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Text: Joining me on the call today are Dale Gibbons and Tim Bruckner, our Chief Financial Officer and Chief Credit Officer.
I will first provide an overview of our quarterly results and how we are managing the business in this current economic environment, and then Dale will walk you through the bank's financial performance.
The continued growth in Western Alliance's national commercial business strategy drove financial results and balance sheet growth through record quarterly highs to kick off 2021.
Barring the company's strong fourth quarter performance and underlying fundamental trends, WAL earned net income of $192.5 million and earnings per share of $1.90 for the quarter, up $108 million year-over-year and nearly flat to Q4.
Net revenue expanded 4.5 times the rate of expense as improvement in asset quality and economic conditions drove a $32.4 million relief in loan loss reserve this quarter.
Our focus continues to be on PPNR growth, which rose approximately 31% year-over-year to $202 million while marginally lower than last quarter due to two fewer days.
Regarding the acquisition of AmeriHome, I am pleased that the closing took place approximately three weeks ahead of schedule.
While personnel and technology integrations are minimal, we have begun to focus on balance sheet and funding synergies with the paydown of external credit lines.
Additionally, we signed agreements with the sale of approximately $750 million of mortgage servicing rights to strong counterparties that will allow Western Alliance to retain substantially all the custodial deposits.
We expect this to be completed in early May.
AmeriHome was an attractive strategic acquisition, expanding Western Alliance's fee income and lowering the company's reliance on spread income while providing growth optionality to our commercial portfolio of businesses.
Turning to the first quarter balance sheet trends, outstating quarterly loan and deposit growth of $1.7 billion and $6.5 billion respectively, lifted total assets to $43.4 billion, up 49% from the prior year.
Our near-term focus on growing loans in low-risk asset classes was on display as loan growth was primarily driven by warehouse funding, residential loan purchases and increased activity throughout our traditional banking and regional footprint.
Our deposit growth was broad-based across our franchise, which pushed down our loan-to-deposit ratio of 75% and creates a strong funding foundation for ongoing loan and earnings growth from our commercial loan pipeline and the AmeriHome acquisition.
The continued excess liquidity from our improving deposit franchise is at the expense of short-term NIM compression, but it's a trade-off we are willing to accept for long-term value creation.
This impressive loan growth drove net interest income of $317.3 million, or $2.5 million higher than last quarter and up 18% on a year-over-year basis.
Quarterly net interest margin was 3.37%, down 47% from the fourth quarter as we continued to deploy excess liquidity into loans and investment securities.
Non-interest income totaled $19.7 million for the quarter, aided by $7.3 million of warrant income from Bridge Bank.
Asset quality remained stable this quarter as the economic recovery gained steam.
For the quarter, net loan charge-offs were $1.4 million or 2 basis points on an annualized basis.
Credit losses may not appear in any meaningful way as prior and proposed stimulus packages continue to positively impact consumer spending habits and many businesses were provided the liquidity to weather the pandemic.
Finally, Western Alliance continues to generate significant excess capital, which grew tangible book value per share to $33.02, or 23.5% year-over-year -- or 23.5% year-over-year growth.
We remain one of the most profitable banks in the industry with return on average assets and return on average tangible common equity of 1.93% and 24.2%, respectively.
This strong momentum, coupled with economic reopening, positions Western Alliance well for an industry-leading 2021.
At this time, I'll let Dale take you through the financial performance.
For the quarter, Western Alliance generated net income of $192.5 million or $1.90 per share, each down about 1% from the prior quarter.
This is inclusive of a reversal of credit loss provisions of $32.4 million due to continued improvement in economic forecasts relative to year-end 2020 and continued loan [Phonetic] -- in [Phonetic] loan segments with historically very low loss rates.
Additionally, merger expenses related to the AmeriHome acquisition of $400,000 were recognized.
We expect total merger charges to be approximately $15 million, preponderance of which will be incurred in Q2 as integration continues.
Net interest income grew $2.5 million during the quarter to $317.3 million, an increase of 18% year-over-year, primarily as a result of our significant balance sheet growth.
However, while average earning assets grew $5.7 billion, the relative proportion held in cash and lower-yielding securities increased to approximately 32% in Q1 from 22% in Q4, which temporarily muted our interest income growth as we prepare to deploy excess liquidity into AmeriHome-generated assets and higher-yielding commercial loans.
Quarter-over-quarter, our loan-to-deposit ratio fell to 75% from 85% in Q4 as we proactively look to grow low-cost deposits as dry powder for future loan growth.
Non-interest income fell $4.1 million to $19.7 million from the prior quarter, mainly driven by smaller fair value gain adjustments in our securities measured at fair value, but partially offset by $7.3 million in the warrant income.
Non-interest expense increased $2.8 million, mainly due to higher deposit costs as lower rates were offset by higher average balances.
Continued balance sheet growth generating superior net interest income drove pre-provision net revenue of $202 million, up over 30% from a year ago.
Turning now to net interest drivers.
As our strong core deposit growth continued throughout the quarter, we look to redeploy excess liquidity into the investment portfolio and loans.
Total investments grew $2.4 billion for the quarter or 43% to $7.9 billion compared to an average balance of $6.5 billion.
Investment yields declined 24 basis points from the prior quarter to 2.37% due to lower reinvestment rates in the current environment.
Similarly, on a linked-quarter basis, linked -- loan yields declined 8 basis points following ongoing mix shift toward residential loans and asset class with generally lower yields than the remainder of the portfolio and lower credit risk.
This was partially offset by modestly higher PPP fees, strong loan growth and liquidity deployment toward the end of the quarter.
Significantly, quarter-end balances for loans and investments were $3.3 billion higher than the average balances and yielded 3.5% more than our Fed account.
Higher income from this already-deployed liquidity positions us well for Q2.
Interest-bearing deposit costs were reduced by 3 basis points in Q1 to 22 basis points, due to ongoing repricing efforts and maturities of higher cost CDs.
The spot rate for total deposits, which includes non-interest-bearing, was 11 basis points.
We expect funding costs have generally stabilized at these levels.
Net interest income increased $2.5 million to $317.3 million during the quarter or 18% year-over-year as higher loan and investment balances offset net interest margin compression.
NIM declined 47 basis points to 337 basis points as our purposeful strong deposit growth in advance of closing the AmeriHome acquisition negatively impacted the margin by 43 basis points.
To put this in perspective, average securities and cash balances to interest-earning assets increased meaningfully in Q1 32% from 22%.
Given our higher end of quarter loan balances, healthy loan pipeline and ability to deploy this excess liquidity over the coming quarters into higher-yielding earning assets, we expect this margin drag to moderate while net interest income declines [Phonetic].
Additionally, a PPP loan yield of 4.9% benefited the NIM by 8 basis points, which was similar to the fourth quarter benefit.
Cumulatively, over the remainder of 2021, we expect to recognize $15.4 million of BBB fees.
Our efficiency ratio rose 90 basis points to 39.1%, an increase from 38.2% in Q4.
This higher efficiency ratio was driven by a modest decline in non-interest income and an increase in expenses, partially offset by increased net interest income.
Non-interest expense linked quarter growth increased by 2.1%, driven by higher deposit fees related to the 82% annualized rise in deposit balances.
Excluding PPP, net loan fees and interest, the efficiency ratio for the quarter would have been 41%.
Inclusive of AmeriHome, we expect the efficiency ratio to rise to the mid-40s this quarter.
Pre-provision net revenue declined $4.4 million or 2.1% from the prior quarter, but increased 31% from the same period last year.
This results in PPNR and our ROA of 2.03% for the quarter, a decrease of 21 basis points compared to 2.24% for the year-ago period, partially impacted by a much larger asset base.
This continued strong performance in capital generation provides us significant flexibility to fund ongoing balance sheet growth, capital management actions or meet credit demands.
Balance sheet momentum continued during the quarter as loans increased $1.7 billion or 6.1% to $28.7 billion and deposit growth of $6.5 billion brought balances to $38.4 billion at quarter end.
Inclusive of the second round of PPP funding, loans grew 24% year-over-year, while deposits grew approximately 55% year-over-year, with our focus on low loan loss segments and DDA.
In all, total assets have grown 49% year-over-year as we approach the $50 billion asset level, including AmeriHome.
Finally, tangible book value per share increased $2.12 over the prior quarter to $33.02, an increase of $6.29 or 23.5% over the prior year, attributable to both net income and the common stock offering of 2.3 million shares completed during Q1 in anticipation of the AmeriHome acquisition.
Our strong loan growth continues to benefit from flexible national commercial business strategy.
The majority of the $1.7 billion in growth was driven by an increase in C&I loans of $746 million.
Loan growth was also strong in residential real estate loans of $675 million, supplemented by construction loans of $337 million and CRE non-owner-occupied loans of $27 million.
Residential and consumer loans now comprise 10.9% of our loan portfolio, an increase from 9.9% a year ago.
Within the C&I growth for the quarter and highlighting our focus on low-risk assets, mortgage warehouse loans grew $562 million and Round 2 3P [Phonetic] loans, originations were $560 million, which were nearly offset by $479 million from Round 1 of payoffs.
We continue to believe our ability to grow core deposits from diversified funding channels is our key to firm's long-term value creation.
Given the ability to deploy funds into attractive assets in the near term, we purposefully looked to expand balance sheet liquidity in Q1.
Deposits grew $6.5 billion or 20% in the first quarter driven by increases in non-interest-bearing DDA of $4.1 billion, which now comprise 46% of our deposit base and the savings in money market of $2.9 billion.
Market share gains in mortgage warehouse continued to be a significant driver of deposit growth during the quarter, along with robust activity in tech and innovation and seasonal inflows from HOA banking relationships developed during 2020.
Our asset quality remains strong, and borrowers are stable, liquid and supported by strong sponsors.
Total classified assets increased $57 million in Q1 to $281 million due to migration of a few borrowers and COVID-impacted industries, such as travel, leisure and entertainment as reopening continues but at an uneven pace.
We see the potential for these credits to be upgraded as travel and events increase in the coming quarters.
Our non-performing loans plus OREO ratio declined to 27 basis points to total assets and total classified assets rose 4 basis points to total assets up to 0.65% compared to the ratio at the end of 2020.
Special mention loans increased $23 million during the quarter to 1.65% of funded loans.
As we've discussed before, SM loans are a result of our credit [Indecipherable] litigation strategy to early identify, elevate and apply heightened monitoring to loans or segments impacted by the current COVID environment and fluctuate as credits migrate in and out.
We do not see credit losses emerging from special mention volatility.
Regarding loan deferrals, as of quarter end, we had $68.5 million of deferrals, all of which are in low LTV residential loans.
Quarterly net credit losses were modest to $1.4 million or 2 basis points of average loans compared to $3.9 million in the fourth quarter.
Our loan ACL fell $36 million from the prior quarter to $280 million due to improvement in macroeconomic forecast loan growth in portfolio segments with low expected loss rates.
In all, total loan ACL to funded loans declined 20 basis points to 97 basis points or 1.03% when excluding PPP loans.
For comparison purposes, the loan ACL to funded levels was 84 basis points at year-end 2019 before CECL adoption.
We continue to generate capital and maintain strong regulatory ratios with tangible common equity to total assets of 7.9% weighed down this quarter by strong asset growth, and the common equity Tier 1 ratio of 10.3%, an increase of 40 basis points during the quarter, mainly driven by our common stock offering and growth in low-risk assets.
Inclusive of our quarterly cash dividend payment of $0.25 a share, our tangible book value per share rose $2.12 in the quarter to $33.02, an increase of 23% in the past year.
I'll now hand the call back over to Ken.
Western Alliance is one of only a handful growth banks in the industry with double-digit loan growth, liquidity to fund the growth, strong improving net interest income that generates consistent peer-leading ROA and return on average tangible common equity with steady asset quality and low net charge-offs.
Going forward, based on our current pipelines, we expect loan and deposit growth of $1 billion to $1.5 billion per quarter, which will drive higher net interest income and PPNR growth.
We expect NIM pressure to subside through the deployment of liquidity into attractive asset classes.
One of the characteristics of AmeriHome that we found very attractive is that it provides a natural solution to WAL's excess liquidity.
AmeriHome will be expanding its product ray to include higher-yielding non-QM and jumbo loans that fit our established credit box.
Placing and holding these loans on our balance sheet enhances our existing residential mortgage purchase program, and is a worthy credit solution for the swift deployment of excess liquidity.
To keep pace with balance sheet performance, our risk management programs and technology platforms are evolving and expenses will rise, but will be offset by the revenue generated from excess liquidity deployment.
There will be no drag on PPNR or earnings per share from these investments.
Inclusive of AmeriHome, the efficiency ratio will rise to the mid-place [Phonetic].
Finally, our long-term asset quality and loan loss reserves are informed by the economic consensus forecast incorporating risk for tail economic events, which is consistent going forward, could imply a steady reserve balance.
Depending on the timing and pace of the recovery, there could be some loan migration into the special mention category, but we do not expect material migrations into substandard.
We believe the provisions in excess of charge-offs since the pandemic began are more than sufficient to cover charge-offs through the cycle as we do not see any indicators that have implied material losses are on the horizon.
To conclude, Western Alliance is well positioned for balance sheet growth with steady asset quality.
PPNR should continue its upward trajectory from Q1, along with industry-leading return on assets and equity.

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western alliance bancorp q1 earnings per share $1.90.
q1 earnings per share $1.90.
q1 revenue fell 0.5 percent to $337 million.
net interest income was $317.3 million in q1 2021, an increase of $2.5 million from $314.8 million in q4 2020.

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