve works as is. So, now it's about what do we talk about in terms of what falls down to the bottom line in terms of...
in terms of tangible common equity. You know, I wouldn't move up our timeline at all. I know, you know, I think 60 basis points is a fairly significant move for one quarter, but we're going to do both. We're going to grow capital and we're going to grow our balance sheet at the same time, sustain an improving trajectory in terms of net interest income and sustain our return.
Q4 by opportunistically selling some loans and then being able to move quickly in the EFR space, that's our capital call and subscription line. So quite frankly, we're pretty proud that we were able to move to capital 60 bps in one quarter.
But I think you can look towards the back end of the year for those numbers.
And that's, Ken, that's all organically, right? There's no more CLNs assumed in that.
We don't have any CLNs in there and certainly no ATM either.
Thanks, Dale.
Thank you.
The next question comes from the line of David Smith with anonymous.
You may proceed.
You shared the run rate for the ECR on the deposit costs as of 1231.
what that would be on a full quarter basis.
I wouldn't say that it materially changed from where we were for the quarterly number.
So, you know, it didn't grow quite as much as maybe someone anticipated because the dollars came down in terms of ECR deposits.
I think that we can track from the fourth quarter number, overlay what you think is going to happen in terms of FOMC actions, and what you think is going to happen on the balance sheet in those particular categories.
fourth quarter number overlay what you think is going to happen in terms of FOMC actions and what you think is going to happen on the balance sheet in those particular categories.
That should work. Okay. We should have $10 we have in there with one of those big gifts.
Okay.
In terms of the mortgage warehouse deposit book,
you know, can you see the breakdown between non-interest bearing and interest bearing there? Is it, you know, notably different from what the mix was for the bank as a whole as of the fourth quarter?
Most of the mortgage warehouse deposits are in DDA with an ECR.
And that is the preponderance of all the ECR dollars that we have.
Got it.
Okay, thank you. And lastly.
In terms of the RWA benefit that you got from the reduction equity fund resources.
Could you expand that a little bit? But I imagine that it might must not be zero risk weighting But given the risk those loans tend to have it must be a pretty low risk weighting I would have thought
The general construct of providing a
credit link note is to provide protection, i.e. first loss taken by a third party. So we get funds in, we sell a bond to a third party, and they get that interest on that bond less any losses that are included, that arise from this reference pool.
So on the EFR loans, these subscription lines, they're normally 100% risk weighted, but because we've sold a note to a third party and they assume first loss, the first 12.5% of losses in that portfolio, they pay. And actually, we already have their money, so we control how much they get back, so we only pay them back.
less any losses incurred and because of that architecture whereby you have moved the you know the Now kind of this structured product to a double layer better category It's basically treated as 20% risk weighted assets So no matter what type you you ask that you come from you end up at 20. So residential you started 50 into 20
capital call and warehouse you start at 100 and you still end up with 20. Okay, got it. So without the CLN though, the risk rating is 100. That's good to know. Thank you.
Thank you.
The next question comes from the line up to Mayor Brazil with Wells Fargo. Please proceed.
Hi, good afternoon.
Just a couple follow-ups. With deposit growth expecting to exceed loan growth in 23, what's the excess funding going to be used for? Is the primary focus initially to pay down some of this near-term borrowing, or is that excess funding going to be layered into the securities book?
It could either or, but our first goal would probably be to lower our borrowings and take down that cost.
Okay great and then again following up on the large bank exiting the correspondence space and thank you for not mentioning the bank by name but pretty large player in the space what happens to that market share is that is that market share kind of
split amongst the rest of the constituents and are you expecting a Marihomus portion to grow or are you more or less kind of ring-pensing that and keeping the existing business as is with kind of competitors maybe getting more of that market share that's up for grabs.
So I think like some of the other competitors, they balance market share with
with gain-on-sale margin, and that's what we do. So if we can hold our existing market share and grow the gain-on-sale margin, that works for us. And that's sort of where we've been, and I think that's what the industry is trying to do. There seems to be a little discipline going on here.
But without mentioning that bank that left its early days and we'll wait and see. I clearly have more color on it as we get through the end of the first quarter. During the third quarter, which is when margins dropped, we did a little experiment whereby we pulled back.
in terms of activity and purchase volume. And we saw margins move up a little bit in that scenario, and I'm not sure that's the reason why, but they basically stayed at a somewhat elevated place from how far they had fallen to in the fourth quarter. So, um,,,,,,...
I don't know, we're encouraged by that and we'll see what happens.
encouraged by that and we'll see what happens. Got it. Thank you.
Thank you.
The next question comes from the line of John Archambault with RBC. Please proceed.
Thanks, hello everyone.
A question for you on the...
The chart you have on the...
Slide 18.
the economically resilient portfolio positioning. Sorry.
What do you expect that mix to look like?
in one to two years from now. I guess another way is where's the emphasis in terms of your growth drivers.
from where we're starting today.
And I Tim Bruckner
You will see us...
focus growth, particularly through any potential or real recession in areas that are resistant.
At the same time, you'll see us reduce our exposures in some of the more sensitive areas. We will do that more with precision than with a broad brush, but specifically lowering exposure, getting out of industries.
that are particularly sensitive and then really the resistant areas that's sticking to our day. When we talk about growth there, we're talking about relationship growth.
So these are with sponsors that we know not just at the at the lender level but at the top of the house.
And we're growing specifically at low loan-to-value, high amount of sponsor investment in the deal. What we're doing differently though right now, and we can do it, we can be more selective, is we're being very selective about the sub-markets.
as well that we're in if it's real estate related. And that's where we're growing. Okay.
well that we're in if it's real estate related. And that's where we're growing. Okay, got it.
Dale, question for you, the PPNR growth of 11 to 15 percent.
may be obvious but what do you see as the key risks
Meaning what brings you closer to 11 or below 11 and what could put you at the higher end.
Well, I mean, you know, first and foremost, we see our task in front of us is sustaining deposit growth. With deposit growth, we've got the balance sheet leverage. We can, we have opportunity, you know, in the asset side to deploy this at significant spreads.
which will drive NII, obviously driving PP&R, and of course avoiding much in terms of the provision costs other than...
to support the higher balances. I think that's the number one thing.
sustaining our deposit growth and we've got a number of initiatives and some of them are coming to fruition, I think now. And we think we're going to be on track.
Qualitative reserve size. Any help you can give us on that, and how big is the qualitative piece of your reserve?
Yeah, I can. As far as you're talking about the quality of adjustments on the ACL grade.
About 5%.
Okay.
And then Ken, just one for you.
Thank you.
How are you judged? How are you guys judged? Is it...
tangible book failure growth? Is it EPS? Is it credit? Where are you guys most focused?
in terms of the financial metrics that we look at for the coming year. Thanks.
As it relates to performance...
It's sort of up and down both the income statement and the balance sheet as
as determined by our short-term or SDI.
compensation, GPS, loan growth, deposit growth.
asset quality, operational quality, and the growth in our capital base. In terms of the LTI.
Of course, it's share price and the share price is motivated by the growth in EPS. Those are the things that we focus on.
Okay. All right. Thank you.
Thank you.
There are no additional questions at this time. I will now hand the call over to Ken Vignone for closed remarks.
Thank you all for...
joining us today and we look forward to talking to you about the Q1 results in the next couple months. Thanks.
That concludes today's conference call. Thank you, you may now disconnect your line.
Goodbye.