Western Alliance Reports Third Quarter 2020 Financial Results

Western Alliance Bancorporation (NYSE:WAL):

THIRD QUARTER 2020 FINANCIAL RESULTS

CEO COMMENTARY

“The flexibility of Western Alliance’s diversified business model drove the Company’s record third quarter performance,” said Kenneth A. Vecchione, President and Chief Executive Officer. “Our deep segment and product expertise enables us to pivot our business in response to a changing external environment and we continue to prove that we can achieve industry-leading profitability and growth, while maintaining prudent credit risk management. Net income of $135.8 million and earnings per share of $1.36 are each up over 45% from the prior quarter, benefiting from a decline in the provision for credit losses of $77.3 million as the macroeconomic outlook improved and the Company grew loans in low-risk asset classes. In addition, return on average tangible common equity1 of 18.7% for the quarter continues to be among the highest in the industry.”

"The Company produced another quarter of sizable loan and deposit growth of $985 million and $1.3 billion, respectively. While deposit growth ($314 million over loan growth) provides a stable base for asset expansion in future quarters, it added transitory pressure on net interest margin, which declined 48 basis points from the prior quarter to 3.71%, largely as a result of excess liquidity that had not been fully deployed at quarter-end. Nonperforming assets to total assets remained stable at 0.47%, attributable to the Company’s timely credit mitigation actions that also resulted in a decline in loan deferrals to 5.0% of total loans. Capital levels also remain strong with a tangible common equity ratio1 of 8.9% and a total ACL to funded loans ratio of 1.46%, excluding PPP loans.”

1 See reconciliation of Non-GAAP Financial Measures.

Income Statement

Net interest income was $284.7 million in the third quarter 2020, a decrease of $13.7 million from $298.4 million in the second quarter 2020, and an increase of $18.3 million, or 6.9%, compared to the third quarter 2019. Net interest income was impacted by changes in prepayment assumptions on PPP loans, which resulted in reversal of $6.4 million of net deferred loan fee accretion on PPP loans recognized in the prior quarter and a decrease of $4.2 million in current quarter accretion.

Provision for credit losses2 was $14.7 million in the third quarter 2020, a decrease of $77.3 million from $92.0 million in the second quarter 2020, and an increase of $10.9 million from $3.8 million in the third quarter 2019. The significant decrease in the provision for credit losses during the third quarter 2020 is due to improvement in economic forecasts relative to June 30, 2020 and concentration of loan growth in portfolio segments with lower expected loss rates. 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 a loan 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 contributed to an increased provision for credit losses for 2020.

The Company’s net interest margin in the third quarter 2020 was 3.71%, a decrease from 4.19% in the second quarter 2020 and from 4.41% in the third quarter 2019. The decrease in net interest margin from the prior periods is largely a result of excess liquidity from deposit growth that has outpaced loan growth as well as a decrease in net deferred loan fee accretion on PPP loans from the prior quarter, as discussed above. These drivers of net interest margin compression during the quarter are expected to be temporary in nature and will taper off over time.

Non-interest income was $20.6 million for the third quarter 2020, compared to $21.3 million for the second quarter 2020, and $19.4 million for the third quarter 2019.

Net revenue was $305.3 million for the third quarter 2020, a decrease of $14.3 million, compared to $319.7 million for the second quarter 2020, and an increase of $19.5 million, or 6.8%, compared to $285.9 million for the third quarter 2019.

Non-interest expense was $124.1 million for the third quarter 2020, compared to $114.8 million for the second quarter 2020, and $126.2 million for the third quarter 2019. The Company’s efficiency ratio1 was 39.7% for the third quarter 2020, compared to 35.1% in the second quarter 2020, and 43.2% for the third quarter 2019.

Income tax expense was $30.8 million for the third quarter 2020, compared to $19.6 million for the second quarter 2020, and $28.5 million for the third 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 third quarter 2020 in conjunction with a marginal increase in the effective tax rate.

Net income was $135.8 million for the third quarter 2020, an increase of $42.5 million from $93.3 million for the second quarter 2020, and an increase of $8.4 million, or 6.6%, from $127.4 million for the third quarter 2019. Earnings per share was $1.36 for the third quarter 2020, compared to $0.93 for the second quarter 2020, and $1.24 for the third quarter 2019. As discussed above, the increase in net income and earnings per share for the third quarter 2020 compared to the prior quarter was driven by the decrease in the provision for credit losses.

The Company views its pre-provision net revenue1 ("PPNR") as a key metric for assessing the Company’s earnings power, which it defines as net revenue less non-interest expense. For the third quarter 2020, the Company’s PPNR1 was $181.3 million, down $23.6 million from $204.9 million in the second quarter 2020, and up $21.5 million from $159.7 million in the third quarter 2019. PPNR for the second quarter 2020 benefited from a $5.6 million gain related to restructuring of the Company's bank owned life insurance as well as recognition of $13.9 million in net deferred fee accretion and $5.6 million in cost deferrals related to PPP loans.

The Company had 1,885 full-time equivalent employees and 49 offices at September 30, 2020, compared to 1,851 employees and 47 offices at June 30, 2020, and 1,814 employees and 47 offices at September 30, 2019.

Balance Sheet

Gross loans totaled $26.0 billion at September 30, 2020, an increase of $985 million from $25.0 billion at June 30, 2020, and an increase of $5.9 billion from $20.2 billion at September 30, 2019. By loan type, the largest increases from the prior quarter include $892 million in commercial and industrial loans and $103 million in construction and land development loans. From September 30, 2019, the largest increases in the loan balance were driven by commercial and industrial loans of $4.9 billion (includes $1.7 billion of PPP loans), residential real estate loans of $525 million, and CRE non-owner occupied loans of $376 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 September 30, 2020, the allowance for loan losses to loans held for investment was 1.19%, compared to 1.24% at June 30, 2020, and 0.82% at September 30, 2019. The allowance for credit losses, which includes the allowance for unfunded loan commitments, to loans held for investment was 1.37% at September 30, 2020, compared to 1.39% at June 30, 2020, and 0.86% at September 30, 2019.

Deposits totaled $28.8 billion at September 30, 2020, an increase of $1.3 billion from $27.5 billion at June 30, 2020, and an increase of $6.4 billion from $22.4 billion at September 30, 2019. By deposit type, the largest increases from the prior quarter include $777 million from non-interest bearing demand deposits and $752 million from savings and money market accounts. These increases were offset by a decrease in certificates of deposit of $276 million. From September 30, 2019, deposits increased across most deposit types, with increases in non-interest bearing demand deposits of $4.3 billion, savings and money market accounts of $1.5 billion, and interest-bearing demand deposits of $1.0 billion. These increases were partially offset by a decrease in certificates of deposit of $416 million. Non-interest bearing deposits were $13.0 billion at September 30, 2020, compared to $12.2 billion at June 30, 2020, and $8.8 billion at September 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 90.2% at September 30, 2020, compared to 90.9% at June 30, 2020, and 89.8% at September 30, 2019.

Borrowings were $10 million at September 30, 2020 and June 30, 2020, and zero at September 30, 2019. The increase in borrowings from September 30, 2019 is due to an increase in short-term borrowings from the FHLB.

Qualifying debt totaled $619 million at September 30, 2020, compared to $618 million at June 30, 2020, and $389 million at September 30, 2019. The increase in qualifying debt from September 30, 2019 is primarily due to the issuance of $225 million in subordinated debt in May 2020.

Stockholders’ equity was $3.2 billion at September 30, 2020, compared to $3.1 billion at June 30, 2020, and $2.9 billion at September 30, 2019. The increase in stockholders' equity from September 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. During the third 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 August 27, 2020.

At September 30, 2020, tangible common equity, net of tax, was 8.9% of tangible assets1 and total capital was 13.0% of risk-weighted assets. The Company’s tangible book value per share1 was $29.03 at September 30, 2020, up 13.4% from September 30, 2019.

Total assets increased 4.5% to $33.3 billion at September 30, 2020, from $31.9 billion at June 30, 2020, and increased 26.6% from $26.3 billion at September 30, 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 totaled $14.7 million for the third quarter 2020, compared to $92.0 million for the second quarter 2020, and $3.8 million for the third quarter 2019. Net loan charge-offs (recoveries) in the third quarter 2020 were $8.2 million, or 0.13% of average loans (annualized), compared to $5.5 million, or 0.09%, in the second quarter 2020, and $(0.6) million, or (0.01)%, in the third quarter 2019.

Nonaccrual loans increased $6.8 million to $146.5 million during the quarter and increased $96.1 million from September 30, 2019. Loans past due 90 days and still accruing interest were $28.1 million at September 30, 2020, compared to zero at June 30, 2020 and September 30, 2019. Loans past due 30-89 days and still accruing interest totaled $24.3 million at September 30, 2020, an increase from $9.3 million at June 30, 2020, and a decrease from $29.5 million at September 30, 2019.

Repossessed assets totaled $8.6 million at September 30, 2020, a decrease of $0.8 million from $9.4 million at June 30, 2020, and a decrease of $6.9 million from $15.5 million at September 30, 2019. Classified assets totaled $325.7 million at September 30, 2020, an increase of $27.2 million from $298.5 million at June 30, 2020, and an increase of $105.2 million from $220.4 million at September 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 9.9% at September 30, 2020, compared to 9.5% at June 30, 2020, and 7.8% at September 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 September 30, 2020, a decrease of $33 million during the quarter, and an increase of $1.5 billion during the last twelve months. The decline in loans during the quarter was driven by decreases in the Nevada and Southern California segments of $76 million and $46 million, respectively. These decreases were partially offset by increases in the Arizona and Northern California segments of $51 million and $38 million, respectively. During the last twelve months, each of the regional segments reported loan growth, with increases in the Northern California, Nevada, Arizona, and Southern California segments of $560 million, $433 million, $420 million, and $70 million, respectively. Total deposits for the regional segments were $19.5 billion, an increase of $1.5 billion during the quarter, and an increase of $4.3 billion during the last twelve months. The increase in deposits during the quarter was spread across all regional segments, with the largest increases in the Arizona and Southern California segments of $913 million and $478 million, respectively. The growth in deposits over the last twelve months was spread across all regional segments with increases in the Arizona, Southern California, Northern California, and Nevada segments of $2.6 billion, $749 million, $470 million, and $465 million, respectively.

Pre-tax income for the regional segments was $116.1 million for the three months ended September 30, 2020, an increase of $33.3 million from the three months ended June 30, 2020, and an increase of $12.1 million from the three months ended September 30, 2019. The increase in pre-tax income during the quarter was primarily attributable to increases in the Arizona and Southern California segments of $22.9 million and $9.5 million, respectively. These increases were partially offset by a decrease in the Nevada segment of $0.7 million. Pre-tax income from the three months ended September 30, 2019 was driven by increases in the Arizona and Northern California segments of $14.5 million and $3.2 million, respectively, which were partially offset by decreases in the Nevada and Southern California segments of $3.4 million and $2.1 million, respectively. For the nine months ended September 30, 2020, the regional segments reported total pre-tax income of $287.9 million, a decrease of $1.2 million compared to the nine months ended September 30, 2019. The decrease was driven by decreases in the Southern California and Nevada segments of $12.7 million and $4.6 million, respectively. These decreases were partially offset by increases in the Arizona and Northern California segments of $14.4 million and $1.6 million, respectively.

The NBL segments reported gross loan balances of $14.8 billion at September 30, 2020, an increase of $1.0 billion during the quarter, and an increase of $4.4 billion during the last twelve months. Each of the NBL segments reported loan growth during the quarter, with the largest increases in the Other NBLs and Technology & Innovation segments of $829 million and $123 million, respectively. During the last twelve months, each of the NBL segments reported loan growth, with the Other NBLs, Technology & Innovation, HFF, and Public & Nonprofit Finance segments contributing the largest increases of $3.1 billion, $952 million, $203 million, and $104 million, respectively. Total deposits for the NBL segments were $8.4 billion, an increase of $247 million during the quarter, and an increase of $2.0 billion during the last twelve months. The increase in deposits from the prior quarter is primarily attributable to the Technology & Innovation segment, which increased deposits by $230 million. The increase in deposits of $2.0 billion during the last twelve months is attributable to growth in the Technology & Innovation and HOA Services segments of $1.4 billion and $646 million, respectively.

Pre-tax income for the NBL segments was $109.1 million for the three months ended September 30, 2020, an increase of $34.3 million from the three months ended June 30, 2020, and an increase of $38.0 million from the three months ended September 30, 2019. The increase in pre-tax income from the prior quarter was driven by increases in the Technology & Innovation and HFF segments of $25.4 million and $16.1 million, respectively. These increases were partially offset by decreases in the Other NBLs and HOA Services segments of $4.7 million and $3.6 million, respectively. The drivers of the increase in pre-tax income from the same period in the prior year were the Technology & Innovation and Other NBLs segments, which had increases of $22.3 million and $17.8 million, respectively. Pre-tax income for the NBL segments for the nine months ended September 30, 2020 totaled $231.9 million, an increase of $41.2 million compared to the nine months ended September 30, 2019. The Other NBLs, Technology & Innovation, and HOA Services segments each reported an increase in pre-tax income of $47.4 million, $18.8 million, and $3.3 million, respectively. These increases in pre-tax income were offset by decreases in the HFF and Public & Nonprofit Finance segments of $24.4 million and $4.0 million, respectively.

Conference Call and Webcast

Western Alliance Bancorporation will host a conference call and live webcast to discuss its third quarter 2020 financial results at 12:00 p.m. ET on Friday, October 23, 2020. Participants may access the call by dialing 1-888-317-6003 and using passcode 4467607 or via live audio webcast using the website link https://services.choruscall.com/links/wal201016.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 October 23rd through 9:00 a.m. ET November 23rd by dialing 1-877-344-7529 passcode: 10148637.

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 of the COVID-19 pandemic and related economic conditions. 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 $30 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 named #1 best-performing of the 50 largest public U.S. banks for 2019 by S&P Global Market Intelligence. Its primary subsidiary, Western Alliance Bank, Member FDIC, helps business clients realize their 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.

(1) See Reconciliation of Non-GAAP Financial Measures.
NM Changes +/- 100% are not meaningful.

(1) See Reconciliation of Non-GAAP Financial Measures.
(2) Annualized on an actual/actual basis for periods less than 12 months.
(3) Capital ratios for September 30, 2020 are preliminary.
NM Changes +/- 100% are not meaningful.