Market Overview

Western Alliance Bancorporation Reports Second Quarter 2019 Financial Results

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Western Alliance Bancorporation (NYSE:WAL):

SECOND QUARTER 2019 FINANCIAL RESULTS

Net income

 

Earnings per share

 

Net interest margin2

 

Efficiency ratio

 

Book value per

common share

$122.9 million

 

$1.19

 

4.59%

 

41.5%

 

$27.51

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."

LINKED-QUARTER BASIS

YEAR-OVER-YEAR

FINANCIAL HIGHLIGHTS:

 

  • Net income and earnings per share of $122.9 million and $1.19 compared to $120.8 million and $1.16, respectively
  • Net income of $122.9 million and earnings per share of $1.19, up 17.4% and 20.2%, respectively
  • Net operating revenue1 of $267.3 million, an increase of 2.9%, or $7.4 million, compared to an increase in operating non-interest expenses1 of 1.8%, or $2.0 million
  • Net operating revenue1 of $267.3 million, an increase of 12.2%, or $29.1 million, compared to an increase in operating non-interest expenses1 of 11.8%, or $12.1 million
  • Operating pre-provision net revenue1 of $152.5 million, up $5.4 million from $147.1 million
  • Operating pre-provision net revenue1 of $152.5 million, up $17.0 million from $135.5 million
  • Effective tax rate of 16.76%, compared to 17.45%
  • Effective tax rate of 16.76%, compared to 19.48%

FINANCIAL POSITION RESULTS:

 

  • Total loans of $19.3 billion, up $1.1 billion, or 25.0% annualized
  • Increase in total loans of $3.1 billion, or 19.3%
  • Total deposits of $21.4 billion, up $1.2 billion, or 24.4% annualized
  • Increase in total deposits of $3.4 billion, or 18.5%
  • Stockholders' equity of $2.9 billion, up $131 million
  • Increase in stockholders' equity of $460 million

LOANS AND ASSET QUALITY:

 

  • Nonperforming assets (nonaccrual loans and repossessed assets) to total assets of 0.27%, compared to 0.26%
  • Nonperforming assets to total assets of 0.27%, compared to 0.29%
  • Annualized net loan charge-offs to average loans outstanding of 0.03% compared to 0.03%
  • Annualized net loan charge-offs2 to average loans outstanding of 0.03%, compared to 0.07%

KEY PERFORMANCE METRICS:

 

  • Net interest margin of 4.59% compared to 4.71%
  • Net interest margin2 of 4.59%, compared to 4.71%
  • Return on average assets and on tangible common equity1 of 2.05% and 19.72%, compared to 2.12% and 20.49%, respectively
  • Return on average assets2 and on tangible common equity1,2 of 2.05% and 19.72%, compared to 2.02% and 20.47%, respectively
  • Tangible common equity ratio1 of 10.2%, compared to 10.3%
  • Tangible common equity ratio1 of 10.2%, compared to 9.9%
  • Tangible book value per share1, net of tax, of $24.65, an increase from $23.20
  • Tangible book value per share1, net of tax, of $24.65, an increase of 24.6% from $19.78
  • Operating efficiency ratio1 of 42.0%, compared to 42.4%
  • Operating efficiency ratio1 of 42.0%, compared to 42.1%

1

See reconciliation of Non-GAAP Financial Measures.

2

Beginning in Q1 2019, annualized performance metrics are calculated on an actual/actual basis, from a previous 30/360 basis. Prior period amounts have been restated to conform to the current presentation.

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.

1

See reconciliation of Non-GAAP Financial Measures.

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

1

See reconciliation of Non-GAAP Financial Measures.

2

Beginning in Q1 2019, annualized performance metrics are calculated on an actual/actual basis, from a previous 30/360 basis. Prior period amounts have been restated to conform to the current presentation.

Segment Highlights

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