Western Alliance Bancorporation Reports First Quarter 2020 Financial Results

Western Alliance Bancorporation (NYSE:WAL):

FIRST QUARTER 2020 FINANCIAL RESULTS

CEO COMMENTARY:

“As we all experience the pressure that the COVID-19 pandemic has caused around the world, the people at Western Alliance remain actively engaged and are focused on helping our clients navigate through this challenging time,” said Kenneth A. Vecchione, President and Chief Executive Officer. He continued, “We arrive here uniquely prepared to address what’s ahead - at the end of 2019, the Company had $3.3 billion in total regulatory capital and strong tangible common equity1. Further, our robust and diverse deposit sources support our liquidity position.”

“The Company’s first quarter results produced loan and deposit growth that each exceeded $2.0 billion, bringing total assets to $29.2 billion at the end of the quarter. The $2.0 billion increase in loans, together with the adoption of the new current expected credit losses accounting guidance that requires recognition of lifetime losses upfront and consideration of the current economic environment and outlook, resulted in a first quarter 2020 provision for credit losses of $51.2 million that reduced net income to $84.0 million and earnings per share to $0.83. Operating pre-provision net revenue1, which excludes the impact of the provision for credit losses rose $4.7 million, or 3%, from the prior quarter to $163.4 million, even with one less day in the quarter. Asset quality at the end of the quarter remains steady with a ratio of non-performing assets to total assets of 0.33%. As we enter into the second quarter, we believe that we are well-positioned and prepared for the challenges ahead with a seasoned leadership team in place, ample liquidity and substantial capital resources.”

Impact of and Response to the COVID-19 Pandemic

In response to the rapidly evolving COVID-19 pandemic, the Company focused first on the well-being of its people, customers and communities. Preventative health measures were put in place including elimination of business related travel requirements, mandatory work from home for all employees able to do so, social distancing precautions for all employees in the office and customers visiting branches, and preventative cleaning at offices and branches. The Company also focused on business continuity measures, including forming a COVID-19 task force, monitoring potential business interruptions, making improvements to our remote working technology, and conducting regular discussions with our technology vendors.

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

• helping business customers through the Paycheck Protection Program 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 economic environment and uncertainty related to the COVID-19 pandemic contributed to the $51.2 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.

As a result of the economic uncertainty, the Company will pause its stock repurchase program for the remainder of the second quarter. While the Company does not anticipate any need for additional liquidity, it may take advantage of federal facilities in the future in connection with funding loans to small and medium-sized businesses. The Company's capital ratios remained strong as of March 31, 2020, with a tangible common equity to total assets ratio1 of 9.4%.

Income Statement

Net interest income was $269.0 million in the first quarter 2020, a decrease of $3.0 million from $272.0 million in the fourth quarter 2019, and an increase of $21.7 million, or 8.8%, compared to the first quarter 2019. Net interest income in the first quarter 2020 includes $1.7 million of total accretion income from acquired loans, compared to $2.5 million in the fourth quarter 2019, and $2.8 million in the first quarter 2019.

Provision for credit losses2 was $51.2 million in the first quarter 2020, an increase of $47.2 million from $4.0 million in the fourth quarter 2019, and an increase of $46.6 million from $4.5 million in the first quarter 2019. The significant increase in the provision for credit losses during the first quarter 2020 is due to the $2.0 billion increase in loans, together with the adoption of the new CECL accounting standard. This standard 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 quarter 2020.

The Company’s net interest margin in the first quarter 2020 was 4.22%, a decrease from 4.39% in the fourth quarter 2019 and from 4.71% in the first 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 $16.3 million for the first quarter 2020, compared to $15.5 million for the fourth quarter 2019, and $12.6 million for the first quarter 2019.

Net operating revenue1 was $285.4 million for the first quarter 2020, a decrease of $2.2 million, compared to $287.5 million for the fourth quarter 2019, and an increase of $25.4 million, or 9.8%, compared to $259.9 million for the first quarter 2019.

Operating non-interest expense1 was $121.9 million for the first quarter 2020, compared to $128.8 million for the fourth quarter 2019, and $111.8 million for the first quarter 2019. The Company’s operating efficiency ratio1 was 41.8% for the first quarter 2020, compared to 43.8% in the fourth quarter 2019, and 42.0% for the first quarter 2019.

Income tax expense was $18.5 million for the first quarter 2020, compared to $26.2 million for the fourth quarter 2019, and $25.5 million for the first quarter 2019. The decrease in income tax expense from the prior periods is primarily the result of a decrease in pre-tax income during the first quarter 2020, partially offset by a marginal increase in the effective tax rate.

Net income was $84.0 million for the first quarter 2020, a decrease of $44.1 million from $128.1 million for the fourth quarter 2019, and $36.8 million, or 30.5%, from $120.8 million for the first quarter 2019. Earnings per share was $0.83 for the first quarter 2020, compared to $1.25 for the fourth quarter 2019, and $1.16 for the first quarter 2019. As discussed above, the decrease in net income and earnings per share for the first quarter 2020 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 first quarter 2020, the Company’s operating PPNR1 was $163.4 million, up $4.7 million from $158.7 million in the fourth quarter 2019, and up $15.3 million from $148.1 million in the first quarter 2019. Non-operating income1 for the first quarter 2020 consisted of a net fair value loss adjustment on assets measured at fair value of $11.3 million, which predominately relates to valuation declines on preferred stock holdings of other banking companies, and a net gain on sales of investment securities of $0.1 million. Non-operating expense1 for the first quarter 2020 consisted of a net gain on sales and valuations of repossessed and other assets of $1.5 million.

The Company had 1,858 full-time equivalent employees and 47 offices at March 31, 2020, compared to 1,835 employees and 47 offices at December 31, 2019, and 1,773 employees and 47 offices at March 31, 2019.

Balance Sheet

Gross loans totaled $23.1 billion at March 31, 2020, an increase of $2.0 billion from $21.1 billion at December 31, 2019, and an increase of $5.0 billion from $18.1 billion at March 31, 2019. The increase from the prior quarter was driven by an increase of $1.8 billion in commercial and industrial loans, $107 million in construction and land development loans, $92 million in residential real estate loans, and $47 million in CRE, non-owner occupied loans. These increases were partially offset by a decrease of $28 million in CRE, owner occupied loans. From March 31, 2019, the largest increases in the loan balance were driven by commercial and industrial loans of $3.5 billion, CRE, non-owner occupied loans of $988 million, and residential real estate loans of $778 million. These increases were partially offset by a decrease of $224 million in construction and land development loans. The Company's allowance for credit losses on loans consists of an allowance for funded loans and an allowance for unfunded loan commitments. At March 31, 2020, the allowance for loan losses to loans held for investment was 1.02%, compared to 0.80% at December 31, 2019, and 0.86% at March 31, 2019. The allowance for credit losses, which includes the allowance for unfunded loan commitments, to loans held for investment was 1.14% at March 31, 2020, compared to 0.84% at December 31, 2019, and 0.91% at March 31, 2019.

Deposits totaled $24.8 billion at March 31, 2020, an increase of $2.0 billion from $22.8 billion at December 31, 2019, and an increase of $4.6 billion from $20.2 billion at March 31, 2019. The increase from the prior quarter was driven by an increase of $1.3 billion from non-interest bearing demand deposits and $818 million in interest bearing demand deposits. These increases were offset by a decrease of $143 million from savings and money market accounts. From March 31, 2019, deposits increased across all deposit types, with increases in non-interest bearing demand deposits of $2.2 billion, savings and money market accounts of $1.2 billion, interest-bearing demand deposits of $1.1 billion, and certificates of deposit of $156 million. Non-interest bearing deposits were $9.9 billion at March 31, 2020, compared to $8.5 billion at December 31, 2019, and $7.7 billion at March 31, 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 93.3% at March 31, 2020, compared to 92.7% at December 31, 2019, and 89.6% at March 31, 2019.

Borrowings were $308 million at March 31, 2020, compared to zero at December 31, 2019 and March 31, 2019. The increase in borrowings is due to an increase in federal funds purchased.

Qualifying debt totaled $390 million at March 31, 2020, compared to $394 million at December 31, 2019, and $374 million at March 31, 2019.

Stockholders’ equity was $3.0 billion at March 31, 2020, compared to $3.0 billion at December 31, 2019, and $2.7 billion at March 31, 2019. The increase in stockholders' equity from March 31, 2019 is primarily a function of net income, partially offset by share repurchases and dividends to shareholders as well and 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 first quarter 2020, the Company repurchased 1,769,479 shares of its common stock, representing approximately 1.7% of the Company's outstanding shares. Shares were repurchased at a weighted average price of $35.30, for a total of $62.5 million. During the first quarter 2020, the Company's Board of Directors approved a cash dividend of $0.25 per share. The dividend payment to shareholders totaled $25.6 million, and was paid on February 28, 2020.

At March 31, 2020, tangible common equity, net of tax, was 9.4% of tangible assets1 and total capital was 11.9% of risk-weighted assets. The Company’s tangible book value per share1 was $26.73 at March 31, 2020, up 15.2% from March 31, 2019.

Total assets increased 8.7% to $29.2 billion at March 31, 2020, from $26.8 billion at December 31, 2019, and increased 22.6% from $23.8 billion at March 31, 2019. The increase in total assets from the prior year was driven by organic loan and deposit growth.

Asset Quality

The provision for credit losses increased to $51.2 million for the first quarter 2020, compared to $4.0 million for the fourth quarter 2019, and $4.5 million for the first quarter 2019. Net loan (recoveries) charge-offs in the first quarter 2020 were $(3.2) million, or (0.06)% of average loans (annualized), compared to net charge-offs of $1.2 million, or 0.02%, in the fourth quarter 2019, and $1.2 million, or 0.03%, in the first quarter 2019.

Nonaccrual loans increased $30.6 million to $86.6 million during the quarter and increased $42.7 million from March 31, 2019. Loans past due 90 days and still accruing were zero at March 31, 2020, December 31, 2019, and March 31, 2019. Loans past due 30-89 days and still accruing interest totaled $38.5 million at March 31, 2020, an increase from $14.5 million at December 31, 2019, and an increase from $20.5 million at March 31, 2019.

Repossessed assets totaled $10.6 million at March 31, 2020, a decrease of $3.3 million from $13.9 million at December 31, 2019, and a decrease of $7.1 million from $17.7 million at March 31, 2019. Adversely graded loans and non-performing assets totaled $351.3 million at March 31, 2020, an increase of $9.7 million from $341.6 million at December 31, 2019, and a decrease of $6.3 million from $357.6 million at March 31, 2019.

The ratio of classified assets to Tier 1 capital plus the allowance for credit losses, a common regulatory measure of asset quality, was 8.2% at March 31, 2020, compared to 5.8% at December 31, 2019, and 8.9% at March 31, 2019.

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") segment provides 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 $9.9 billion at March 31, 2020, an increase of $284 million during the quarter, and an increase of $779 million during the last twelve months. The growth in loans during the quarter was driven by the Northern California, Arizona, and Nevada segments with growth of $118 million, $112 million, and $44 million, respectively. During the last twelve months, each of the regional segments reported loan growth, with the Arizona, Northern California, and Nevada segments contributing the largest increases of $306 million, $232 million, and $227 million, respectively. Total deposits for the regional segments were $16.3 billion, an increase of $1.6 billion during the quarter, and an increase of $2.2 billion during the last twelve months. The increase in deposits during the quarter was driven by the Arizona, Southern California, and Northern California segments, with deposit increases of $1.1 billion, $442 million, and $135 million, respectively. These increases were partially offset by a decrease of $105 million in the Nevada segment. The growth in deposits over the last twelve months was spread across all regional segments with increases in the Arizona, Northern California, Nevada, and Southern California segments of $1.2 billion, $500 million, $238 million, and $234 million, respectively.

Pre-tax income for the regional segments was $89.0 million for the three months ended March 31, 2020, a decrease of $16.0 million from the three months ended December 31, 2019, and an increase of $0.7 million from the three months ended March 31, 2019. The decline in pre-tax income during the quarter was spread across all regional segments, with decreases in the Southern California, Arizona, Northern California, and Nevada segments of $5.4 million, $4.9 million, $3.7 million, and $2.0 million, respectively. The increase in pre-tax income from the three months ended March 31, 2019 was driven by increases in the Arizona and Nevada segments of $2.3 million and $1.8 million, respectively. These increases were partially offset by decreases in the Northern California and Southern California segments of $2.2 million and $1.3 million, respectively, from the three months ended March 31, 2019.

The NBL segments reported gross loan balances of $13.2 billion at March 31, 2020, an increase of $1.8 billion during the quarter, and an increase of $4.3 billion during the last twelve months. With the exception of the HOA Services segment, which reported a slight decrease in its loan balances from the prior quarter, each of the NBL segments reported loan growth, with the largest increases in the Other NBLs and Technology & Innovation segments of $1.2 billion and $502 million, respectively. During the last twelve months, each of the NBL segments reported loan growth, with the Other NBLs, Technology & Innovation, and HFF segments contributing the largest increases of $2.7 billion, $997 million, and $414 million, respectively. Total deposits for the NBL segments were $7.7 billion, an increase of $727 million during the quarter, and an increase of $2.4 billion during the last twelve months. The increase in deposits from the prior quarter is primarily attributable to the Technology & Innovation and HOA Services segments, which increased deposits by $383 million and $330 million, respectively. The increase in deposits of $2.4 billion during the last twelve months is also attributable to growth in the Technology & Innovation and HOA Services segments of $1.7 billion and $577 million, respectively.

Pre-tax income for the NBL segments was $47.9 million for the three months ended March 31, 2020, a decrease of $29.5 million from the three months ended December 31, 2019, and a decrease of $11.5 million from the three months ended March 31, 2019. The decrease in pre-tax income from the prior quarter was spread across most of the NBL segments with decreases in the Technology & Innovation, Other NBLs, HFF, and HOA Services segments of $14.4 million, $8.2 million, $5.8 million, and $1.2 million, respectively. The drivers of the decrease in pre-tax income from the same period in the prior year were the Technology & Innovation and HFF segments, which had decreases of $8.7 million and $4.5 million, respectively. These increases were partially offset by an increase in pre-tax income for the Other NBLs segment of $2.8 million.

Conference Call and Webcast

Western Alliance Bancorporation will host a conference call and live webcast to discuss its first quarter 2020 financial results at 12:00 p.m. ET on Friday, April 17, 2020. Participants may access the call by dialing 1-888-317-6003 and using passcode 4136497 or via live audio webcast using the website link https://services.choruscall.com/links/wal200417.html. The webcast is also available via the Company’s website at www.westernalliancebancorporation.com. Participants should log in at least 15 minutes early to receive instructions. The call will be recorded and made available for replay after 2:00 p.m. ET April 17th through 9:00 a.m. ET May 17th by dialing 1-877-344-7529 passcode: 10142009.

Reclassifications

Certain amounts in the Consolidated Income Statements for the prior periods have been reclassified to conform to the current presentation. The reclassifications have no effect on net income or stockholders’ equity as previously reported.

Use of Non-GAAP Financial Information

This press release contains both financial measures based on GAAP and non-GAAP based financial measures, which are used where management believes them to be helpful in understanding the Company’s results of operations or financial position. Where non-GAAP financial measures are used, the comparable GAAP financial measure, as well as the reconciliation to the comparable GAAP financial measure, can be found in this press release. These disclosures should not be viewed as a substitute for operating results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies.

Adoption of Accounting Standards

During the first quarter of 2020, the Company adopted the Accounting Standards Updates ("ASU") related to credit losses, which include ASU 2016-13, Measurement of Credit Losses on Financial Instruments, ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, ASU 2019-05, Financial Instruments - Credit Losses, and ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments—Credit Losses.

The new standards significantly change the impairment model for most financial assets that are measured at amortized cost, including off-balance sheet credit exposures, from an incurred loss model to an expected loss model. The amendments in ASU 2016-13 require that an organization measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The Company adopted the amendments within ASU 2016-13 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. The Company recorded a cumulative effect adjustment to retained earnings, which resulted in a total decrease to retained earnings of $24.9 million as of January 1, 2020. This adjustment was due primarily to expected total losses under the new model in the Company's loan portfolio and its off-balance sheet credit exposures.

Cautionary Note Regarding Forward-Looking Statements

This release contains 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. Examples of forward-looking statements include, among others, statements we make regarding our expectations with regard to our business, financial and operating results, future economic performance and dividends, and the impact to the Company’s allowance and provision for credit losses and capital levels under the new current expected credit loss (CECL) accounting standard. 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. Some factors that could cause actual results to differ materially from historical or expected results include, among others: the risk factors discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 as filed with the Securities and Exchange Commission; the potential adverse effects of the ongoing COVID-19 pandemic and any governmental or societal responses thereto, or other unusual and infrequently occurring events; changes in general economic conditions, either nationally or locally in the areas in which we conduct or will conduct our business; inflation, interest rate, market and monetary fluctuations; increases in competitive pressures among financial institutions and businesses offering similar products and services; higher defaults on our loan portfolio than we expect; changes in management’s estimate of the adequacy of the allowance for credit losses; legislative or regulatory changes including in response to the COVID-19 pandemic such as the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) and the rules and regulations that may be promulgated thereunder; or changes in accounting principles, policies or guidelines (including changes related to CECL); supervisory actions by regulatory agencies which may limit our ability to pursue certain growth opportunities, including expansion through acquisitions; additional regulatory requirements resulting from our continued growth; management’s estimates and projections of interest rates and interest rate policy; the execution of our business plan; and other factors affecting the financial services industry generally or the banking industry in particular.

Any forward-looking statement made by us in this release is based only on information currently available to us and speaks only as of the date on which it is made. We do not intend and disclaim any duty or obligation to update or revise any industry information or forward-looking statements, whether written or oral, that may be made from time to time, set forth in this press release to reflect new information, future events or otherwise.

About Western Alliance Bancorporation

With more than $25 billion in assets, Western Alliance Bancorporation (NYSE:WAL) is one of the country’s top-performing banking companies. The Company has ranked in the top 10 on the Forbes “Best Banks in America” list for five consecutive years, 2016-2020, and was recognized as the #1 best-performing of the 50 largest public U.S. banks in 2019 by S&P Global Market Intelligence. Its primary subsidiary, Western Alliance Bank, Member FDIC, helps business clients realize their growth ambitions with local teams of experienced bankers who deliver superior service and a full spectrum of customized loan, deposit and treasury management capabilities. Business clients also benefit from a powerful array of specialized financial services that provide strong expertise and tailored solutions for a wide variety of industries and sectors. A national presence with a regional footprint, Western Alliance Bank operates individually branded, full-service banking divisions and has offices in key markets nationwide. For more information, visit westernalliancebank.com.