Western Alliance Reports First Quarter 2017 Financial Results

Western Alliance Bancorporation (NYSE:WAL):

CEO COMMENTARY:

"Western Alliance is off to a strong start to the year with $73.4 million in net income and $0.70 EPS in Q1 2017,” commented Robert Sarver, Chairman and Chief Executive Officer of Western Alliance Bancorporation. “We are particularly pleased with our loan growth of $454 million to $13.66 billion, up 3.4% over the prior quarter, and our very strong deposit growth of $806 million to $15.36 billion, up 5.5% over the prior quarter. Asset quality remains strong with a net charge-off rate of 0.04% and non-performing assets to total assets of 0.44%. Our return on average assets and tangible common equity1 rose for the quarter to 1.69% and 17.85%, among the highest in the industry. With the quarter’s increase in tangible book value per share to $15.86,1 Western Alliance continues to deliver to its shareholders superior income, asset, and capital growth and has set a firm foundation for a strong 2017."

1 See reconciliation of Non-GAAP Financial Measures.

Income Statement

Net interest income was $179.3 million in the first quarter 2017, an increase of $4.0 million from $175.3 million in the fourth quarter 2016, and an increase of $33.6 million, or 23.1%, compared to the first quarter 2016. Net interest income in the first quarter 2017 includes $6.4 million of total accretion income from acquired loans, compared to $7.0 million in the fourth quarter 2016, and $5.3 million in the first quarter 2016.

The Company’s net interest margin in the first quarter 2017 was 4.63%, an increase from 4.57% in the fourth quarter 2016, and from 4.58% in the first quarter 2016. The increase in net interest margin from the fourth quarter 2016 is attributable to higher yields on loans and securities as a result of rising interest rates. The increase in net interest margin from the first quarter 2016 primarily relates to an increase in acquired loan accretion, partially offset by an increase in interest expense resulting from the issuance of long-term subordinated debt in June 2016, as well as an increase in the cost of interest-bearing deposits.

Operating non-interest income was $9.9 million for the first quarter 2017, compared to $10.5 million for the fourth quarter 2016, and $12.1 million for the first quarter 2016.1

Net operating revenue was $189.2 million for the first quarter 2017, an increase of $3.4 million, compared to $185.8 million for the fourth quarter 2016, and an increase of $31.4 million, or 19.9%, compared to $157.8 million for the first quarter 2016.1

Operating non-interest expense was $88.3 million for the first quarter 2017, compared to $82.7 million for the fourth quarter 2016, and $75.8 million for the first quarter 2016.1 The increase in operating non-interest expense from the prior quarter relates to higher professional fees and compensation costs as the Company continues to build out its infrastructure to support growth and also reflects seasonal compensation costs. The Company’s operating efficiency ratio1 on a tax equivalent basis was 44.4% for the first quarter 2017, compared to 42.4% for the fourth quarter 2016, and 45.6% for the first quarter 2016.

Net income was $73.4 million for the first quarter 2017, an increase of $3.6 million from $69.8 million for the fourth quarter 2016, and an increase of $12.1 million, or 19.6%, from $61.3 million for the first quarter 2016. Earnings per share was $0.70 for the first quarter 2017, compared to $0.67 for the fourth quarter 2016, and $0.60 for the first quarter 2016.

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 first quarter 2017, the Company’s operating PPNR was $100.9 million, down from $103.1 million in the fourth quarter 2016, and up 23.0% from $82.1 million in the first quarter 2016.1 The non-operating items1 for the first quarter 2017 consisted primarily of net gains on sales of investment securities of $0.6 million and a net gain on sales / valuations of repossessed and other assets of $0.5 million.

The Company had 1,564 full-time equivalent employees and 45 offices at March 31, 2017, compared to 1,557 employees and 48 offices at December 31, 2016 and 1,464 employees and 47 offices at March 31, 2016.

Balance Sheet

Gross loans totaled $13.66 billion at March 31, 2017, an increase of $454 million from $13.21 billion at December 31, 2016, and an increase of $2.42 billion from $11.24 billion at March 31, 2016. The year-over-year increase is comprised of $1.28 billion from Hotel Franchise Finance ("HFF") acquisition as of April 20, 2016 and the remainder from organic loan growth. 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. At March 31, 2017, the allowance for credit losses was 0.94% of total loans, compared to 0.95% at December 31, 2016, and 1.06% at March 31, 2016. The allowance for credit losses as a percent of total loans, adjusted to include credit discounts on acquired loans1, was 1.26% at March 31, 2017, compared to 1.30% at December 31, 2016, and 1.21% at March 31, 2016.

Deposits totaled $15.36 billion at March 31, 2017, an increase of $806 million from $14.55 billion at December 31, 2016, and an increase of $2.27 billion from $13.08 billion at March 31, 2016. The increase from both the prior quarter and from March 31, 2016 is the result of organic deposit growth. Non-interest bearing deposits were $6.11 billion at March 31, 2017, compared to $5.63 billion at December 31, 2016, and $4.64 billion at March 31, 2016. Non-interest bearing deposits comprised 39.8% of total deposits at March 31, 2017, compared to 38.7% at December 31, 2016, and 35.4% at March 31, 2016. The proportion of savings and money market balances to total deposits decreased to 40.7% from 42.1% at December 31, 2016, and from 43.2% at March 31, 2016. Certificates of deposit as a percentage of total deposits were 10.0% at March 31, 2017, compared to 10.0% at December 31, 2016, and 13.1% at March 31, 2016. The Company’s ratio of loans to deposits was 89.0% at March 31, 2017, compared to 90.8% at December 31, 2016, and 85.9% at March 31, 2016.

Borrowings decreased to zero at March 31, 2017, from $80.0 million at December 31, 2016, and $0.2 million at March 31, 2016. The decrease from the prior quarter is due to payoff of FHLB overnight advances. The decrease from the prior year is due to the payoff of short-term federal funds purchased.

Qualifying debt totaled $367 million at March 31, 2017, a decrease from $368 million at December 31, 2016, and an increase of $157 million from $210 million at March 31, 2016. The increase from the prior year is primarily related to the issuance of $175 million in subordinated debt in June 2016.

Stockholders’ equity at March 31, 2017 was $1.97 billion, compared to $1.89 billion at December 31, 2016, and $1.66 billion at March 31, 2016. The increase from the prior year relates primarily to at-the-market stock issuances and net income for the respective period, which was partially offset by valuation declines on available-for-sale investment securities.

At March 31, 2017, tangible common equity, net of tax, was 9.4% of tangible assets1 and total capital was 13.2% of risk-weighted assets. The Company’s tangible book value per share1 was $15.86 at March 31, 2017, up 20.5% from March 31, 2016.

Total assets increased to $18.12 billion at March 31, 2017, from $17.20 billion at December 31, 2016, and increased 18.9% from $15.25 billion at March 31, 2016. The increase in total assets from the prior year relates primarily to the HFF acquisition, organic loan growth, and an increase in investment securities resulting from increased deposits.

Asset Quality

The provision for credit losses was $4.3 million for the first quarter 2017, compared to $1.0 million for the fourth quarter 2016, and $2.5 million for the first quarter 2016. Net loan charge-offs (recoveries) in the first quarter 2017 were $1.3 million, or 0.04% of average loans (annualized), compared to $(0.8) million in net recoveries, or (0.03)%, in the fourth quarter 2016 and $2.3 million in net charge-offs, or 0.08%, in the first quarter 2016.

Nonaccrual loans decreased $5.8 million to $34.5 million during the quarter. Loans past due 90 days and still accruing interest totaled $3.7 million at March 31, 2017, compared to $1.1 million at December 31, 2016, and $4.5 million at March 31, 2016. Loans past due 30-89 days and still accruing interest totaled $10.8 million at quarter end, an increase from $6.3 million at December 31, 2016, and an increase from $9.2 million at March 31, 2016.

Repossessed assets totaled $45.2 million at quarter end, a decrease of $2.6 million from $47.8 million at December 31, 2016, and a decrease of $7.6 million from $52.8 million at March 31, 2016. Adversely graded loans and non-performing assets totaled $388.3 million at quarter end, an increase of $45.5 million from $342.9 million at December 31, 2016, and an increase of $76.3 million from $312.1 million at March 31, 2016.

As the Company’s asset quality and capital remain strong, the ratio of classified assets to Tier I capital plus the allowance for credit losses, a common regulatory measure of asset quality, was 12.6% at March 31, 2017, compared to 11.8% at December 31, 2016, and 13.0% at March 31, 2016.1

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") segment provides specialized banking services to niche markets. The Company's NBL reportable segments include Homeowner Associations ("HOA") Services, 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 HOA Services NBL corresponds to the Alliance Association Bank division. The HFF NBL includes the hotel franchise loan portfolio purchased from GE on April 20, 2016. The operations of Public and Nonprofit Finance are combined into one reportable segment. The Technology & Innovation NBL includes the operations of Equity Fund Resources, the Life Sciences Group, the Renewable Resource Group, and Technology Finance. The Other NBLs segment consists of the operations of Corporate Finance, Mortgage Warehouse Lending, and Resort Finance.

The Corporate & Other segment consists of corporate-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 $7.75 billion at March 31, 2017, an increase of $202 million during the quarter, and an increase of $273 million during the last twelve months. All regional segments had loan growth during the quarter with Arizona contributing the largest growth of $84 million, followed by Nevada, Southern California, and Northern California with growth of $44 million, $40 million, and $35 million, respectively. The growth in loans during the last twelve months was primarily driven by increases of $225 million in Arizona and $60 million in Nevada, which were partially offset by a decrease of $19 million in Northern California. Total deposits for the regional segments were $12.01 billion, an increase of $509 million during the quarter, and an increase of $1.54 billion during the last twelve months. Arizona and Nevada generated increased deposits during the quarter of $412 million and $165 million, respectively, which was partially offset by a decrease of $82.3 million in Northern California. With the exception of Northern California, each of the regional segments generated increased deposits during the last twelve months, with Arizona contributing the largest increase of $1.07 billion, followed by Southern California and Nevada with increases of $341 million and $267 million, respectively.

Pre-tax income for the regional segments was $72.4 million for the three months ended March 31, 2017, a decrease of $4.1 million from the three months ended December 31, 2016, and an increase of $6.3 million from the three months ended March 31, 2016. Arizona and Southern California each had a decrease in pre-tax income of $2.7 million. These decreases were partially offset by increases in pre-tax income for Nevada and Northern California of $0.5 million and $1.0 million, respectively, compared to the three months ended December 31, 2016. With the exception of Southern California, which had a decrease in pre-tax income of $0.7 million, each regional segment had increases in pre-tax income from the three months ended March 31, 2016, with Arizona and Nevada contributing the largest increases of $5.5 million and $1.1 million, respectively.

The NBL segments reported gross loan balances of $5.91 billion at March 31, 2017, an increase of $256 million during the quarter, and an increase of $2.17 billion during the last twelve months. The increase in loans for the NBL segments compared to the prior quarter relates primarily to the Other NBLs and Public & Nonprofit Finance segments, which increased loans by $178 million and $74 million, respectively. The increases in loans during the last twelve months were driven by HFF (as a result of the $1.28 billion purchase), Other NBLs, and Technology & Innovation segments, which increased loans by $1.28 billion, $617 million, and $166 million, respectively. Total deposits for the NBL segments were $3.26 billion, an increase of $327 million during the quarter, and an increase of $923 million during the last twelve months. The HOA Services and Technology & Innovation segments increased deposits by $223 million and $104 million, respectively, during the quarter. The increase of $923 million during the last twelve months is the result of growth in the HOA Services and Technology & Innovation segments of $585 million and $339 million, respectively.

Pre-tax income for the NBL segments was $37.5 million for the three months ended March 31, 2017, a decrease of $3.0 million from the three months ended December 31, 2016, and an increase of $11.0 million from the three months ended March 31, 2016. The decrease in pre-tax income from the prior quarter relates primarily to the Other NBLs segment, which decreased $3.7 million. This decrease was offset by increases in pre-tax income from the Public & Nonprofit and HOA Services segments of $0.4 million and $0.5 million, respectively. The HFF and HOA Services segments had the largest increases in pre-tax income of $10.6 million and $2.5 million, respectively, from the three months ended March 31, 2016, which were offset by decreases in pre-tax income of $1.2 million and $1.0 million from the Technology & Innovation and Other NBLs segments, respectively.

Conference Call and Webcast

Western Alliance Bancorporation will host a conference call and live webcast to discuss its first quarter 2017 financial results at 12:00 p.m. ET on Friday, April 21, 2017. Participants may access the call by dialing 1-888-317-6003 and using passcode 3879324 or via live audio webcast using the website link http://services.choruscall.com/links/wal170421.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 21st through 9:00 a.m. ET May 21st by dialing 1-877-344-7529 passcode: 10103883.

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.

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, and future economic performance, including our recent domestic select-service hotel franchise finance loan portfolio acquisition. 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, 2016 as filed with the Securities and Exchange Commission; 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 or changes in accounting principles, policies or guidelines; 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 $18 billion in assets, Western Alliance Bancorporation (NYSE:WAL) is one of the country’s top-performing banking companies and is ranked #4 on the Forbes 2017 “Best Banks in America” list. Its primary subsidiary, Western Alliance Bank, is the go-to bank for business and succeeds with local teams of experienced bankers who deliver superior service and a full spectrum of deposit, lending, treasury management, international banking and online banking products and services. Western Alliance Bank operates full-service banking divisions: Alliance Bank of Arizona, Bank of Nevada and First Independent Bank, Torrey Pines Bank and Bridge Bank. The bank also serves business customers through a robust national platform of specialized financial services including Corporate Finance, Equity Fund Resources, Hotel Franchise Finance, Life Sciences Group, Mortgage Warehouse Lending, Public and Nonprofit Finance, Renewable Resource Group, Resort Finance, Technology Finance and Alliance Association Bank. For more information, visit westernalliancebancorporation.com.