Western Alliance Bancorporation Reports Third Quarter 2019 Financial Results

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

THIRD QUARTER 2019 FINANCIAL RESULTS

CEO COMMENTARY:

“Western Alliance continues to deliver strong shareholder value and produced another record quarter with third quarter results that generated $127.4 million in net income and earnings per share of $1.24, representing an 18% increase in earnings per share from a year ago,” commented Kenneth Vecchione, Chief Executive Officer. “Thoughtful balance sheet growth continues to be at the forefront of our business plan as demonstrated by our third consecutive quarter of deposit growth of more than $1 billion and loan growth of over $900 million during the quarter. Our asset quality remains stable and we closed out the quarter with $0.6 million of net loan recoveries. Our healthy loan origination volume coupled with a reduction in deposit costs overcame a net interest margin compression of 18 basis points to produce net interest income growth of 18.4%, on a linked quarter annualized basis. Our consistent, broad-based results, combined with our commitment to distribute excess capital to shareholders through stock repurchases and dividends, positions the Company to finish the year with solid shareholder results.”

Income Statement

Net interest income was $266.4 million in the third quarter 2019, an increase of $11.7 million from $254.7 million in the second quarter 2019, and an increase of $32.4 million, or 13.8%, compared to the third 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 third quarter 2019 includes $2.7 million of total accretion income from acquired loans, compared to $4.6 million in the second quarter 2019, and $3.3 million in the third quarter 2018.

The Company’s net interest margin in the third quarter 2019 was 4.41%, a decrease from 4.59% in the second quarter 2019 and 4.68% in the third quarter 2018.

Operating non-interest income was $16.1 million for the third quarter 2019, compared to $12.6 million for the second quarter 2019, and $12.9 million for the third quarter 2018.¹ The increase in operating non-interest income from the third quarter 2018 primarily relates to an increase in income from warrants.

Net operating revenue was $282.5 million for the third quarter 2019, an increase of $15.2 million, compared to $267.3 million for the second quarter 2019, and an increase of $35.6 million, or 14.4%, compared to $246.9 million for the third quarter 2018.¹

Operating non-interest expense was $122.6 million for the third quarter 2019, compared to $114.8 million for the second quarter 2019, and $105.0 million for the third quarter 2018.¹ The Company’s operating efficiency ratio¹ was 42.4% for the third quarter 2019, compared to 42.0% in the second quarter 2019, and 41.5% for the third quarter 2018.

Income tax expense was $28.5 million for the third quarter 2019, compared to $24.8 million for the second quarter 2019, and $7.5 million for the third quarter 2018. Income tax expense for the third quarter 2018 includes the effect of a carryback election.

Net income was $127.4 million for the third quarter 2019, an increase of $4.4 million from $122.9 million for the second quarter 2019, and an increase of $16.3 million, or 14.6%, from $111.1 million for the third quarter 2018. Earnings per share was $1.24 for the third quarter 2019, compared to $1.19 for the second quarter 2019, and $1.05 for the third 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 third quarter 2019, the Company’s operating PPNR was $159.9 million, up $7.4 million from $152.5 million in the second quarter 2019, and up $18.1 million from $141.9 million in the third quarter 2018.¹ Non-operating income¹ for the third quarter 2019 consisted of a net gain on sales of investment securities of $3.2 million and net unrealized gains on assets measured at fair value of $0.2 million. Non-operating expense¹ for the third quarter 2019 consisted of a net loss on sales and valuations of repossessed and other assets of $3.4 million.

The Company had 1,814 full-time equivalent employees and 47 offices at September 30, 2019, compared to 1,806 employees and 47 offices at June 30, 2019 and 1,795 employees and 47 offices at September 30, 2018.

Balance Sheet

Gross loans totaled $20.2 billion at September 30, 2019, an increase of $903 million from $19.3 billion at June 30, 2019, and an increase of $3.4 billion from $16.7 billion at September 30, 2018. The increase from the prior quarter was driven by an increase of $346 million in CRE, non-owner occupied loans, $282 million in residential real estate loans, and $275 million in commercial and industrial loans. These increases were partially offset by a decrease of $55 million in construction and land development loans. From September 30, 2018, loans increased across all loan types, with the largest increases in commercial and industrial loans of $1.2 billion, CRE, non-owner occupied loans of $1.1 billion, and residential real estate loans of $1.0 billion. At September 30, 2019, the allowance for credit losses to gross loans held for investment was 0.82%, compared to 0.83% at June 30, 2019, and 0.90% at September 30, 2018. At September 30, 2019, the allowance for credit losses to total organic loans was 0.85%, compared to 0.87% at June 30, 2019, and 0.97% at September 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 $7.5 million at September 30, 2019, compared to $10.6 million at June 30, 2019, and $17.2 million at September 30, 2018.

Deposits totaled $22.4 billion at September 30, 2019, an increase of $1.0 billion from $21.4 billion at June 30, 2019, and an increase of $3.5 billion from $18.9 billion at September 30, 2018. The increase from the prior quarter was driven by an increase of $1.2 billion from savings and money market accounts and $78 million in non-interest bearing demand deposits. These increases were offset by a decrease of $221 million from certificates of deposit. From September 30, 2018, deposits increased across all deposit types, with the largest increases in savings and money market accounts of $2.0 billion, non-interest bearing demand deposits of $741 million, interest-bearing demand deposits of $531 million, and certificates of deposit of $261 million. Non-interest bearing deposits were $8.8 billion at September 30, 2019, compared to $8.7 billion at June 30, 2019, and $8.0 billion at September 30, 2018. Non-interest bearing deposits comprised 39.0% of total deposits at September 30, 2019, compared to 40.5% at June 30, 2019, and 42.4% at September 30, 2018. The proportion of savings and money market balances to total deposits was 40.4%, compared to 36.8% at June 30, 2019, and 37.3% at September 30, 2018. Interest-bearing demand deposits as a percentage of total deposits were 11.2% at September 30, 2019, compared to 11.8% at June 30, 2019, and 10.5% at September 30, 2018. Certificates of deposit as a percentage of total deposits were 9.4% at September 30, 2019, compared to 10.9% at June 30, 2019, and 9.8% at September 30, 2018. The Company’s ratio of loans to deposits was 89.8% at September 30, 2019, compared to 89.8% at June 30, 2019, and 88.5% at September 30, 2018.

Qualifying debt totaled $389 million at September 30, 2019, compared to $387 million at June 30, 2019, and $359 million at September 30, 2018.

Stockholders’ equity was $2.9 billion at September 30, 2019 and June 30, 2019, compared to $2.5 billion at September 30, 2018. The increase in stockholders’ equity from September 30, 2018 is primarily a function of net income, partially offset by share repurchases and dividends to shareholders. 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 third quarter 2019, the Company repurchased 1.0 million shares of its common stock at a weighted average price of $43.63, for a total of $43.6 million. During the nine months ended September 30, 2019, the Company repurchased a total of 2.7 million shares of its common stock, representing approximately 3% of the Company’s outstanding shares. Shares were repurchased at a weighted average price of $42.25, for a total of $115.5 million. During the third quarter 2019, the Company’s Board of Directors approved a quarterly cash dividend of $0.25 per share. The Company made its first dividend payment to shareholders totaling $25.7 million on August 30, 2019.

At September 30, 2019, tangible common equity, net of tax, was 10.1% of tangible assets¹ and total capital was 12.6% of risk-weighted assets. The Company’s tangible book value per share¹ was $25.60 at September 30, 2019, up 23.7% from September 30, 2018.

Total assets increased 4.0% to $26.3 billion at September 30, 2019, from $25.3 billion at June 30, 2019, and increased 18.7% from $22.2 billion at September 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 $4.0 million for the third quarter 2019, compared to $7.0 million for the second quarter 2019, and compared to $6.0 million for the third quarter 2018. Net loan (recoveries)² in the third quarter 2019 were $(0.6) million, or (0.01)% of average loans (annualized), compared to net charge-offs of $1.6 million, or 0.03%, in the second quarter 2019, and $3.1 million, or 0.08%, in the third quarter 2018.

Nonaccrual loans decreased $1.5 million to $50.3 million during the quarter and increased $13.5 million from September 30, 2018. Loans past due 90 days and still accruing were zero at September 30, 2019, June 30, 2019, and September 30, 2018. Loans past due 30-89 days and still accruing interest totaled $29.5 million at September 30, 2019, an increase from $9.7 million at June 30, 2019, and an increase from $9.4 million at September 30, 2018.

Repossessed assets totaled $15.5 million at September 30, 2019, compared to $17.7 million at June 30, 2019, and a decrease of $4.5 million from $20.0 million at September 30, 2018. Adversely graded loans and non-performing assets totaled $439.2 million at September 30, 2019, an increase of $40.3 million from $399.0 million at June 30, 2019, and an increase of $80.9 million from $358.3 million at September 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 September 30, 2019, compared to 7.8% at June 30, 2019, and 10.2% at September 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 $9.7 billion at September 30, 2019, an increase of $196 million during the quarter, and an increase of $701 million during the last twelve months. The growth in loans during the quarter was spread across all regional segments with increases in the Nevada, Southern California, Arizona, and Northern California segments of $85 million, $50 million, $31 million, and $30 million, respectively. The growth in loans during the last twelve months was driven by increases in the Arizona, Nevada, and Southern California segments, with loan growth of $375 million, $243 million, and $190 million, respectively. These increases were partially offset by a decrease of $107 million in the Northern California segment. Total deposits for the regional segments were $15.3 billion, an increase of $423 million during the quarter, and an increase of $1.6 billion during the last twelve months. The increase in deposits during the quarter was driven by the Northern California, Southern California, and Nevada segments, with deposit growth of $262 million, $217 million, and $81 million, respectively. These increases were partially offset by a decrease of $137 million in the Arizona 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, Northern California, and Southern California segments totaled $639 million, $422 million, $319 million, and $202 million, respectively.

Pre-tax income for the regional segments was $103.9 million for the three months ended September 30, 2019, an increase of $7.1 million from the three months ended June 30, 2019, and an increase of $16.7 million from the three months ended September 30, 2018. The growth in pre-tax income during the quarter was driven by increases in the Arizona and Southern California segments, with pre-tax income growth of $6.0 million and $2.3 million, respectively. These increases were partially offset by decreases of $0.9 million and $0.3 million in the Northern California and Nevada segments, respectively. The Arizona, Southern California, and Nevada segments had the largest increases in pre-tax income from the three months ended September 30, 2018 of $7.3 million, $5.0 million, and $4.0 million, respectively. For the nine months ended September 30, 2019, the regional segments reported total pre-tax income of $289.2 million, an increase of $30.1 million compared to the nine months ended September 30, 2018 with increases across all regional segments. Southern California, Arizona, Nevada, and Northern California had increases in pre-tax income of $9.8 million, $8.6 million, $7.9 million, and $3.9 million, respectively.

The NBL segments reported gross loan balances of $10.5 billion at September 30, 2019, an increase of $709 million during the quarter, and an increase of $2.7 billion during the last twelve months. The increase in loans from the prior quarter was driven by the Other NBLs, HFF, and Technology & Innovation segments, which had loan growth of $369 million, $240 million, and $131 million, respectively. These increases were partially offset by a decrease of $44 million in the Public & Nonprofit Finance segment. During the last twelve months, the largest drivers of loan growth were the Other NBLs, HFF, and Technology & Innovation segments, with increases of $1.9 billion, $461 million, and $271 million, respectively. Total deposits for the NBL segments were $6.4 billion, an increase of $440 million during the quarter, and an increase of $1.5 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 $436 million. The increase of $1.5 billion during the last twelve months is a result of growth in the Technology & Innovation and HOA Services segments of $970 million and $528 million, respectively.

Pre-tax income for the NBL segments was $71.2 million for the three months ended September 30, 2019, an increase of $11.1 million from the three months ended June 30, 2019, and an increase of $19.7 million from the three months ended September 30, 2018. The increase in pre-tax income from the prior quarter primarily relates to the Technology & Innovation and Other NBLs segments, which increased by $8.4 million and $4.4 million, respectively. These increases were partially offset by decreases in pre-tax income from the HFF segments, which had decreases of $1.8 million. The drivers of the increase in pre-tax income from the same period in the prior year were the Other NBLs, Technology & Innovation, and HOA Services segments, which had increases of $11.7 million, $7.7 million, and $2.4 million, respectively. These increases were partially offset by decreases in pre-tax income for the HFF and Public & Nonprofit Finance segments, which decreased by $1.6 million and $0.5 million, respectively. Pre-tax income for the NBL segments for the nine months ended September 30, 2019 totaled $190.7 million, an increase of $43.9 million compared to the nine months ended September 30, 2018. The largest increases in pre-tax income compared to the nine months ended September 30, 2018 were in the Other NBLs, Technology & Innovation, and HOA Services segments. These segments had increases of $19.6 million, $17.1 million, and $11.5 million, respectively. These increases were partially offset by decreases of $3.3 million and $1.1 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 third quarter 2019 financial results at 12:00 p.m. ET on Friday, October 18, 2019. Participants may access the call by dialing 1-888-317-6003 and using passcode 1909804 or via live audio webcast using the website link https://services.choruscall.com/links/wal191018_1200.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 18th through 9:00 a.m. ET November 18th by dialing 1-877-344-7529 passcode: 10134684.

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.

Contacts

Western Alliance Bancorporation

Dale Gibbons, 602-952-5476

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