Western Alliance Reports Third Quarter 2017 Financial Results

Western Alliance Bancorporation (NYSE:WAL):

CEO COMMENTARY:

Robert Sarver, Chairman and CEO, commented, “The economy continues to steadily expand and our clients are growing their businesses. Our highly experienced bankers have deep local roots and are among the best and brightest in our markets. This quarter was marked by continued momentum in key financial metrics and reaffirms our outstanding 2017 results for shareholders. Tangible book value per share increased 5% to $17.531 from the prior quarter. Robust loan growth of $532 million and deposit growth of $874 million during the quarter has us well-positioned for future success. Our quarterly operating results, with net income of $82.9 million, EPS of $0.79 and an operating efficiency ratio of 40%1 reflect our strong fundamentals.”

Income Statement

Net interest income was $201.6 million in the third quarter 2017, an increase of $8.8 million from $192.7 million in the second quarter 2017 and an increase of $29.0 million, or 16.8%, compared to the third quarter 2016. Net interest income in the third quarter 2017 includes $7.5 million of accretion income from acquired loans, compared to $7.1 million in the second quarter 2017, and $8.8 million in the third quarter 2016.

The Company’s net interest margin in the third quarter 2017 was 4.65%, an increase from 4.61% in the second quarter 2017, and from 4.55% in the third quarter 2016. The increase in net interest margin from the second quarter 2017 and the third quarter 2016 is attributable to higher yields on loans as a result of rising interest rates, as well as an increase in yields from investment securities.

Operating non-interest income was $9.9 million for the third quarter 2017, compared to $10.5 million for the second quarter 2017, and $10.7 million for the third quarter 2016.1 The decrease in operating non-interest income from the prior quarter primarily relates to a decrease in income from equity investments. The decrease in operating non-interest income from the third quarter 2016 is due primarily to a decrease in lending related income, resulting from decreased SBA income.

Net operating revenue was $211.5 million for the third quarter 2017, an increase of $8.3 million, or 4.1%, compared to $203.2 million for the second quarter 2017, and an increase of $28.3 million, or 15.4%, compared to $183.2 million for the third quarter 2016.1

Operating non-interest expense was $88.8 million for the third quarter 2017, compared to $88.0 million for the second quarter 2017, and $82.4 million for the third quarter 2016.1 Operating non-interest expense held relatively flat from the prior quarter as the decrease in legal, professional and directors' fees resulting from vesting of director restricted stock awards at the end of the second quarter 2017 was offset by increases in deposit costs and charitable contributions during the quarter. The increase in operating non-interest expense from the third quarter 2016 relates primarily to higher compensation costs resulting from an increase in the number of employees to support growth, as well as higher incentive compensation related to achievement of performance targets. The Company’s operating efficiency ratio1 on a tax equivalent basis was 40.0% for the third quarter 2017, compared to 41.2% for the second quarter 2017, and 43.0% for the third quarter 2016.

Net income was $82.9 million for the third quarter 2017, an increase of $2.9 million, or 3.6%, from $80.0 million for the second quarter 2017, and an increase of $15.8 million, or 23.6%, from $67.1 million for the third quarter 2016. Earnings per share was $0.79 for the third quarter 2017, compared to $0.76 for the second quarter 2017, and $0.64 for the third 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 third quarter 2017, the Company’s operating PPNR was $122.7 million, up 6.5% from $115.2 million in the second quarter 2017, and up 21.7% from $100.8 million in the third quarter 2016.1 The non-operating items1 for the third quarter 2017 consisted primarily of a net gain on sales of investment securities of $0.3 million, offset by a net loss on sales / valuations of repossessed and other assets of $0.3 million. The non-operating items1 for the third quarter 2016 consisted primarily of acquisition / restructure expenses of $2.7 million related to the HFF and system conversion costs.

The Company had 1,673 full-time equivalent employees and 47 offices at September 30, 2017, compared to 1,628 employees and 46 offices at June 30, 2017 and 1,520 employees and 48 offices at September 30, 2016.

Balance Sheet

Gross loans totaled $14.52 billion at September 30, 2017, an increase of $532 million from $13.99 billion at June 30, 2017, and an increase of $1.49 billion from $13.03 billion at September 30, 2016. The increase from both the prior quarter and from September 30, 2016 is due to organic loan growth. At September 30, 2017, the allowance for credit losses to gross loans held for investment was 0.94%, compared to 0.94% at June 30, 2017, and 0.94% at September 30, 2016. At September 30, 2017, the allowance for credit losses to total organic loans was 1.06%, compared to 1.08% at June 30, 2017, and 1.13% at September 30, 2016. 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 $32.7 million at September 30, 2017, compared to $37.8 million at June 30, 2017, and $56.1 million at September 30, 2016.

Deposits totaled $16.90 billion at September 30, 2017, an increase of $874 million from $16.03 billion at June 30, 2017, and an increase of $2.46 billion from $14.44 billion at September 30, 2016. The increase from both the prior quarter and from September 30, 2016 is the result of organic deposit growth. Non-interest bearing deposits were $7.61 billion at September 30, 2017, compared to $6.86 billion at June 30, 2017, and $5.62 billion at September 30, 2016. Non-interest bearing deposits comprised 45.0% of total deposits at September 30, 2017, compared to 42.8% at June 30, 2017, and 38.9% at September 30, 2016. The proportion of savings and money market balances to total deposits decreased to 37.3% from 38.1% at June 30, 2017, and from 41.3% at September 30, 2016. Certificates of deposit as a percentage of total deposits were 9.4% at September 30, 2017, compared to 9.9% at June 30, 2017, and 11.0% at September 30, 2016. The Company’s ratio of loans to deposits was 85.9% at September 30, 2017, compared to 87.3% at June 30, 2017, and 90.2% at September 30, 2016.

Qualifying debt totaled $373 million at September 30, 2017, compared to $375 million at June 30, 2017, and $383 million at September 30, 2016.

Stockholders’ equity at September 30, 2017 was $2.15 billion, compared to $2.06 billion at June 30, 2017, and $1.86 billion at September 30, 2016. The increase from the prior quarter and prior year relates primarily to net income for the respective period.

At September 30, 2017, tangible common equity, net of tax, was 9.4% of tangible assets1 and total capital was 13.3% of risk-weighted assets. The Company’s tangible book value per share1 was $17.53 at September 30, 2017, up 18.1% from September 30, 2016.

Total assets increased 5.7% to $19.92 billion at September 30, 2017, from $18.84 billion at June 30, 2017, and increased 16.9% from $17.04 billion at September 30, 2016. The increase in total assets from the prior quarter and prior year relates primarily to loan growth of $532 million and $1.49 billion, respectively.

Asset Quality

The provision for credit losses was $5.0 million for the third quarter 2017, compared to $3.0 million for the second quarter 2017, and $2.0 million for the third quarter 2016. Net charge-offs (recoveries) in the third quarter 2017 were $0.4 million, or 0.01% of average loans (annualized), compared to $(1.2) million in net recoveries, or (0.03)%, in the second quarter 2017 and $1.2 million in net charge-offs, or 0.04%, in the third quarter 2016.

Nonaccrual loans increased $24.9 million to $55.0 million during the quarter, which primarily relates to one loan with a net balance of $23 million, which the Company sold subsequent to quarter end. The Company incurred a loss of $1.4 million on the sale of the loan, which was recognized as a charge-off during the quarter. Loans past due 90 days and still accruing interest totaled less than $0.1 million at September 30, 2017, compared to $4.0 million at June 30, 2017, and $2.8 million at September 30, 2016. Loans past due 30-89 days and still accruing interest totaled $5.2 million at quarter end, an increase from $4.1 million at June 30, 2017, and a decrease from $18.4 million at September 30, 2016.

Repossessed assets totaled $29.0 million at quarter end, a decrease of $2.0 million from $31.0 million at June 30, 2017, and a decrease of $20.6 million from $49.6 million at September 30, 2016. Adversely graded loans and non-performing assets totaled $406.2 million at quarter end, an increase of $38.4 million from $367.8 million at June 30, 2017, and an increase of $71.3 million from $334.9 million at September 30, 2016. The increase in non-performing assets during the quarter primarily relates to the $23 million loan discussed above.

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 10.7% at September 30, 2017, compared to 12.7% at June 30, 2017, and 12.3% at September 30, 2016.1

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 HOA Services NBL corresponds to the Alliance Association Bank division. The HFF NBL includes the hotel franchise loan portfolio purchased from GE Capital 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 $7.95 billion at September 30, 2017, an increase of $121 million during the quarter, and an increase of $410 million during the last twelve months. All regional segments, with the exception of Nevada, had loan growth during the quarter, with Northern California contributing the largest growth of $88 million, followed by Arizona and Southern California with growth of $41 million and $35 million, respectively. The growth in loans during the last twelve months was primarily driven by increases of $193 million in Arizona, $189 million in Northern California, and $40 million in Southern California. Total deposits for the regional segments were $13.20 billion, an increase of $693 million during the quarter, and an increase of $1.79 billion during the last twelve months. Arizona and Southern California generated increased deposits during the quarter of $420 million and $261 million, respectively, which was partially offset by a decrease of $12 million in Northern California. During the last twelve months, each regional segment generated increased deposits, with Arizona, Southern California, and Nevada contributing increases of $1.27 billion, $257 million, and $239 million, respectively.

Pre-tax income for the regional segments was $86.1 million for the three months ended September 30, 2017, an increase of $1.4 million from the three months ended June 30, 2017, and an increase of $5.4 million from the three months ended September 30, 2016. Arizona generated the largest increase in pre-tax income of $3.2 million, compared to the three months ended June 30, 2017, which was partially offset by a decrease in Southern California of $1.5 million. Arizona and Nevada had increases in pre-tax income from the three months ended September 30, 2016 of $7.1 million and $1.5 million, respectively, which were offset by decreases in Northern California and Southern California of $3.0 million and $0.2 million, respectively. For the nine months ended September 30, 2017, the regional segments reported total pre-tax income of $243.1 million, an increase of $22.6 million compared to the nine months ended September 30, 2016. All regional segments with the exception of Northern California had increases in pre-tax income with Arizona and Nevada contributing the largest increases of $18.9 million and $6.9 million, respectively.

The NBL segments reported gross loan balances of $6.57 billion at September 30, 2017, an increase of $414 million during the quarter, and an increase of $1.09 billion during the last twelve months. All NBL segments had loan growth during the quarter, with the Other NBLs segment contributing the largest growth of $340 million, followed by increases in HFF and Public & Nonprofit Finance of $34 million and $29 million, respectively. The increase in loans for the NBL segments over the last twelve months relates primarily to the Other NBLs, Public & Nonprofit Finance, and Technology & Innovation segments, which increased loans by $839 million, $127 million, and $115 million, respectively. Total deposits for the NBL segments were $3.61 billion, an increase of $154 million during the quarter, and an increase of $732 million during the last twelve months. During the quarter, the Technology & Innovation segment increased deposits by $187 million, which was partially offset by a decrease of $34 million in HOA Services. The increase of $732 million during the last twelve months is the result of growth in the Technology & Innovation and HOA Services segments of $393 million and $339 million, respectively.

Pre-tax income for the NBL segments was $45.6 million for the three months ended September 30, 2017, an increase of $3.0 million from the three months ended June 30, 2017, and an increase of $7.6 million from the three months ended September 30, 2016. The increase in pre-tax income from the prior quarter relates primarily to the HFF segment as it had an increase in pre-tax income of $3.8 million. This increase was offset by a decrease in pre-tax income from the Other NBLs segment of $1.3 million. The increase in pre-tax income compared to the three months ended September 30, 2016 was driven by increases across all NBL segments. The largest increases were generated by HFF, Public & Nonprofit Finance, and Technology & Innovation with increases of $2.2 million, $2.0 million, and $1.8 million, respectively. Pre-tax income for the NBL segments for the nine months ended September 30, 2017 totaled $125.8 million, an increase of $26.2 million compared to the nine months ended September 30, 2016. The largest increases in pre-tax income compared to the nine months ended September 30, 2016 were in the HFF, HOA Services, and Public & Nonprofit Finance segments, which increased $11.8 million, $6.3 million, and $4.5 million, respectively.

Conference Call and Webcast

Western Alliance Bancorporation will host a conference call and live webcast to discuss its third quarter 2017 financial results at 12:00 p.m. ET on Friday, October 20, 2017. Participants may access the call by dialing 1-888-317-6003 and using passcode 0722330 or via live audio webcast using the website link https://services.choruscall.com/links/wal171020.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 20th through 9:00 a.m. ET November 20th by dialing 1-877-344-7529, passcode: 10112871.

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. 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 $19 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.