Western Alliance Bancorporation Reports Fourth Quarter and Full Year 2019 Financial Results

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

FOURTH QUARTER AND FULL YEAR 2019 FINANCIAL RESULTS

CEO COMMENTARY:

“Western Alliance produced strong results in the fourth quarter of 2019 leading to record revenues and earnings for the quarter and full year,” said Kenneth Vecchione, President and Chief Executive Officer. “Our distinctive business model delivered strong quarterly results, achieving a record $128.1 million in net income and earnings per share of $1.25, an increase of 10.6% over prior year. Quarterly loan and deposit growth of $970 million and $356 million, respectively, lifted total assets to $26.8 billion. Quarterly net interest margin of 4.39% declined only 2 basis points from prior quarter due to timely deposit repricing and tangible book value ¹ rose 3.7% to $26.54.

“Reflecting on full year results, our growth in loans of $3.4 billion and deposits of $3.6 billion generated the highest total revenues in company history, surpassing $1.0 billion, against the backdrop of lower rates. Asset quality remained steady, with net charge-offs for the year of $3.4 million, or only 2 basis points of average loans. Net income climbed 14.5% over the prior year to $499.2 million and earnings per share increased 16.9% to $4.84 over the same period. As we enter into 2020, we remain committed to providing continued shareholder value with disciplined growth, while maintaining strong asset quality and industry leading revenue to expense metrics.”

Income Statement

Net interest income was $272.0 million in the fourth quarter 2019, an increase of $5.6 million from $266.4 million in the third quarter 2019, and an increase of $28.5 million, or 11.7%, compared to the fourth quarter 2018. For 2019, net interest income was $1.0 billion, an increase of $124.5 million, or 13.6%, compared to $915.9 million in 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 fourth quarter 2019 includes $2.5 million of total accretion income from acquired loans, compared to $2.7 million in the third quarter 2019, and $4.5 million in the fourth quarter 2018. Net interest income in 2019 includes $12.7 million of total accretion income from acquired loans, compared to $18.6 million in 2018.

The Company’s net interest margin in the fourth quarter 2019 was 4.39%, a decrease from 4.41% in the third quarter 2019 and 4.68% in the fourth quarter 2018. The decrease in net interest margin of 29 basis points from the fourth quarter 2018 is primarily the result of the federal rate cuts in 2019, totaling 75 basis points.

Operating non-interest income¹ was $15.5 million for the fourth quarter 2019, compared to $16.1 million for the third quarter 2019, and $14.7 million for the fourth quarter 2018. For 2019, operating non-interest income¹ was $56.8 million, an increase of $2.4 million, or 4.5%, compared to $54.4 million in 2018. The increase in operating non-interest income from 2018 primarily relates to an increase in rental income from equipment leases.

Net operating revenue¹ was $287.5 million for the fourth quarter 2019, an increase of $5.0 million, compared to $282.5 million for the third quarter 2019, and an increase of $29.3 million, or 11.4%, compared to $258.2 million for the fourth quarter 2018. For 2019, net operating revenue¹ was $1.1 billion, an increase of $127.0 million, or 13.1%, compared to $970.3 million in 2018.

Operating non-interest expense¹ was $128.7 million for the fourth quarter 2019, compared to $122.6 million for the third quarter 2019, and $109.6 million for the fourth quarter 2018. The Company’s operating efficiency ratio¹ was 43.8% for the fourth quarter 2019, compared to 42.4% in the third quarter 2019, and 41.5% for the fourth quarter 2018. For 2019, operating non-interest expense¹ was $479.0 million, an increase of $62.2 million, or 14.9%, compared to $416.8 million in 2018. The increase in operating non-interest expense from 2018 primarily relates to an increase in compensation related costs and technology initiatives to support the Company’s continued growth. Deposit costs in 2019 have also increased commensurate with growth in average deposit balances and increased rates compared to 2018.

Income tax expense was $26.2 million for the fourth quarter 2019, compared to $28.5 million for the third quarter 2019, and $20.9 million for the fourth quarter 2018. Income tax expense for 2019 was $105.1 million, an increase of $30.5 million, or 40.9%, compared to $74.5 million in 2018.

Net income was $128.1 million for the fourth quarter 2019, an increase of $0.7 million from $127.4 million for the third quarter 2019, and an increase of $9.0 million, or 7.5%, from $119.1 million for the fourth quarter 2018. Earnings per share was $1.25 for the fourth quarter 2019, compared to $1.24 for the third quarter 2019, and $1.13 for the fourth quarter 2018. For 2019, net income was $499.2 million, an increase of $63.4 million, or 14.5%, compared to $435.8 million in 2018. Earnings per share for 2019 was $4.84, an increase of 16.9%, compared to $4.14 in 2018.

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 fourth quarter 2019, the Company’s operating PPNR¹ was $158.8 million, down $1.1 million from $159.9 million in the third quarter 2019, and up $10.2 million from $148.5 million in the fourth quarter 2018. Non-operating income¹ for the fourth quarter 2019 consisted of net unrealized gains on assets measured at fair value of $0.5 million. Non-operating expense¹ for the fourth quarter 2019 consisted of a net loss on sales and valuations of repossessed and other assets of $1.0 million. For 2019, operating PPNR¹ was $618.3 million, an increase of $64.8 million, or 11.7%, from $553.5 million in 2018. The non-operating income items¹ for 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 $5.1 million. Non-operating expense¹ for 2019 consisted of a net loss on sales and valuations of repossessed and other assets of $3.8 million.

The Company had 1,835 full-time equivalent employees and 47 offices at December 31, 2019, compared to 1,814 employees and 47 offices at September 30, 2019, and 1,787 employees and 47 offices at December 31, 2018.

Balance Sheet

Gross loans totaled $21.1 billion at December 31, 2019, an increase of $970 million from $20.2 billion at September 30, 2019, and an increase of $3.4 billion from $17.7 billion at December 31, 2018. The increase from the prior quarter was driven by an increase of $674 million in commercial and industrial loans, $285 million in residential real estate loans, and $214 million in CRE, non-owner occupied loans. These increases were partially offset by a decrease of $203 million in construction and land development loans. From December 31, 2018, the largest increases in the loan balance were driven by commercial and industrial loans of $1.6 billion, CRE, non-owner occupied loans of $1.0 billion, and residential real estate loans of $943 million. At December 31, 2019, the allowance for credit losses to gross loans held for investment was 0.80%, compared to 0.82% at September 30, 2019, and 0.86% at December 31, 2018. At December 31, 2019, the allowance for credit losses to total organic loans was 0.82%, compared to 0.85% at September 30, 2019, and 0.92% at December 31, 2018. The Company defines its organic loans as those loans that have not been acquired in a transaction accounted for as a business combination.

Deposits totaled $22.8 billion at December 31, 2019, an increase of $356 million from $22.4 billion at September 30, 2019, and an increase of $3.6 billion from $19.2 billion at December 31, 2018. The increase from the prior quarter was driven by an increase of $260 million in certificates of deposits, $252 million in interest bearing demand deposits, and $62.3 million from savings and money market accounts. These increases were offset by a decrease of $218 million from non-interest bearing demand deposits. From December 31, 2018, deposits increased across all deposit types, with increases in savings and money market accounts of $1.8 billion, non-interest bearing demand deposits of $1.1 billion, certificates of deposit of $542 million, and interest-bearing demand deposits of $205 million. Non-interest bearing deposits were $8.5 billion at December 31, 2019, compared to $8.8 billion at September 30, 2019, and $7.5 billion at December 31, 2018. Non-interest bearing deposits comprised 37.5% of total deposits at December 31, 2019, compared to 39.0% at September 30, 2019, and 38.9% at December 31, 2018. The proportion of savings and money market balances to total deposits was 40.0%, compared to 40.4% at September 30, 2019, and 38.2% at December 31, 2018. Interest-bearing demand deposits as a percentage of total deposits were 12.1% at December 31, 2019, compared to 11.2% at September 30, 2019, and 13.3% at December 31, 2018. Certificates of deposit as a percentage of total deposits were 10.4% at December 31, 2019, compared to 9.4% at September 30, 2019, and 9.6% at December 31, 2018. The Company’s ratio of loans to deposits was 92.7% at December 31, 2019, compared to 89.8% at September 30, 2019, and 92.4% at December 31, 2018.

Borrowings were zero at December 31, 2019 and September 30, 2019, compared to $491 million at December 31, 2018. The decrease in borrowings from December 31, 2018 is due to a decrease in overnight advances.

Qualifying debt totaled $394 million at December 31, 2019, compared to $389 million at September 30, 2019, and $361 million at December 31, 2018.

Stockholders’ equity was $3.0 billion at December 31, 2019, compared to $2.9 billion at September 30, 2019, and $2.6 billion at December 31, 2018. The increase in stockholders’ equity from December 31, 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 was authorized to repurchase up to $250 million of its shares of common stock through December 31, 2019. During the fourth quarter 2019, the Company repurchased 88,799 shares of its common stock at a weighted average price of $51.33, for a total of $4.6 million. During the year ended December 31, 2019, the Company repurchased a total of 2.8 million shares of its common stock, representing approximately 3% of the Company’s outstanding shares. Shares were repurchased at a weighted average price of $42.53, for a total of $120.0 million. During the fourth quarter 2019, 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 November 29, 2019.

At December 31, 2019, tangible common equity, net of tax, was 10.3% of tangible assets¹ and total capital was 12.8% of risk-weighted assets. The Company’s tangible book value per share¹ was $26.54 at December 31, 2019, up 20.3% from December 31, 2018.

Total assets increased 1.9% to $26.8 billion at December 31, 2019, from $26.3 billion at September 30, 2019, and increased 16.1% from $23.1 billion at December 31, 2018. The increase in total assets from the prior year relates primarily to organic loan growth.

Asset Quality

The provision for credit losses remained flat at $4.0 million for the fourth quarter 2019 compared to the third quarter 2019, and decreased from $6.0 million for the fourth quarter 2018. Net loan charge-offs² in the fourth quarter 2019 were $1.2 million, or 0.02% of average loans (annualized), compared to net (recoveries) of $(0.6) million, or (0.01)%, in the third quarter 2019, and net charge-offs of $3.3 million, or 0.08%, in the fourth quarter 2018.

Nonaccrual loans increased $5.6 million to $56.0 million during the quarter and increased $28.2 million from December 31, 2018. Loans past due 90 days and still accruing were zero at December 31, 2019 and September 30, 2019, and $0.6 million at December 31, 2018. Loans past due 30-89 days and still accruing interest totaled $14.5 million at December 31, 2019, a decrease from $29.5 million at September 30, 2019, and a decrease from $16.6 million at December 31, 2018.

Repossessed assets totaled $13.8 million at December 31, 2019, compared to $15.5 million at September 30, 2019, and a decrease of $4.1 million from $17.9 million at December 31, 2018. Adversely graded loans and non-performing assets totaled $341.6 million at December 31, 2019, a decrease of $97.6 million from $439.2 million at September 30, 2019, and an increase of $26.0 million from $315.6 million at December 31, 2018.

The ratio of classified assets to Tier 1 capital plus the allowance for credit losses¹, a common regulatory measure of asset quality, was 5.8% at December 31, 2019, compared to 7.8% at September 30, 2019, and 9.4% at December 31, 2018.

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 December 31, 2019, a decrease of $15 million during the quarter, and an increase of $553 million during the last year. The decline in loans during the quarter was driven by the Arizona and Southern California segments with loan decreases of $120 million and $53 million, respectively. These decreases were partially offset by increases of $86 million and $73 million in the Northern California and Nevada segments, respectively. The growth in loans during the last year was spread across all regional segments with increases in the Nevada, Arizona, Southern California, and Northern California segments of $249 million, $200 million, $93 million, and $11 million, respectively. Total deposits for the regional segments were $14.7 billion, a decrease of $570 million during the quarter, and an increase of $1.4 billion during the last year. The decrease in deposits during the quarter was driven by the Arizona and Southern California segments, with deposit decreases of $586 million and $168 million, respectively. These decreases were partially offset by increases of $103 million and $81 million, respectively, in the Northern California and Nevada segments. The growth in deposits over the last year was spread across all regional segments with increases in the Northern California, Nevada, Arizona, and Southern California segments of $535 million, $354 million, $295 million, and $238 million, respectively.

Pre-tax income for the regional segments was $105.1 million for the three months ended December 31, 2019, an increase of $1.1 million from the three months ended September 30, 2019, and an increase of $18.3 million from the three months ended December 31, 2018. The growth in pre-tax income during the quarter was driven by increases in the Northern California and Nevada segments, with pre-tax income growth of $1.2 million and $1.1 million, respectively. These increases were partially offset by a decrease of $1.7 million in the Arizona segment. The Arizona, Southern California, Nevada, and Northern California segments had increases in pre-tax income from the three months ended December 31, 2018 of $8.8 million, $4.6 million, $3.8 million, and $1.1 million, respectively. For the year ended December 31, 2019, the regional segments reported total pre-tax income of $394.2 million, an increase of $48.4 million compared to the year ended December 31, 2018 with increases across all regional segments. Arizona, Southern California, Nevada, and Northern California had increases in pre-tax income of $17.4 million, $14.3 million, $11.7 million, and $4.9 million, respectively.

The NBL segments reported gross loan balances of $11.5 billion at December 31, 2019, an increase of $986 million during the quarter, and an increase of $2.9 billion during the last year. The increase in loans from the prior quarter was driven by the Other NBLs, Technology & Innovation, Public & Nonprofit Finance, and HFF segments, which had loan growth of $714 million, $175 million, $53 million, and $35 million, respectively. During the last year, the largest drivers of loan growth were the Other NBLs, HFF, Technology & Innovation, and Public & Nonprofit Finance segments, with increases of $1.9 billion, $451 million, $351 million, and $88 million, respectively. Total deposits for the NBL segments were $7.0 billion, an increase of $646 million during the quarter, and an increase of $1.9 billion during the last year. The increase in deposits from the prior quarter is primarily attributable to the Technology & Innovation and HOA Services segments, which increased deposits by $482 million and $158 million, respectively. The increase of $1.9 billion during the last year is a result of growth in the Technology & Innovation and HOA Services segments of $1.2 billion and $603 million, respectively.

Pre-tax income for the NBL segments was $77.4 million for the three months ended December 31, 2019, an increase of $6.2 million from the three months ended September 30, 2019, and an increase of $21.7 million from the three months ended December 31, 2018. The increase in pre-tax income from the prior quarter primarily relates to the Other NBLs, HFF, Technology & Innovation and HOA Services segments, which increased by $2.9 million, $2.3 million, $1.1 million and $0.6 million, respectively. These increases were partially offset by a decrease in pre-tax income from the Public & Nonprofit segment of $0.8 million. The drivers of the increase in pre-tax income from the same period in the prior year were the Other NBLs, Technology & Innovation, HOA Services, and HFF segments, which had increases of $15.0 million, $4.3 million, $3.2 million, and $0.7 million, respectively. These increases were partially offset by a decrease in pre-tax income for the Public & Nonprofit Finance segment, which decreased by $1.6 million. Pre-tax income for the NBL segments for the year ended December 31, 2019 totaled $268.1 million, an increase of $65.6 million compared to the year ended December 31, 2018. The largest increases in pre-tax income compared to the year ended December 31, 2018 were in the Other NBLs, Technology & Innovation, and HOA Services segments. These segments had increases of $34.6 million, $21.4 million, and $14.7 million, respectively. These increases were partially offset by decreases of $2.6 million and $2.5 million in the Public & Nonprofit and HFF segments, respectively.

Conference Call and Webcast

Western Alliance Bancorporation will host a conference call and live webcast to discuss its fourth quarter 2019 financial results at 12:00 p.m. ET on Friday, January 24, 2020. Participants may access the call by dialing 1-888-317-6003 and using passcode 7572681 or via live audio webcast using the website link https://services.choruscall.

Contacts

Western Alliance Bancorporation

Dale Gibbons, 602-952-5476

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