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Text: And joining me on the call today are Dale Gibbons, our -- and our Chief Credit Officer, Tim Bruckner.
I'll begin by laying out Western Alliance's approach to the COVID, an 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 force the early engagement with our borrowers and begin the necessary credit triage process.
For example, Robert Sarver is leading the hotel franchise group, while I am leading the warehouse lending and gaming groups, Dale has corporate finance; and Tim Bruckner coordinates overseas 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.
Today, 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 to support liquidity in the financial markets to 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 PPP 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 today.
We anticipate funding approximately $150 million per day.
As part of our broader risk management strategy, we have prioritized implementing the PPP program as the most expedient method to quickly get incremental liquidity to our clients.
Furthermore, we believe that the newly initiated mainstream lending program when implemented provides incremental liquidity for our large clients as well as PPP participants.
Our approach to loan modifications and deferment request is to look for resourceful ways to partner with our clients along with assessing their willingness and capacity to support their business interests.
We are asking our clients to work hand-in-hand with us for a long-term solutions 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 banks' 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 today.
We learned during the last downturn when both the borrower and the bank use their resources to bridge the gap, it generates a mutually favorable outcome.
With all of this as the backdrop, I'd like to walk through our financial performance for the quarter.
Despite a 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 CECL 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 CECL drove our provisions, but our ACL to funded loan ratio now stands at 1.14%.
WAL generated net income of $84 million or $0.83 per share and tangible book value per share was $26.73.
This quarter, we produced a NIM of a 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 continue 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 channel 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's 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 restaurants 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 request at this time.
Single family residential construction, which composes another 27%, were still experiencing positive absorption trends through March.
However, April's traffic has fallen off.
Our 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 10b5 plan, we repurchased 270,000 shares thus far in Q2.
However, given the rapidly changing environment, we have now paused our share repurchase activity.
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 the CET1 ratio of 9.7% and ample liquidity -- 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 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 center banks of $11.3 million, partially offset by $3.8 million equity investment gain.
To-date, of the $11.3 million mark, $3.5 million has been recovered.
As credit spreads widened during the last quarter, the yield on preferred stocks followed impacting valuations.
We do not believe this represents a premanently 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 $7 million.
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 held-to-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 availed 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 less day during the quarter compared to Q4 and margin compression was offset by loan to deposit growth.
Investment yield showed a modest improvement of 2 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 cost 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 their earning asset yield fell 28 basis points, partially offset by 19 basis points 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 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 on 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 in excessive charge-offs of $54.4 million.
As Kim 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 billion.
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 $0.19 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 roll out of our deposit initiatives, deposits grew $2 billion.
The increase was driven by growth of $1.3 billion in non-interest bearing DDA primarily from market share gains in our mortgage warehouse operations.
Additionally, HOA continues to perform well and contributed $330 million of low cost deposits.
During the quarter, the relative proportion of non-interest bearing DDA grew to nearly 40% of deposits from 37.5% on a linked quarter basis.
Turning to loan growth.
In line with the industry, the vast majority of growth was driven by increases in C&I loans totaling $1.8 billion, followed by $107 million in construction and land development, and $92 million in residential.
Residential homes 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 & Innovation loans grew $626 million, with $124 million 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 was 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 to 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 for the same amount.
Overall, asset quality was stable during the quarter with total adversely 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 million or 0.33% of total assets, and is now held-for-sale.
Within these categories, we had migration from special mention to substandard and some of the normal investor funding was delayed in tech and innovation.
As a precaution, when remaining liquidity declines below six months, repaying those loans into either special mention or sub for enhanced monitoring and engagement.
This quarter, we also -- we saw the cumulative impact of our efforts of managing certain special mention and substandard loans as several resolved in our favor with no losses, a $100 million of adversely graded loans 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're 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 indication in 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 result in 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, a 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 $15.4 million of provisions in excess of 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 $26.73 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 Correspondent.
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.
Regarding our Hotel Franchise Finance business, we believe our focus on the Select Service subsegment, conservative loan to cost underwriting discipline and strong operating partners sets us up for a maximum financial flexibility to weather the duration of the crisis.
Like most hotels in the country, our clients have seen a dramatic reduction in occupancy rates over the last month, and senior management is involved in active dialogue with each borrower to evaluate remediation efforts and contingency plans.
Going into the pandemic, 75% of the portfolio had an LTV under 65% and more than 73% had a debt service coverage ratio of 1.3 times.
Additionally, we only partner with experienced hotel operators with significant invested equity and resources to support ongoing operations.
Fully 66% of the portfolio is with large sponsors who operate more than 25 hotels and 90% operate 10 or more properties with top franchises or flags.
Based on our ongoing constructive dialogue, we believe that sponsors view this as a temporary event and want to continue to maintain and support these properties over the long-term, given their significant equity investments.
We are actively working with them to appropriately utilize the PPP program and the Main Street lending programs, along with their own liquidity as a helpful financial bridge to arrive at a longer-term solution.
Based on the mutually developed financial action plans, we will selectively implement loan modifications along the lines we previously discussed.
This is a prime example where both parties contribute to a comprehensive solution.
Now, regarding our Tech & Innovation business, we primarily financed established growth technology firms with a strong risk profile, mainly companies classified as Stage 2 with an established business model, validated product, multiple rounds of investment, and a path to profitability.
This provides greater operating and financial flexibility in times of stress.
99% of the borrowers have revenues greater than $5 million and have strong institutional backing with 86% backed by one or more DC or PE firms.
During the quarter the portfolio grew $495 million to $2 billion or 8.8% of the total portfolio, which was attributed to $175 million of existing line drawdowns in the technology division and an additional $124 million from capital call lines, a product that historically has had zero losses.
Tech & Innovation commitments grew $284 million in Q1 and utilization rates increased to 60% from 49% in Q4 2019.
The portfolio is fairly granular with average loan size of $6 million and these borrowers are generally liquid with more than 2:1 deposit coverage ratio.
Additionally, since 2007, warrant income has covered cumulative net charge-offs 2 times over.
Currently 14% of technology loans or $164 million has less than six months remaining liquidity, which is in line with historical trends.
Although some fund raising has been delayed, we were pleased to see several investment rounds closed over the last several weeks and days with strong continued sponsored support.
In conclusion, we see increased cash generation driven by our balance sheet momentum going into the quarter-end as well as continued loan growth from the PPP distributions.
We expect pre-provision net revenue to continue to grow to Q2 with the ability to absorb any necessary future provisions.
Given uncertainty surrounding the likely duration of the virus and evolving economic environment, we will continue to reassess our outlook as health and economic facts warrant.
Regarding asset quality, our proactive risk management approach is institutionalized throughout the Company.
We are actively working with our borrowers to develop mutually agreed upon financial plans assuming an elongated economic downturn that leads to long-term solutions.
Our strong collateral positions and little unsecured or consumer lending should serve us well in mitigating potential risk of loss as we navigate these uncertain times.
We stand ready to implement the likely next phase of PPP and the Main Street Lending Program to assist our clients and communities.
Finally, Western Alliance has assembled a seasoned management team that has weathered several economic downturns and is applying the lessons learned from the Great Recession to face these uncertain economic times.
And with that we'll open up the line, operator, and we'll take everyone's questions.

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q1 earnings per share $0.83.
will pause its stock repurchase program for remainder of q2.
western alliance - q1 results were affected by current economic environment resulting from covid-19, contributing to $51.2 million provision for credit losses.
offering flexible repayment options to current customers and a streamlined loan modification process, when appropriate.

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