Western Alliance Bancorporation (WAL) Earnings Call Transcript & Summary

Good day, everyone. Welcome to Western Alliance Bancorporation's Update Call. You may also view the presentation today via webcast through the company's website at www.westernalliancebancorporation.com. I would now like to turn the call over to Miles Pondelik, Director of Investor Relations and Corporate Development. Please go ahead.

Thank you for joining us today. Our speaker today is Ken Vecchione, President and Chief Executive Officer. Before I hand the call over to Ken, please note that today's discussion may include forward-looking statements, which are subject to risks, uncertainties and assumptions. Except as required by law, the company does not undertake any obligation to update any forward-looking statements. For a more complete discussion of the risks and uncertainties that could cause actual results to differ materially from any forward-looking statements, please refer to the company's SEC filings, including the Form 8-K filed this morning, which are available on the company's website. I'd like to now turn the call over to Ken Vecchione.

Good morning. I regret that it has become necessary to convene this call. Integrity, honesty, consistency, dependability and adherence to contractual obligations are not aspirational values at Western Alliance Bank. They are foundational requirements, and Jefferies has breached these requirements. As you're aware, Western Alliance Bank extended a loan to a Point Bonita Capital fund managed by Leucadia Asset Management, which is a subsidiary of Jefferies. A forbearance agreement associated with the loan was entered into in October of 2025. Up until last week, this loan had performed as expected. In fact, it was paying down at an accelerated pace. Since August of 2025, it has been reduced from $337 million to $126 million (sic) [ $126.4 million ], which is currently outstanding. Last week, however, Jefferies informed us that it directed Leucadia Asset Management to cease making payments on this remaining balance. As a result of this nonpayment, Western Alliance will be required to charge off the full remaining balance in the quarter and reestablish a corresponding provision. Thanks to our strong capital position and growth prospects, the bank can absorb this loss with minimal disruption. In a moment, I will outline how we intend to offset most of this impact through actions already taken, including realized and expected securities gains and expense reductions throughout the year. This action by Jefferies was unforeseen and represents a highly unusual breach of contract by counterparties with the capacity to perform. I will state plainly, in my entire banking career, I have never witnessed a breach of contract that so deliberately places a reputation and operating integrity of a counterparty at risk, forcing future banks, clients and counterparties to seriously reevaluate the dependability of that organization's commitments. This morning, Western Alliance filed a formal complaint in New York Supreme Court to hold Jefferies, Leucadia Asset Management and Point Bonita accountable for their obligations to the bank. We believe we will prevail our multiple claims and recover all damages caused by this breach. As detailed in the complaint, our confidence is supported by the representations made by Jefferies, Leucadia Asset Management and Point Bonita Capital, both publicly and privately. Let me provide some additional color. At origination, the loan we made was secured by receivables that Leucadia Asset Management's LAM Trade Finance Group, or LAM TFG, purchased from First Brands and for which LAM TFG provided representations and warranties and had servicing obligations. In September of 2025, the bank learned LAM TFG allowed the UCC filings on the receivables to lapse. Western Alliance quickly protected its right to full repayment by entering into a forbearance agreement pursuant to which LAM TFG acknowledged breaches of representations and warranties, admitted to failing to file required UCC statements and agreed to an accelerated payment schedule regardless of the collection of First Brands receivables. I think that's important, regardless of the collection of First Brands receivables. That structure appropriately prioritized debt repayment ahead of equity, consistent with the applicable waterfall provisions. The forbearance agreement required 5 payments. First payment of $84.5 million was made on October 3, 2025. Second payment of $84.25 million made on October 17, 2025, 4 days before the Q3 earnings call. Third payment of $42.125 million made on January 15, 2026, ahead of the Q4 earnings release. The fourth payment of $42.125 million scheduled for February 2027 and the final payment of $84.25 million scheduled for March 31, obviously are not going to be made. Western Alliance entered into this agreement based on our working history and explicit assurances from Jefferies and Leucadia Asset Management that all Point Bonita debt would be repaid in full. We possess correspondence edited by Leucadia Asset Management and reviewed by Jefferies legal counsel, stating that Point Bonita had the ability to pay off all of its debt to the bank. They further acknowledged that LAM Trade Finance Group was performing as agreed and that Point Bonita generates sufficient cash flow to amortize the loan. Based on the facts, we made claims, including fraud -- based on the facts, we have made claims, including fraud, breach of fiduciary duty and fraudulent conveyance. We also assert the court must pierce the corporate veil to hold Jefferies, LAM and Point Bonita directly responsible. I encourage stakeholders to review the filed complaint to understand Western Alliance's position. Litigation was not our preferred path. I personally met with Richard Handler, Jefferies CEO this past Sunday to emphasize that collaboration was preferable, yet litigation is the path that Jefferies left us with and the path we must pursue to serve our stakeholders' interest. I will conclude by saying the obligation to pay is absolute, and we will be aggressive in pursuing that payment and all related fees, expenses and damages on behalf of our shareholders. The forbearance agreement supersedes reliance on collection of First Brands receivables as the only source of repayment. Issues related to Jefferies' First Brand exposure are not Western Alliance's responsibility. We will seek to claw back payments made to limited partners and fees earned by Jefferies. Now turning to the financial impact, which is well managed. The $126.4 million charge-off and provision will substantially -- will be substantially offset through 3 actions: first, approximately $50 million of gains from security sales, $45 million of which have already been realized with the remaining $5 million expected by the end of March. Second, approximately $50 million from expense initiatives throughout the year that do not impair growth or operational capacity. The remaining $26 million is under active review with multiple migration pathways that will be discussed on our first quarter earnings call. Following these actions, we expect to maintain an approximate 11% CET1 ratio. As a management team, we always plan for excess earnings capacity to absorb unexpected events. In summary, we are deeply disappointed by Jefferies' conduct. While the $126.4 million charge-off is manageable, it is unwelcome. After this call, management will return to remaining fully focused on growing Western Alliance in a safe, sound and disciplined manner. Joining me today are Vishal, Dale, Tim Bruckner and our General Counsel, Jess Jarvi. We will now take a few questions, noting that our responses will be appropriately limited given the litigation filed today and only focus on this event. This call is not intended to provide a mid-quarter financial update. So operator, let's proceed with the questions.

Just one clarifying comment. With respect to the complaint that was filed, it includes fraud and breach of contract, and we're exploring other claims and may amend the complaint in the future.

Thank you, Jess.

We will now take our first question, which comes from Chris McGratty at KBW.

Ken, I want to focus on the mitigation efforts. You outlined basically the P&L impact is largely contained. Can you just unpack the expense impact? I guess, had expense rationalization been considered prior to this? I guess, can you elaborate on what exactly is being pulled here? And then two, on the bond sales, obviously, that would have an impact on future NII. Just what are you harvesting in the bond book?

Yes. I think those are fair questions, Chris. So as I said, we really look at remediating the $126.4 million charge-off in terms of the earning impact in 3 buckets. The first were the security gains and $45 million of the $50 million has been realized and we'll take care of the other $5 million between now and the end of the quarter. The second, we expect to reduce the corporation's expense run rate through operational efficiencies, moderating LFI readiness, slowing the rollout of future expansion projects and optimizing technology and vendor programs. None of these programs are designed to impact projected full year balance sheet targets, okay. And then lastly, the third item, which is the remaining $26 million, this should be accomplished either through growth, pricing initiatives, future stock repurchases and other fee and expense programs. And so we'll have more to report on the remaining $26 million by Q3. But to kind of look at that $26 million for a moment, the $26 million shortfall equates to just 1 week's worth of 2025's PPNR. So we're working on that now. I just be honest with you, the programs are in front of me, given all the things we're working on, I just haven't had time with the rest of the team to tie it out and absolutely confirm that $26 million. But I have a high degree of confidence that we're going to get to that $26 million. So Chris, really, it's what we do best, which is we optimize tangible book value at this company. We had a few programs that were nice to do if we had the opportunity to do them, and we put them into our numbers this year. We can move them towards the back end of the year or into 2027 without impacting our balance sheet growth guide that we gave you just a couple of weeks ago.

The next question comes from Janet Lee with TD Cowen.

To the extent you could share, are you able to provide some context around based on your conversations, what has changed or triggered Point Bonita or Jefferies to not pay after a series of payments they've obviously been making. Just wanted to get the better context around the situation.

Yes, I can't -- but I can't tell you what's behind Jefferies motive. I can just tell you that we were a week out from receiving our next payment. We received a call from their General Counsel to our management team saying they just weren't going to make payment. And I'm not going to speculate as to what's going on at Jefferies as to why they couldn't make payments. But as I said, they were making payments. Those payments were bringing down the loan in an accelerated fashion. We relied on their private and public conversations we've had with them. And we were very surprised that they decided to pull back. To me, it's quite shocking.

The next question comes from Jared Shaw with Barclays Capital.

I guess just going back to the $50 million of savings and calling out some of the impact to future growth. Is that -- is there an impact there to some of the initiatives that Dale is working on, on the digital deposit front?

No, no. Dale, do you want to add anything to that or?

No, sure. Yes, I perceive our opportunities as strong as they've ever been. We are moving headlong into several initiatives that we haven't really given color on at this point in time that I think are going to move the needle for the company. We look forward to it.

And let me just go back to the first question that came from Chris. I don't think I fully answered it, just gone to me now. The last part of Chris' question is, how will you make up the shortfall in interest income from the sale of these securities? And I should have said that we sold a number of these securities and generated gains when spreads were tighter. I actually think the backup in spreads are going to help us mitigate some of the shortfall in interest income. But we'll either make up that shortfall in interest income the same way as we're looking to close the gap on the $26 million, which is either through fee income initiatives or programs and incremental expense reduction programs as well. And quite possibly, we'll push to see if we can bring up our average earning assets as deposits flow into the bank. And if that could happen, then we'll be able to put that money to work. So that was the last part to Chris' question that I -- sorry, I missed.

The next question comes from David Smith with Truist Securities.

Could you give us, I guess, some more detail about how -- if you expect to prevail in court, why you still needed to take the charge just for accounting purposes? I know you had an issue last fall where you didn't charge off the full loan because of expected -- you expected to prevail as you went through the legal process. So any color you can provide there?

I'll give you my best legal answer. My General Counsel will stop me if I'm going down the wrong path. In this particular case, we had a counterparty that absolutely said they weren't going to pay, all right? And we have collateral behind their commitment to pay, which is the First Brands receivables that do not have value. And we thought it's appropriate to take this charge now. Anything that we will recover will come down -- will come down the road from today. It will be some time as this claim runs through the court system. Versus the other transaction, we have tangible property that had appraisals and we could do those properties, we could -- we have appraisals. And by the way, we are having them reappraised as we talk right now, and that's what gave us the confidence level to put a reserve on that rather than take a charge-off.

The next question comes from Ebrahim Poonawala with Bank of America.

Two questions. I guess we're just taking one at a time. But one, just remind us what's the total exposure of Western Alliance to similar type of loans to funds and where loans might have been backed by accounts receivable? Because I understand the situation here. I'm just wondering what's the total exposure if you don't see good faith reciprocation in events where there's a credit issue, number one. And second, why the expense mitigation action? I mean we've seen a lot of one-off credit issues over the years. I'm just wondering why is that leading to a knee-jerk reaction on how you invest longer term for the business?

Okay. Yes. Great. The first answer is we have about $450 million, of which $126 million was from LAM Fund I in terms of ABL. So we really won't have much after this $330-ish million will be all that will be in our asset-based lending book after this write-down. The second is we're able to do several things here. I don't think any of the expense programs that we're putting into place is going to impair our future growth ambition and take away from the trajectory of where this company is going through in 2026 and in 2027. So we were looking to do these programs, some of these programs anyway in terms of getting continuously to bring down our efficiency ratio. This just accelerated it. And again, Western Alliance has had a history of being a very strong tangible book value growing organic bank, and we want to keep that same reputation in the market, and we felt that shareholders would be better served by taking out expenses that were not needed.

The next question comes from Casey Haire with Autonomous.

So 2-parter. One, apologies if I missed this, but the charge-off guide for '26 ex this credit, any updated thoughts there? And then two, how do we think about reserve going forward? I know this is an isolated incident, but it did -- it represents 25% of the reserve. You guys have been talking about building it a little bit stronger going forward. I'm just wondering, any learnings from this that would impact reserve going forward?

Okay. Yes, Case, the way I look at it, I'm going to break your question down into a couple of components. First, the credit outlook for the year can be divided into 3 key categories. First, consistent with our last earnings call, the bank continues to expect net charge-offs to land in the high end of the 25 to 35 basis point guidance for the first half of the year. And this trajectory should position us to reduce nonperforming loans and bring that balance below funded ACL by the end of the second quarter. That is consistent with what we said previously. Second, of course, this charge-off is $126 million, and we've talked about it. Third is, regarding the Cantor Fund V fraud. And we've now received nearly 2/3 of the property appraisals and expect the remainder by the end of the quarter. As of today, I can tell you the reserve established when we first reported that fraud still appears appropriate. We will revisit both the reserve and any related charge-offs based on the remaining appraisals and foreclosure strategy during the third quarter call. I also will remind people that we have a $25 million fraud insurance policy against that reserve. We took a reserve for $30 million, if you recall. So we have a $25 million fraud insurance policy with a $5 million deductible against any future charge-offs. Vishal, do you want to say anything about the loan loss reserve?

Yes, sure. Happy to. So I think on this one, right, the $126.4 million charge-off, we're going to reprovision for that. So that will keep the allowance and replace that. Going forward, I'd just repeat the comments we made on the earnings call, which is we can expect the reserve to continue to trend up. And I think the guidance we gave is in the near term, we're going to try to move that to the low 80s, and that's still where we're thinking.

Our final question today comes from Anthony Elian with JPMorgan.

Ken, on the $50 million expense savings, is this something you could recognize in 2Q? Or is this a second half event? And then following up on EB's question, how do you guys -- how will you guys ensure that the $50 million expense savings actually don't impede your balance sheet growth for this year, right? If I just think about companies that introduce expense savings or operational efficiency programs, they're not usually the ones that are leading the industry on growth like you guys?

Yes. So the $50 million expense savings, they'll build through the course of the year. We probably have about $5-ish million coming in Q1 and then they build up from the end of Q1 going forward. Part of what we're saving here is, I'll tell you, is the LFI readiness program. And there's been a lot of indication that, that readiness -- that threshold is going to be a much higher number. And so we're pushing out some of those program development, which I'll say is just further enhancements to what we already have into '27. So that won't impede our growth at all. And then what we do here is when we think about growth, we think about growth in 3 horizons. It starts in Horizon 3, which is interesting things, interesting businesses that we like, that we review. We try to develop a viewpoint on. And then if we like one of those businesses, we then move it into Horizon 2, which is take 12 to 18 or plus months to build and develop and test it, and then we move it into Horizon 1, which is beta testing for 12 months and roll out before we go live. That process is still intact, okay? And I don't think these expense reductions are going to impact the way we continue to roll out our growth. One of the things that you'll hear when we get to Investor Day, and maybe this is just a little bit of a prelude, what makes Western Alliance so special in the way we are able to grow, is that we create a number of -- we have a number of specialty-related businesses that have these S growth -- S-curve growth aspects to them. And our S curves are -- these businesses are built on one S-curve on top of the other. And the good news is the businesses that we've rolled out, none of them are beginning to flatten out. Even businesses that we began 14 years ago, like our Homeowners Association still has a very strong S curve attached to it in terms of growth. And so we have a lot of growth in the existing businesses that we've rolled out and the businesses that we may have slightly delayed and moved into '27 will not impact our future growth because of the growth that we have coming from all the prior businesses that we have rolled out to the marketplace. So thank you for your question.

Those are all the questions we have time for today. And so I'll turn the call back over to Ken Vecchione for closing remarks.

Yes. I'll just end by saying highly disappointed in the actions of Jefferies. We thought it was very important to be as transparent as we always are and as clear and concise as to what we're going to do about this loss. I hope that today's 8-K demonstrates that. I hope this call demonstrates that. And for our shareholders listening, they should know that after this call, it's back to business as usual. This loss has been contained. We'll see what happens through the court system, but we're back to growth as we normally know it here, and we're going to be focused on that. So I look forward to talking to you in Q1 with a further update. Thank you all for attending the call today.

Thank you, everyone, for joining us today. Goodbye. This concludes our call, and you may now disconnect your lines.