Western Alliance Bancorporation Reports Second Quarter 2020 Financial Results

PHOENIX–(BUSINESS WIRE)–=Western Alliance Bancorporation (NYSE:WAL):

SECOND QUARTER 2020 FINANCIAL RESULTS

CEO COMMENTARY:

“Western Alliance’s second quarter results reflect the drive, passion and agility of its people to persevere in challenging times,” said Kenneth A. Vecchione, President and Chief Executive Officer. He continued, “Net income of $93.3 million and earnings per share of $0.93 both increased over 10% from the first quarter despite a $40.8 million increase in the provision for credit losses from the prior quarter. Operating pre-provision net revenue¹, which supports capital and growth flexibility, continues to rise, up 19% and 28% from the prior quarter and prior year, respectively. Under the Payroll Protection Program, Western Alliance helped more than 4,700 clients secure loans totaling $1.9 billion, which was the primary driver of the Company’s $1.9 billion in loan growth in the quarter. Loan growth was remarkably outpaced by deposit growth of $2.7 billion during the quarter, which includes approximately $1.1 billion in deposits related to loans originated under the PPP. Asset quality continues to be a focus as we saw marginal increases in net charge-offs and grew our allowance for credit losses to total loans to 1.39%.”

¹ See reconciliation of Non-GAAP Financial Measures.

Impact of and Response to the COVID-19 Pandemic

In response to the COVID-19 pandemic, the Company has focused first on the well-being of its people, customers and communities. Preventative health measures were put in place and the majority of employees worked remotely for the majority of the second quarter. The Company also established social distancing precautions for all employees in the office and customers visiting branches, preventative cleaning at offices and branches, and eliminated business related travel. Towards the end of the second quarter, the Company began returning employees to the office pursuant to new health and safety procedures and in accordance with guidance from the CDC and local authorities, including regular symptom checks, requiring face cloth coverings, increasing physical space between employees, staggering employee shifts and alternating schedules for employees in the workplace, and requiring employees with COVID-19 related symptoms or exposure to quarantine away from the office. The Company implemented business continuity measures as necessary throughout the pandemic, including establishing a cross-functional COVID-19 team, monitoring potential business interruptions, making improvements to our remote working technology, and conducting regular discussions with our technology vendors.

The Company has taken measures both to support customers affected by the pandemic and to maintain strong asset quality, including:

• helping business customers through the Paycheck Protection Program (“PPP”) and other loan products;
• implementing a broad-based risk management strategy to manage credit segments on a real-time basis;
• tightened underwriting standards;
• monitoring portfolio risk and related mitigation strategies by segments;
• placing limits on originations to higher risk industries and customers including, but not limited to, transportation, travel, hospitality, entertainment, and retail;
• contacting customers in order to assess credit situations and needs and develop long-term contingency financial plans; and
• offering flexible repayment options to current customers and a streamlined loan modification process, when appropriate.

The continued decline in macroeconomic inputs resulting from the COVID-19 pandemic relative to March 31, 2020 contributed to the $92.0 million provision for credit losses recognized during the quarter under the CECL accounting standard adopted by the Company on January 1, 2020. Continued uncertainty regarding the severity and duration of the pandemic and related economic effects will continue to affect the accounting for credit losses under the new standard.

While the Company does not anticipate any need for additional liquidity, in response to the economic uncertainty, the Company has taken additional actions to ensure the strength of its liquidity position. These actions include issuance of $225 million in subordinated debt at the bank, establishing a Federal Reserve lending facility in connection with funding loans to small and medium-sized businesses, and temporarily suspending stock repurchases. The Company’s capital ratios remained strong as of June 30, 2020, with a tangible common equity to total assets ratio¹ of 8.9%.

Income Statement

Net interest income was $298.4 million in the second quarter 2020, an increase of $29.4 million from $269.0 million in the first quarter 2020, and an increase of $43.7 million, or 17.2%, compared to the second quarter 2019.

Provision for credit losses² was $92.0 million in the second quarter 2020, an increase of $40.8 million from $51.2 million in the first quarter 2020, and an increase of $85.0 million from $7.0 million in the second quarter 2019. The significant increase in the provision for credit losses during the second quarter 2020 is due to worsening of economic assumptions relative to March 31, 2020, as well as increases in net charge-offs and specific loan reserves. The CECL standard, adopted by the Company in the first quarter of 2020, changes the methodology for estimating credit losses on financial instruments from an incurred loss model to an expected total loss model. This results in the recognition of expected losses over the life of loans at the time that the loan is originated, rather than after a loss has been incurred, which results in an acceleration in the timing of loss recognition. Further, as the Company’s CECL models incorporate historical experience, current conditions, and reasonable and supportable forecasts in measuring expected credit losses, the current uncertainty in the overall economy has also contributed to an increased provision for credit losses for the first half of 2020.

The Company’s net interest margin in the second quarter 2020 was 4.19%, a decrease from 4.22% in the first quarter 2020 and from 4.59% in the second quarter 2019. The decrease in NIM from the prior periods is primarily a result of decreased yields on loans, partially offset by lower rates on deposits and interest expense on borrowings.

Operating non-interest income¹ was $11.1 million for the second quarter 2020, compared to $16.3 million for the first quarter 2020, and $12.6 million for the second quarter 2019.

Net operating revenue¹ was $309.5 million for the second quarter 2020, an increase of $24.1 million, compared to $285.4 million for the first quarter 2020, and an increase of $42.1 million, or 15.8%, compared to $267.3 million for the second quarter 2019.

Operating non-interest expense¹ was $114.8 million for the second quarter 2020, compared to $121.9 million for the first quarter 2020, and $114.9 million for the second quarter 2019. The Company’s operating efficiency ratio¹ was 36.3% for the second quarter 2020, compared to 41.8% in the first quarter 2020, and 42.0% for the second quarter 2019.

Income tax expense was $19.6 million for the second quarter 2020, compared to $18.5 million for the first quarter 2020, and $24.8 million for the second quarter 2019. The increase in income tax expense from the prior quarter is primarily the result of an increase in pre-tax income during the second quarter 2020 and tax expense associated with a surrender of bank owned life insurance, partially offset by a marginal decrease in the effective tax rate.

Net income was $93.3 million for the second quarter 2020, an increase of $9.3 million from $84.0 million for the first quarter 2020, and a decrease of $29.7 million, or 24.1%, from $122.9 million for the second quarter 2019. Earnings per share was $0.93 for the second quarter 2020, compared to $0.83 for the first quarter 2020, and $1.19 for the second quarter 2019. As discussed above, the decrease in net income and earnings per share for the second quarter 2020 compared to the same period in 2019 was driven by the increase in the provision for credit losses.

The Company views its operating pre-provision net revenue¹ (“PPNR”) as a key metric for assessing the Company’s earnings power, which it defines as net operating revenue less operating non-interest expense. For the second quarter 2020, the Company’s operating PPNR¹ was $194.7 million, up $31.3 million from $163.4 million in the first quarter 2020, and up $42.2 million from $152.5 million in the second quarter 2019.Non-operating income¹ for the second quarter 2020 consisted of a $5.6 million gain related to the surrender and purchase of bank owned life insurance, a net fair value gain adjustment on assets measured at fair value of $4.4 million, which predominately relates to valuation increases on preferred stock holdings of other banking companies, and a net gain on sales of investment securities of $0.2 million. Non-operating expense¹ items for the second quarter 2020 were not significant.

The Company had 1,851 full-time equivalent employees and 47 offices at June 30, 2020, compared to 1,858 employees and 47 offices at March 31, 2020, and 1,806 employees and 47 offices at June 30, 2019.

¹ See reconciliation of Non-GAAP Financial Measures.

² Upon adoption of CECL on January 1, 2020, Provision for credit losses has been modified to also include amounts related to unfunded loan commitments and investment securities. Prior period amounts have been restated to conform to the current presentation.

Balance Sheet

Gross loans totaled $25.0 billion at June 30, 2020, an increase of $1.9 billion from $23.2 billion at March 31, 2020, and an increase of $5.8 billion from $19.3 billion at June 30, 2019. The increase from the prior quarter was driven by loans originated under the PPP, which totaled $1.7 billion as of June 30, 2020. By loan type, the largest increases from the prior quarter include $1.6 billion in commercial and industrial loans, $165 million in residential real estate loans, and $138 million in construction and land development loans. From June 30, 2019, the largest increases in the loan balance were driven by commercial and industrial loans of $4.3 billion, residential real estate loans of $825 million, and CRE non-owner occupied loans of $659 million. The Company’s allowance for credit losses on loans consists of an allowance for funded loans and an allowance for unfunded loan commitments. At June 30, 2020, the allowance for loan losses to loans held for investment was 1.24%, compared to 1.02% at March 31, 2020, and 0.83% at June 30, 2019. The allowance for credit losses, which includes the allowance for unfunded loan commitments, to loans held for investment was 1.39% at June 30, 2020, compared to 1.14% at March 31, 2020, and 0.88% at June 30, 2019.

Deposits totaled $27.5 billion at June 30, 2020, an increase of $2.7 billion from $24.8 billion at March 31, 2020, and an increase of $6.1 billion from $21.4 billion at June 30, 2019. Deposits generated from loans originated under the PPP totaled $1.1 billion as of June 30, 2020. By deposit type, the largest increases from the prior quarter include $2.3 billion from non-interest bearing demand deposits and $845 million from savings and money market accounts. These increases were offset by decreases in certificates of deposit of $410 million and interest bearing demand deposits of $71 million. From June 30, 2019, deposits increased across most deposit types, with increases in non-interest bearing demand deposits of $3.6 billion, savings and money market accounts of $1.9 billion, and interest-bearing demand deposits of $1.0 billion. These increases were partially offset by a decrease in certificates of deposit of $361 million. Non-interest bearing deposits were $12.2 billion at June 30, 2020, compared to $9.9 billion at March 31, 2020, and $8.7 billion at June 30, 2019.

The table below shows the Company’s deposit types as a percentage of total deposits:

The Company’s ratio of loans to deposits was 90.9% at June 30, 2020, compared to 93.3% at March 31, 2020, and 89.8% at June 30, 2019.

Borrowings were $10 million at June 30, 2020, compared to $308 million at March 31, 2020, and zero at June 30, 2019. The decrease in borrowings from March 31, 2020 is due to a decrease in federal funds purchased.

Qualifying debt totaled $618 million at June 30, 2020, compared to $390 million at March 31, 2020, and $387 million at June 30, 2019. The increase in qualifying debt is due to the issuance of $225 million in subordinated debt in May 2020.

Stockholders’ equity was $3.1 billion at June 30, 2020, compared to $3.0 billion at March 31, 2020, and $2.9 billion at June 30, 2019. The increase in stockholders’ equity from June 30, 2019 is primarily a function of net income, partially offset by share repurchases and dividends to shareholders as well as the adoption impact of CECL. Under the Company’s common stock repurchase program, the Company is authorized to repurchase up to $250 million of its shares of common stock through December 31, 2020. During the second quarter 2020, the Company paused its stock repurchase program. Prior to this decision, the Company repurchased 297,000 shares of its common stock through April 17, 2020. Shares were repurchased at a weighted average price of $30.73, for a total of $9.1 million. During the second quarter 2020, the Company’s Board of Directors approved a cash dividend of $0.25 per share. The dividend payment to shareholders totaled $25.2 million, and was paid on May 29, 2020.

At June 30, 2020, tangible common equity, net of tax, was 8.9% of tangible assets¹ and total capital was 13.4% of risk-weighted assets. The Company’s tangible book value per share¹ was $27.84 at June 30, 2020, up 12.9% from June 30, 2019.

Total assets increased 9.4% to $31.9 billion at June 30, 2020, from $29.2 billion at March 31, 2020, and increased 26.0% from $25.3 billion at June 30, 2019. The increase in total assets from the prior year was driven by organic loan and deposit growth, bolstered by participation in the PPP.

Asset Quality

The provision for credit losses increased to $92.0 million for the second quarter 2020, compared to $51.2 million for the first quarter 2020, and $7.0 million for the second quarter 2019. Net loan charge-offs (recoveries) in the second quarter 2020 were $5.5 million, or 0.09% of average loans (annualized), compared to $(3.2) million, or (0.06)%, in the first quarter 2020, and $1.6 million, or 0.03%, in the second quarter 2019.

Nonaccrual loans increased $53.1 million to $139.7 million during the quarter and increased $87.9 million from June 30, 2019. Loans past due 90 days and still accruing were zero at June 30, 2020, March 31, 2020, and June 30, 2019. Loans past due 30-89 days and still accruing interest totaled $9.3 million at June 30, 2020, a decrease from $38.5 million at March 31, 2020, and a decrease from $9.7 million at June 30, 2019.

Repossessed assets totaled $9.4 million at June 30, 2020, a decrease of $1.2 million from $10.6 million at March 31, 2020, and a decrease of $8.3 million from $17.7 million at June 30, 2019. Adversely graded loans and non-performing assets totaled $694.0 million at June 30, 2020, an increase of $342.8 million from $351.3 million at March 31, 2020, and $295.0 million from $399.0 million at June 30, 2019.

The ratio of classified assets to Tier 1 capital plus the allowance for credit losses, a common regulatory measure of asset quality, was 9.5% at June 30, 2020, compared to 8.2% at March 31, 2020, and 7.8% at June 30, 2019.

¹ See reconciliation of Non-GAAP Financial Measures.

Segment Highlights

The Company’s reportable segments are aggregated primarily based on geographic location, services offered, and markets served. The Company’s regional segments, which include Arizona, Nevada, Southern California, and Northern California, provide full service banking and related services to their respective markets. The operations from the regional segments correspond to the following banking divisions: Alliance Bank of Arizona, Bank of Nevada and First Independent Bank, Torrey Pines Bank, and Bridge Bank.

The Company’s National Business Lines (“NBL”) segments provide specialized banking services to niche markets. The Company’s NBL reportable segments include Homeowner Associations (“HOA”) Services, Hotel Franchise Finance (“HFF”), Public & Nonprofit Finance, Technology & Innovation, and Other NBLs. These NBLs are managed centrally and are broader in geographic scope than our other segments, though still predominately located within our core market areas.

The Corporate & Other segment consists of the Company’s investment portfolio, Corporate borrowings and other related items, income and expense items not allocated to our other reportable segments, and inter-segment eliminations.

Key management metrics for evaluating the performance of the Company’s Arizona, Nevada, Southern California, Northern California, and NBL segments include loan and deposit growth, asset quality, and pre-tax income.

The regional segments reported gross loan balances of $11.2 billion at June 30, 2020, an increase of $1.2 billion during the quarter, and an increase of $1.7 billion during the last twelve months. The growth in loans during the quarter was spread across all regional segments, with increases in Nevada, Arizona, Northern California, and Southern California segments of $392 million, $376 million, $319 million, and $160 million, respectively. During the last twelve months, each of the regional segments reported loan growth, with increases in Nevada, Northern California, Arizona, and Southern California segments of $593 million, $553 million, $400 million, and $166 million, respectively. Total deposits for the regional segments were $18.0 billion, an increase of $1.7 billion during the quarter, and an increase of $3.2 billion during the last twelve months. The increase in deposits during the quarter was driven by the Arizona, Nevada, and Northern California segments, with deposit increases of $1.1 billion, $401 million, and $217 million, respectively. The growth in deposits over the last twelve months was spread across all regional segments with increases in the Arizona, Northern California, Southern California, and Nevada segments of $1.5 billion, $717 million, $488 million, and $457 million, respectively.

Pre-tax income for the regional segments was $82.8 million for the three months ended June 30, 2020, a decrease of $6.2 million from the three months ended March 31, 2020, and a decrease of $14.1 million from the three months ended June 30, 2019. The decline in pre-tax income during the quarter was spread across the majority of regional segments, with decreases in the Southern California, Arizona, and Nevada segments of $6.8 million, $1.7 million, and $1.8 million, respectively. These decreases were partially offset by an increase in the Northern California segment of $4.0 million. Pre-tax income from the three months ended June 30, 2019 also declined in the Southern California, Arizona, and Nevada segments, with decreases of $9.3 million, $2.4 million, and $3.0 million, respectively. These decreases were partially offset by an increase in the Northern California segment of $0.6 million. For the six months ended June 30, 2020, the regional segments reported total pre-tax income of $171.8 million, a decrease of $13.4 million compared to the six months ended June 30, 2019. The decrease was spread across all of the regional segments, with decreases in Southern California, Arizona, Northern California, and Nevada of $10.5 million, $0.1 million, $1.6 million, and $1.2 million, respectively.

The NBL segments reported gross loan balances of $13.8 billion at June 30, 2020, an increase of $620 million during the quarter, and an increase of $4.1 billion during the last twelve months. Each of the NBL segments reported loan growth, with the largest increases in the Other NBLs and Technology & Innovation segments of $335 million and $153 million, respectively.

Contacts

Western Alliance Bancorporation

Dale Gibbons, 602-952-5476

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