Western Alliance Bancorporation Reports Second Quarter 2019 Financial Results

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

SECOND QUARTER 2019 FINANCIAL RESULTS

CEO COMMENTARY:

Kenneth Vecchione, Chief Executive Officer, commented: “During the second quarter Western Alliance generated a record $122.9 million in net income and earnings per share of $1.19. We reached a new milestone of $25 billion in total assets as both loan and deposit growth exceeded $1 billion, representing 25% annualized growth. As our loan growth trajectory continues, asset quality remains strong and stable with net loan losses of just 0.03% for the quarter and non-performing assets to total assets ratio of 0.27%. We generated 12% annualized growth in net interest income, absorbing the 12 basis point margin impact from lower rates, from our strong balance sheet growth. We remain among the most profitable banks in our industry, with return on assets of 2.05% and return on average tangible common equity¹ of 19.72%. Further, we continued our shareholder-oriented approach to capital allocation with share repurchases of $33.9 million during the quarter while our board also approved a cash dividend of $0.25 per share to be initiated during the third quarter of 2019. Our superior capital growth, evidenced by industry-leading capital levels and tangible book value per share, continues to optimally position our company for growth and value creation.”

Income Statement

Net interest income was $254.7 million in the second quarter 2019, an increase of $7.3 million from $247.3 million in the first quarter 2019, and an increase of $30.6 million, or 13.6%, compared to the second quarter 2018. As acquired loans are recorded at fair value in an acquisition, purchase discounts on these acquired loans are recorded and accreted into interest income based on expected future cash flows over the life of the loans and may be accelerated upon prepayment of acquired loans. Net interest income in the second quarter 2019 includes $4.6 million of total accretion income from acquired loans, compared to $2.8 million in the first quarter 2019, and $5.1 million in the second quarter 2018.

The Company’s net interest margin in the second quarter 2019 was 4.59%, a decrease from 4.71% in both the first quarter 2019 and second quarter 2018.

Operating non-interest income was $12.6 million for the second and first quarter 2019, compared to $14.1 million for the second quarter 2018.¹ The decrease in operating non-interest income from the second quarter 2018 primarily relates to a decrease in income from warrants.

Net operating revenue was $267.3 million for the second quarter 2019, an increase of $7.4 million, compared to $259.9 million for the first quarter 2019, and an increase of $29.1 million, or 12.2%, compared to $238.2 million for the second quarter 2018.¹

Operating non-interest expense was $114.8 million for the second quarter 2019, compared to $112.8 million for the first quarter 2019, and $102.7 million for the second quarter 2018.¹ The Company’s operating efficiency ratio¹ was 42.0% for the second quarter 2019, an improvement from 42.4% in the first quarter 2019, and from 42.1% for the second quarter 2018.

Income tax expense was $24.8 million for the second quarter 2019, compared to $25.5 million for the first quarter 2019, and $25.3 million for the second quarter 2018.

Net income was $122.9 million for the second quarter 2019, an increase of $2.1 million from $120.8 million for the first quarter 2019, and an increase of $18.3 million, or 17.4%, from $104.7 million for the second quarter 2018. Earnings per share was $1.19 for the second quarter 2019, compared to $1.16 for the first quarter 2019, and $0.99 for the second quarter 2018.

The Company views its operating pre-provision net revenue (“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 2019, the Company’s operating PPNR was $152.5 million, up $5.4 million from $147.1 million in the first quarter 2019, and up $17.0 million from $135.5 million in the second quarter 2018.¹ Non-operating income¹ for the second quarter 2019 consisted of net unrealized gains on assets measured at fair value of $1.6 million. Non-operating expense¹ for the second quarter 2019 consisted of a net gain on sales and valuations of repossessed and other assets of $0.6 million.

The Company had 1,806 full-time equivalent employees and 47 offices at June 30, 2019, compared to 1,773 employees and 47 offices at March 31, 2019 and June 30, 2018.

Balance Sheet

Gross loans totaled $19.3 billion at June 30, 2019, an increase of $1.1 billion from $18.1 billion at March 31, 2019, and an increase of $3.1 billion from $16.1 billion at June 30, 2018. The increase from the prior quarter was driven by an increase of $730 million in commercial and industrial loans, $381 million in CRE, non-owner occupied loans, and $119 million in residential real estate loans. These increases were partially offset by a decrease of $73 million in construction and land development loans, and $31 million in CRE, owner occupied. From June 30, 2018, loans increased across most loan types, with the largest increases in commercial and industrial loans of $1.2 billion, residential real estate loans of $1.0 billion, CRE, non-owner occupied loans of $675 million, and construction and land development loans of $232 million. These increases were partially offset by a decrease of $16 million in CRE, owner occupied loans. At June 30, 2019, the allowance for credit losses to gross loans held for investment was 0.83%, compared to 0.86% at March 31, 2019, and 0.91% at June 30, 2018. At June 30, 2019, the allowance for credit losses to total organic loans was 0.87%, compared to 0.90% at March 31, 2019, and 0.99% at June 30, 2018. The Company defines its organic loans as those loans that have not been acquired in a transaction accounted for as a business combination.

Consistent with accounting principles generally accepted in the United States (“GAAP”), the allowance for credit losses is not carried over in an acquisition because acquired loans are recorded at fair value, which discounts the loans based on expected future cash flows. Credit discounts on acquired loans are included as a reduction to gross loans. These discounts totaled $10.6 million at June 30, 2019, compared to $13.1 million at March 31, 2019, and $19.7 million at June 30, 2018.

Deposits totaled $21.4 billion at June 30, 2019, an increase of $1.2 billion from $20.2 billion at March 31, 2019, and an increase of $3.4 billion from $18.1 billion at June 30, 2018. The increase from the prior quarter was driven by an increase of $998 million in non-interest bearing demand deposits, $107 million from certificates of deposit, and $100 million from savings and money market accounts. From June 30, 2018, deposits increased across all deposit types, with the largest increases in savings and money market accounts of $1.4 billion, non-interest bearing demand deposits of $729 million, interest-bearing demand deposits of $661 million, and certificates of deposit of $533 million. Non-interest bearing deposits were $8.7 billion at June 30, 2019, compared to $7.7 billion at March 31, 2019, and $7.9 billion at June 30, 2018. Non-interest bearing deposits comprised 40.5% of total deposits at June 30, 2019, compared to 38.0% at March 31, 2019, and 43.9% at June 30, 2018. The proportion of savings and money market balances to total deposits was 36.8%, compared to 38.6% at March 31, 2019, and 35.8% at June 30, 2018. Interest-bearing demand deposits as a percentage of total deposits were 11.8% at June 30, 2019, compared to 12.4% at March 31, 2019, and 10.3% at June 30, 2018. Certificates of deposit as a percentage of total deposits were 10.9% at June 30, 2019, compared to 11.0% at March 31, 2019, and 10.0% at June 30, 2018. The Company’s ratio of loans to deposits was 89.8% at June 30, 2019, compared to 89.6% at March 31, 2019, and 89.2% at June 30, 2018.

Borrowings were zero at June 30, 2019 and March 31, 2019, compared to $75 million at June 30, 2018. The decrease in borrowings from June 30, 2018 is due to a reduction in overnight borrowings.

Qualifying debt totaled $387 million at June 30, 2019, compared to $374 million at March 31, 2019, and $361 million at June 30, 2018.

Stockholders’ equity at June 30, 2019 was $2.9 billion, compared to $2.7 billion at March 31, 2019, and $2.4 billion at June 30, 2018. The increase in stockholders’ equity from March 31, 2019 and June 30, 2018 is primarily a function of net income, partially offset by share repurchases. Under the Company’s common stock repurchase program, the Company is authorized to repurchase up to $250 million of its shares of common stock. During the second quarter 2019, the Company repurchased 792,688 shares of its common stock at a weighted average price of $42.82, for a total of $33.9 million. During the six months ended June 30, 2019, the Company repurchased a total of 1,733,603 shares of its common stock, representing approximately 2% of the Company’s outstanding shares. Shares were repurchased at a weighted average price of $41.45, for a total of $71.9 million.

At June 30, 2019, tangible common equity, net of tax, was 10.2% of tangible assets¹ and total capital was 12.9% of risk-weighted assets. The Company’s tangible book value per share¹ was $24.65 at June 30, 2019, up 24.6% from June 30, 2018.

Total assets increased 6.4% to $25.3 billion at June 30, 2019, from $23.8 billion at March 31, 2019, and increased 18.5% from $21.4 billion at June 30, 2018. The increase in total assets from the prior year relates primarily to organic loan growth.

Asset Quality

The provision for credit losses was $7.0 million for the second quarter 2019, compared to $3.5 million for the first quarter 2019, and compared to $5.0 million for the second quarter 2018. Net loan charge-offs² in the second quarter 2019 were $1.6 million, or 0.03% of average loans (annualized), compared to $1.2 million, or 0.03%, in the first quarter 2019, and $2.6 million, or 0.07%, in the second quarter 2018.

Nonaccrual loans increased $7.9 million to $51.8 million during the quarter and increased $17.8 million from June 30, 2018. Loans past due 90 days and still accruing were zero at June 30, 2019, March 31, 2019, and June 30, 2018. Loans past due 30-89 days and still accruing interest totaled $9.7 million at June 30, 2019, a decrease from $20.5 million at March 31, 2019, and an increase from $1.5 million at June 30, 2018.

Repossessed assets totaled $17.7 million at June 30, 2019 and March 31, 2019, a decrease of $9.8 million from $27.5 million at June 30, 2018. Adversely graded loans and non-performing assets totaled $399.0 million at June 30, 2019, an increase of $41.4 million from $357.6 million at March 31, 2019, and an increase of $30.5 million from $368.5 million at June 30, 2018.

The ratio of classified assets to Tier 1 capital plus the allowance for credit losses, a common regulatory measure of asset quality, was 7.8% at June 30, 2019, compared to 8.9% at March 31, 2019, and 10.1% at June 30, 2018.¹

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 $9.5 billion at June 30, 2019, an increase of $314 million during the quarter, and an increase of $763 million during the last twelve months. The growth in loans during the quarter was driven by increases in the Arizona, Nevada, and Southern California segments, with loan growth of $283 million, $26 million, and $7 million, respectively. These increases were partially offset by a decrease of $2 million in the Northern California segment. The growth in loans during the last twelve months was also driven by increases in the Arizona, Nevada, and Southern California segments, with loan growth of $379 million, $245 million, and $229 million, respectively. These increases were partially offset by a decrease of $90 million in the Northern California segment. Total deposits for the regional segments were $14.8 billion, an increase of $711 million during the quarter, and an increase of $1.7 billion during the last twelve months. The increase in deposits during the quarter was driven by the Arizona and Nevada segments, with deposit growth of $787 million and $182 million, respectively. These increases were partially offset by a decrease of $258 million in the Southern California segment. During the last twelve months, each of the regional segments had growth in deposits. Deposit growth over the last twelve months in the Arizona, Nevada, Southern California, and Northern California segments totaled $838 million, $426 million, $233 million, and $225 million, respectively.

Pre-tax income for the regional segments was $96.9 million for the three months ended June 30, 2019, an increase of $8.5 million from the three months ended March 31, 2019, and an increase of $10.9 million from the three months ended June 30, 2018. All regional segments had increases in pre-tax income compared to the three months ended March 31, 2019. The Arizona and Nevada segments each had increases in pre-tax income of $3.0 million and the Southern and Northern California segments each had increases in pre-tax income of $1.3 million. The Nevada, Southern California, and Northern California segments had increases in pre-tax income from the three months ended June 30, 2018 of $6.1 million, $3.0 million, and $1.8 million, respectively. For the six months ended June 30, 2019, the regional segments reported total pre-tax income of $185.2 million, an increase of $13.4 million compared to the six months ended June 30, 2018. Southern California, Nevada, Northern California and Arizona each had increases of $4.7 million, $3.8 million, $3.5 million, and $1.3 million, respectively.

The NBL segments reported gross loan balances of $9.8 billion at June 30, 2019, an increase of $817 million during the quarter, and an increase of $2.3 billion during the last twelve months. The increase in loans from the prior quarter was driven by the Other NBLs, Technology & Innovation, HFF, and Public & Nonprofit Finance segments, which had loan growth of $467 million, $189 million, $91 million, and $65 million, respectively. During the last twelve months, the largest drivers of loan growth were the Other NBLs and HFF segments, with increases of $2.0 billion and $224 million, respectively. Total deposits for the NBL segments were $5.9 billion, an increase of $560 million during the quarter, and an increase of $1.4 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 $449 million and $84 million, respectively. The increase of $1.4 billion during the last twelve months is a result of growth in the Technology & Innovation and HOA Services segments of $860 million and $533 million, respectively.

Pre-tax income for the NBL segments was $60.1 million for the three months ended June 30, 2019, an increase of $0.7 million from the three months ended March 31, 2019, and an increase of $11.4 million from the three months ended June 30, 2018. The increase in pre-tax income from the prior quarter relates to the Other NBLs, HFF, and HOA Services segments, which increased by $3.7 million, $0.7 million, and $0.1 million, respectively. These increases were partially offset by decreases in pre-tax income from the Technology & Innovation and Public & Nonprofit Finance segments, which had decreases of $3.8 million and $0.1 million, respectively. The drivers of the increase in pre-tax income from the same period in the prior year were the Other NBLs, HOA Services, and Technology & Innovation segments, which had increases of $5.9 million, $4.4 million, and $2.0 million, respectively. These increases were partially offset by decreases in pre-tax income for the HFF and Public & Nonprofit Finance segments, which decreased by $0.6 million and $0.3 million, respectively. Pre-tax income for the NBL segments for the six months ended June 30, 2019 totaled $119.5 million, an increase of $24.2 million compared to the six months ended June 30, 2018. The largest increases in pre-tax income compared to the six months ended June 30, 2018 were in the Technology & Innovation, HOA Services, and Other NBLs segments. These segments had increases of $9.4 million, $9.0 million, and $7.9 million, respectively. These increases were partially offset by decreases of $1.6 million and $0.5 million in the HFF and Public & Nonprofit segments.

Conference Call and Webcast

Western Alliance Bancorporation will host a conference call and live webcast to discuss its second quarter 2019 financial results at 12:00 p.m. ET on Friday, July 19, 2019. Participants may access the call by dialing 1-888-317-6003 and using passcode 0520110 or via live audio webcast using the website link https://services.choruscall.com/links/wal190719.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 July 19th through 9:00 a.m. ET August 19th by dialing 1-877-344-7529 passcode: 10132284.

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 2019, the Company adopted the Accounting Standards Updates (“ASU”) related to leases, which include ASU 2016-02, Leases, ASU 2018-10, Codification Improvements to Topic 842, Leases and ASU 2018-11, Leases (Topic 842) Targeted Improvements.

The amendments in ASU 2016-02 require lessees to recognize the lease assets and lease liabilities arising from operating leases in the statement of financial position, resulting in a gross up of assets and liabilities on the balance sheet. The accounting applied by a lessor is largely unchanged from that applied under previous GAAP. The Company elected to apply the package of practical expedients, which permitted the Company to forgo reassessment of 1) expired or existing contracts that may contain leases; 2) lease classification of expired or existing leases; and 3) initial direct costs for any existing leases.

Contacts

Western Alliance Bancorporation

Dale Gibbons, 602-952-5476

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