Western Alliance Bancorporation Common Stock (DE)

Hi, everyone. Welcome to the earnings call for Western Alliance Bancorporation for the first quarter of 2020. Our speakers today are Ken Vecchione, President and Chief Executive Officer, and Dale Gibbons, Chief Financial Officer. You may also view the presentation today via the webcast through the company's website at www.westernalliancebancorporation.com. The call will be recorded and made available for replay after 2 p.m. Eastern, April 17, 2020 through May 17, 2020 at 9 a.m. Eastern by dialing 1-877-344-7529 using the passcode 101-42009. The discussion during this call may contain forward-looking statements that relate to expectations, beliefs, projections, future plans and strategies, Anticipated events or trends and similar expressions concerning matters that are not historical facts. The forward-looking statements contained herein reflect our current views about future events and financial performance and are subject to risks, uncertainties, assumptions and changes in circumstances that may cause our actual results to differ significantly from historical results and those expressed in any forward-looking statement. The factors that could cause actual results to differ materially from historical or expected results are included in this presentation. The related earnings released and our filings with the Securities and Exchange Commission. Except as required by law, the company does not undertake any obligation to update any forward looking statements. Now for the opening remarks, I would like to now turn the call over to Ken Vecchione. Please go ahead.

Good afternoon and welcome to Western Alliance's first quarter earnings call. Joining me on the call today are Dale Gibbons and our Chief Credit Officer, Tim Bruckner. I will first provide an overview of Western Alliance's response to the coronavirus pandemic. Then Dale will walk you through the bank financial performance. Afterwards, we will open the line to take your questions. I'll begin by laying out Western Alliance's approach to the COVID and economic crisis. First and most importantly, I hope that everyone on the line is doing well and that your families and loved ones are safe and healthy. These wishes are especially extended to all the care and safety workers actively putting themselves in harm's way to protect our communities. At Western Alliance Bank, our people remain healthy and engaged, and despite the vast majority working from home for the last month, continue to go above and beyond the call of duty to serve our customers and the communities we operate to navigate this challenging time. Our business continuity plans have been working as anticipated, and I am proud of the entrepreneurial spirit our people continue to demonstrate to get the job done and develop unique solutions for our clients. First, I'd like to lay out the business actions Western Alliance has taken in light of the evolving environment. Although we did not anticipate the widespread severity and likely duration of the virus, we did start assessing potential risks and mitigants as early as mid-January. And as the breadth of the pandemic became apparent, we accelerated implementing plans in mid-February to prioritize asset quality, capital, and liquidity management. We have since divided the business into appropriate risk segments led by senior managers with deep credit and workout experience to monitor and foster early engagement with our borrowers and begin the necessary credit triage process. For example, Robert Sauver is leading the hotel franchise group, while I am leading the warehouse lending and gaming groups. Dale has corporate finance, and Tim Bruckner coordinates, oversees, and directs all credit activities. Our overall risk management approach is focused on establishing individual borrower-level strategies in which we are proactively engaging in customer conversations to evaluate and agree upon financial plans focused on liquidity management to conserve resources in anticipation of an elongated economic downturn. To date, we have had direct dialogue with all borrowers with over $3 million in exposure, or 86% of our portfolio. and substantial dialogue below this level. We assume that all borrowers will have some level of COVID-19 impact and are focused on evaluating our borrowers' remediation efforts, access to capital and contingency plans. We're also very pleased that Congress and the entire federal government came together to expeditiously pass the CARES Act and stimulus measures a few weeks ago. Additionally, we applaud the Fed's actions to reduce interest rates, support liquidity in the financial markets through quantitative easing for a wide variety of asset classes, and provide support for small and medium-sized businesses through its innovative new lending programs. We recognize that the SBA has a large task in front of them, and I'm extremely proud to say that our people work tirelessly with them so that we could successfully process the Triple P program loans on the first day. We have dedicated over a quarter of our workforce to avail our clients of this important program and have successfully approved over 2,600 applications totaling $1.5 billion to date. We anticipate funding approximately $150 million per day. As part of our broader risk management strategy, we have prioritized implementing the Triple P program as the most expedient method to quickly Thank you for joining us today. to hopefully short-term challenging environment whereby our clients contribute liquidity, capital, or equity as an integral component to loan modifications. Our longer-term solutions-based approach distinguishes us from industry standardized 90-day deferral programs. Our approach collectively uses the resources of the borrower, government, and the bank's balance sheets to develop solutions that extend beyond six-month window provided for in the CARES Act. This negotiation process has likely slowed our modification pipeline as approximately $400 million has been processed to date. We learned during the last downturn when both the borrower and the bank used their resources to bridge the gap, it generates a mutually favorable outcome. With all this as the backdrop, I'd like to walk through our financial performance for the quarter. Despite the uniquely challenging operating and rate environment, I am proud to report that in the first quarter, Western Alliance generated $163.4 million of operating pre-provision net revenue up 10% year-over-year and 3% quarter-to-quarter. We continued with the adoption of CISO accounting changes this quarter, which resulted in a provision for credit losses of $51.2 million for the quarter, 47% of which was driven by our robust balance sheet growth. Dale will go into more detail in a bit on how the unique features of CISO drove our provisions, but our ACL to funded loan ratio now stands at 1.14%. We all generated net income of $84 million, or 83 cents per share, and tangible book value per share was $26.73. This quarter we produced a NIM of 4.22%. and had net recoveries of $3.2 million and continue to improve our operating leverage. Even with our increased vigilance, organic balance sheet continued to be healthy in Q1 for both loans and deposits. Deposits grew $2 billion to $24.8 billion as we gained market share in several of our key business lines as well as traction in one of our recently launched deposit initiatives which added over $400 million. This highlights the continued strength of our diversified funding channels and overall deposit franchise to generate stable, low-cost liquidity irrespective of the macroeconomic environment. Continuing on our strong momentum from 2019, total loans increased $2 billion to $23.1 billion. Approximately $1.5 billion of this was through organic loan growth from new client projects and another $500 million was credit line drawdowns, of which approximately half was redeposited into the bank. Let me take a moment now to make a few high-level comments on Western Alliance loan portfolio. We believe that our well-diversified business model and purposeful decisions made over the past decade regarding conservative underwriting criteria and sector allocations positioned the portfolio to withstand the current economic environment. At quarter end, asset quality, was stable with a decline in totally adverse graded loans and OREO to assets of 1.2% from 1.27% in Q4. Western Alliance has no direct energy or large retail mall exposure. We stopped making loans to the quick service restaurant sector several years ago with current exposure of only $150 million. Our construction and land and development portfolio is now under 9% of our loan book, In our institutional lot banking business, which makes up 30% of the CLD portfolio, we have not received any deferral requests at this time. Single family residential construction, which composes another 27%, was still experiencing positive absorption trends through March. However, April's traffic has fallen off. The portfolio is extremely well positioned coming into the pandemic and right now is performing as expected. We are especially focused on monitoring and engaging with our clients in our hotel franchise finance and technology and innovation segments, which will be reviewed in more detail later in the call. During the quarter, we repurchased 1.8 million shares at an average price of $35.30. Additionally, consistent with our 10B-5 plan, we repurchased 270,000 shares thus far in Q2. However, given the rapidly changing environment, we have now paused our share repurchase Finally, Western Alliance arrives at this crisis in a position of strength, uniquely prepared to address what's ahead. We remain well capitalized and highly liquid, with a CET1 ratio of 9.7% and ample total liquidity resources of over $10 billion. Dale will now take you through our financial performance.

For the first quarter, Western Alliance generated net income of $84 million, or $0.83 earnings per share. Net income was reduced by a $51.2 million provision for credit losses driven by the adoption of CECL, balance sheet growth, as well as the change in the economic outlook due to the pandemic. Strong ongoing balance sheet momentum coupled with diligent expense management drove operating pre-provision net revenue to $163.4 million, up 10% from a year ago, which we believe is the most relevant metric to evaluate the ongoing earnings power of the company. Net interest income and fee income remain relatively stable, producing net operating revenue of $285.3 million, primarily a result of lower yields on loans, which was partially offset by lower rates on deposits and borrowings. Non-interest income declined $10.9 million to $5.1 million from the prior quarter due to mark-to-market of preferred stock holdings of primarily large money-centered banks of $11.3 million, partially offset by $3.8 million equity investment gain. to date of the $11.3 million mark, three and a half has been recovered. As credit spreads widen during the last quarter, the yield on preferred stocks followed, impacting valuations. We do not believe this represents a permanently reduced valuation and that preferred stock values will continue to recover over time. Finally, non-interest expense declined $9.3 million as compensation and other operating expenses declined by seven. Regarding implementing CECL in our allowance for credit losses, in our 10-K we disclosed the adoption impact of $37 million, $19 million of which was attributable to funded loans, $15 million for unfunded commitments, and $2.6 million for health and maturity securities. This resulted in a combined January 1st allowance of $214 million. During Q1, loan growth drove an additional $24 million of required reserves and another $30 million was driven by changes in the economic outlook as a result of the pandemic. In total, reserve bill during the first quarter was $91 million, an increase of 50% from the year-end reserve. The quarter end ACL of $268 million was 1.14% of funded loans up 30 basis points. Provision expense for the quarter was $51.2 million, which is over 10 times the average quarterly provision during 2019. As of March 31st, the reserve bill reflects our best estimate of the future economic environment, including the impact of government stimulus programs. We utilized an assimilation of various Moody's macroeconomic outlook scenarios to capture the most likely economic outcomes in a more severe scenario for potential tail risks. As the economy continues to change, we will adjust our ACL modeling accordingly. Turning now to net interest drivers, net interest income for the quarter declined a modest $3 million from the prior quarter to $269 million as there was one last day during the quarter compared to Q4 and margin compression was offset by loan and deposit growth. Investment yields showed a modest improvement of two basis points from the prior quarter to 2.98%. However, on a linked quarter basis, loan yields increased 31 basis points due to the lower rate environment. The average yield of our portfolio at quarter end, or the spot rate, was 5.02%. Interest-bearing deposit costs increased 18 basis points in Q1 to 90 basis points as a result of immediate steps taken to reduce our deposit costs after the FOMC cut rates twice in March. The spot rate of total deposits at quarter end was 29 basis points. Total funding costs decreased 11 when all of the company's funding sources are considered, including non-interest bearing and borrowings. Through the transition to a substantially lower rate environment during the quarter, net interest income was $269 million, a decline of 1.1% from Q4. Continued strong balance sheet growth and immediate steps taken to reduce the cost of interest bearing deposits counteracted the decline in prime and LIBOR. Net interest margin declined 17 basis points to 4.22% during the quarter, as our earning asset yield fell 28, partially offset by 19 basis point funding cost decrease. With regards to our asset sensitivity, our rate risk profile has declined notably as the majority of our variable rate loan portfolio has flipped to fixed rate as floors have been triggered in the declining rate environment. Presently, 82% or $8.1 billion of variable rate loans with floors are at the floors. with the addition of our mix to shift primarily to fixed rate residential loans, 16.2 million or 70% of loans are now behaving as a fixed rate portfolio. This has reduced our interest rate risk in a 100 basis point parallel shock lower scenario to 3% at March 31st from 6.5% one year ago and assumes that rates are held flat at zero across the term structure. Turning now to operating efficiency, On a linked quarter basis, our efficiency ratio decreased 200 basis points to 41.8%. As mentioned earlier, the improvement was attributed to decreases in compensation and other operating expenses while our revenues increased modestly. As a core component of our strategy, we continue disciplined expense management to sustain industry-leading operating leverage and profitability. Our core underlying earnings power remains strong as pre-provision net revenue ROA was 2.38% flat from the prior quarter, while return on assets was down 70 basis points to 1.22%, directly related to our provision expense and excessive charge-offs of $54.4 million. As Ken mentioned earlier, our strong balance sheet momentum from 2019 continued into Q1. During the quarter, loans increased $2 billion to $23.2 billion, and deposits also grew $2 billion to $24.8. Loan-to-deposit ratio increased to 93.2 from 92.7 in the fourth quarter. Our strong liquidity position continues to provide us with balance sheet capacity to meet funding needs. Shareholders' equity declined by $17 million as dividends and share repurchases were matched by net income. Tangible book value per share increased 19 cents over the prior quarter to $26.73 per share as our share count declined. We continue to believe our ability to profitably grow deposits is both a key differentiator and a core value driver to our platform's long-term value creation. Q1 is a seasonally strong deposit quarter, and coupled with the rollout of our deposit initiatives, deposits grew $2 billion. Thank you all for joining us today. In line with the industry, the vast majority of growth was driven by increases in CNI loans, totaling $1.8 billion, followed by $107 million in construction and land development and $92 million in residential. Residential loans now comprise 9.7% of our portfolio, while construction loans decreased as a relative proportion of the portfolio to 8.9% from 9.2 in the fourth. At the segment level, tech and innovation loans grew $626 million, with 124 from capital call and subscription lines and 176 million from existing technology loan draws, in turn bolstering technology-related deposits by 383 million. Corporate finance loans grew 408 million, which is primarily due to line draws, two-thirds of which were from investment-grade borrowers, bringing utilization rates to 38% from 13% during the prior quarter. Mortgage Warehouse also contributed loan growth of $550 million, approximately 50% of which was due to line draws. Across the bank, one quarter or about $500 million of our net new loan growth was driven by drawdowns on existing loan commitments from the beginning of the quarter. In all, total loan growth of $2.2 million for the quarter was fully funded by deposit growth of the same amount. Overall, asset quality was stable during the quarter with total diversely graded assets increasing $10 million during the quarter to $351 million, while non-performing assets comprised of loans on non-accrual and repossessed real estate increased $27 million to $97 or 0.33% of total assets and is now held for sale. Within these categories, we had migration from special mention to substandard as some of the normal investor funding was delayed in tech and innovation. As a precaution, when remaining liquidity declines below six months, we bring those loans into either special mention or sub for enhanced monitoring and engagement. This quarter, we saw the cumulative impact of our efforts in managing certain special mention and substandard loans, as several were resolved in our favor with no losses. 100 million of adversely graded loans were resolved during the past quarter. 37 loans, or 50 million, paid off in full, while the other 50 million were upgraded to pass. As Ken mentioned in his introduction, we are well positioned entering this economic cycle. We only incurred $100,000 of gross credit losses during the quarter, which was more than offset by 3.3 million in recoveries, resulting in net recoveries of 3.2 million. We typically have one or two one-off credit charges every quarter. However, highlighting the strength of our loan book, we didn't experience any of these in Q1. We believe early identification and conservative management helps mitigate losses on these assets. In all, the ACL to funded loans increased 30 basis points to 1.14% in Q1 as a result of CECL adoption and the resultant provision expense related to Q1 loan growth and changes in the economic outlook. We continue to generate capital and maintain strong regulatory capital ratios with tangible common equity, the total assets of 9.4% and a CET1 ratio of 9.7. In Q1, our reduction of TCE to total assets was mainly driven by $2.3 billion increase in tangible assets due to our significant loan growth, while the tangible common equity was affected by $54 million of provisions and excessive charge-offs due to CECL adoption. In spite of reduced quarterly earnings and the payment of quarterly cash dividends of $0.25 per share, our tangible book value per share rose $0.19 in the quarter to $0.2673 and is up 15.2% in the past year. Our diversified deposit generation platform and access to significant liquidity resources is critical in times of economic stress. Overall, we have access to over $10 billion in liquidity primarily through our $4.7 billion investment portfolio, of which $2.7 billion are investment grade, readily marketable, and not pledged on any borrowing base. Additionally, we have $7 billion in unused borrowing capacity with the Fed, Federal Home Loan Bank, and correspondence. Our strong capital base, access to liquidity, and diversified business model will allow us to address any credit demands in the future. I'll now hand back the call to Ken to conclude with comments on a few of our specific portfolios.