Western Alliance Bancorporation (NYSE:WAL):

CEO COMMENTARY:

"Western Alliance is off to a solid start to the year continuing its momentum from 2018, with $120.8 million in net income and $1.16 EPS, representing an increase of 19.7% and 20.8%, respectively, over the first quarter 2018,” commented Kenneth Vecchione, Chief Executive Officer. “Deposit growth for the quarter of $1 billion brought deposits to over $20 billion and outpaced loan growth of $406 million to $18 billion at quarter-end, while net interest margin2 expanded three basis points to 4.71%. Asset quality remains stable with a net charge-off rate2 of 0.03% and non-performing assets to total assets ratio of 0.26%. Our return on average assets2 and tangible common equity1,2 again surpassed industry averages at 2.12% and 20.49% and, with this quarter’s strong balance sheet growth, Western Alliance is well-positioned for another great year.”

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 $247.3 million in the first quarter 2019, an increase of $3.8 million from $243.5 million in the fourth quarter 2018, and an increase of $33.1 million, or 15.5%, compared to the first 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 first quarter 2019 includes $2.8 million of total accretion income from acquired loans, compared to $4.5 million in the fourth quarter 2018, and $5.7 million in the first quarter 2018.

The Company’s net interest margin in the first quarter 2019 was 4.71%, an increase from 4.68% in the fourth quarter 2018, and from 4.66% in the first quarter 2018.

Operating non-interest income was $12.6 million for the first quarter 2019, compared to $14.7 million for the fourth quarter 2018, and $12.7 million for the first quarter 2018.1 The decrease in operating non-interest income from the fourth quarter 2018 primarily relates to a decrease in income from warrants.

Net operating revenue was $259.9 million for the first quarter 2019, an increase of $1.7 million, compared to $258.2 million for the fourth quarter 2018, and an increase of $33.0 million, or 14.5%, compared to $226.9 million for the first quarter 2018.1

Operating non-interest expense was $112.8 million for the first quarter 2019, compared to $109.6 million for the fourth quarter 2018, and $99.4 million for the first quarter 2018.1 The Company’s operating efficiency ratio1 was 42.4% for the first quarter 2019, an increase from 41.5% in the fourth quarter 2018, and a decrease from 42.7% for the first quarter 2018.

Income tax expense was $25.5 million for the first quarter 2019, compared to $20.9 million for the fourth quarter 2018, and $20.8 million for the first quarter 2018.

Net income was $120.8 million for the first quarter 2019, an increase of $1.7 million from $119.1 million for the fourth quarter 2018, and an increase of $19.9 million, or 19.7%, from $100.9 million for the first quarter 2018. Earnings per share was $1.16 for the first quarter 2019, compared to $1.13 for the fourth quarter 2018, and $0.96 for the first 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 first quarter 2019, the Company’s operating PPNR was $147.1 million, down $1.4 million from $148.5 million in the fourth quarter 2018, and up 15.3% from $127.6 million in the first quarter 2018.1 The non-operating income item1 for the first quarter 2019 consisted of net unrealized gains on assets measured at fair value of $2.8 million. The non-operating expense item1 for the first quarter 2019 consisted of a net loss on sales and valuations of repossessed and other assets of $0.1 million.

The Company had 1,773 full-time equivalent employees and 47 offices at March 31, 2019, compared to 1,787 employees and 47 offices at December 31, 2018, and 1,713 employees and 47 offices at March 31, 2018.

1 See reconciliation of Non-GAAP Financial Measures.

Balance Sheet

Gross loans totaled $18.12 billion at March 31, 2019, an increase of $406 million from $17.71 billion at December 31, 2018, and an increase of $2.56 billion from $15.56 billion at March 31, 2018. The increase from the prior quarter was driven by an increase of $257 million in residential real estate loans, $149 million in construction and land development loans, and $91 million in CRE, non-owner occupied loans. These increases were partially offset by a decrease of $40 million in CRE, owner occupied and a decrease of $39 million in commercial and industrial loans. From March 31, 2018, loans increased across all loan types, with the largest increases in residential real estate loans of $1.04 billion, commercial and industrial loans of $779 million, CRE, non-owner occupied loans of $379 million, and construction and land development loans of $326 million. At March 31, 2019 and December 31, 2018, the allowance for credit losses to gross loans held for investment was 0.86%, compared to 0.93% at March 31, 2018. At March 31, 2019, the allowance for credit losses to total organic loans was 0.90%, compared to 0.92% at December 31, 2018, and 1.02% at March 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.

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 $13.1 million at March 31, 2019, compared to $14.6 million at December 31, 2018, and $23.1 million at March 31, 2018.

Deposits totaled $20.21 billion at March 31, 2019, an increase of $1.03 billion from $19.18 billion at December 31, 2018, and an increase of $2.85 billion from $17.35 billion at March 31, 2018. The increase from the prior quarter was driven by an increase of $468 million from savings and money market accounts, $396 million from time certificates, and $223 million in non-interest bearing demand deposits. From March 31, 2018, deposits increased across all deposit types, with the largest increases in savings and money market accounts of $1.48 billion, interest-bearing demand deposits of $724 million, certificates of deposit of $470 million, and non-interest bearing demand deposits of $177 million. Non-interest bearing deposits were $7.68 billion at March 31, 2019, compared to $7.46 billion at December 31, 2018, and $7.50 billion at March 31, 2018. Non-interest bearing deposits comprised 38.0% of total deposits at March 31, 2019, compared to 38.9% at December 31, 2018, and 43.2% at March 31, 2018. The proportion of savings and money market balances to total deposits was 38.6%, compared to 38.2% at December 31, 2018, and 36.4% at March 31, 2018. Interest-bearing demand deposits as a percentage of total deposits were 12.4% at March 31, 2019, compared to 13.3% at December 31, 2018, and 10.2% at March 31, 2018. Certificates of deposit as a percentage of total deposits were 11.0% at March 31, 2019, compared to 9.6% at December 31, 2018, and 10.1% at March 31, 2018. The Company’s ratio of loans to deposits was 89.6% at March 31, 2019, compared to 92.4% at December 31, 2018, and 89.7% at March 31, 2018.

Borrowings were zero at March 31, 2019, compared to $491 million at December 31, 2018, and $300 million at March 31, 2018. The decrease in borrowings from December 31, 2018 to March 31, 2019 is due to a reduction in overnight borrowings.

Qualifying debt totaled $374 million at March 31, 2019, compared to $361 million at December 31, 2018, and $364 million at March 31, 2018.

Stockholders’ equity at March 31, 2019 was $2.72 billion, compared to $2.61 billion at December 31, 2018, and $2.29 billion at March 31, 2018. The increase in stockholders' equity from December 31, 2018 and March 31, 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 first quarter 2019, the Company repurchased 940,915 shares of its common stock, representing approximately 1% of the Company's outstanding shares. Shares were repurchased at a weighted average price of $40.30, for a total payment of $37.9 million.

At March 31, 2019, tangible common equity, net of tax, was 10.3% of tangible assets1 and total capital was 13.2% of risk-weighted assets. The Company’s tangible book value per share1 was $23.20 at March 31, 2019, up 23.0% from March 31, 2018.

Total assets increased 3.0% to $23.79 billion at March 31, 2019, from $23.11 billion at December 31, 2018, and increased 14.6% from $20.76 billion at March 31, 2018. The increase in total assets from the prior year relates primarily to organic loan growth.

Asset Quality

The provision for credit losses was $3.5 million for the first quarter 2019, compared to $6.0 million for both the first and fourth quarter 2018. Net loan charge-offs2 in the first quarter 2019 were $1.2 million, or 0.03% of average loans (annualized), compared to $3.3 million, or 0.08%, in the fourth quarter 2018, and $1.4 million, or 0.04%, in the first quarter 2018.

Nonaccrual loans increased $16.1 million to $43.9 million during the quarter and increased $6.6 million from March 31, 2018. Loans past due 90 days and still accruing were zero at March 31, 2019, compared to $0.6 million at December 31, 2018, and less than $0.1 million at March 31, 2018. Loans past due 30-89 days and still accruing interest totaled $20.5 million at March 31, 2019, an increase from $16.6 million at December 31, 2018, and an increase from $6.5 million at March 31, 2018.

Repossessed assets totaled $17.7 million at March 31, 2019, a decrease of $0.2 million from $17.9 million at December 31, 2018, and a decrease of $12.5 million from $30.2 million at March 31, 2018. Adversely graded loans and non-performing assets totaled $357.6 million at March 31, 2019, an increase of $41.9 million from $315.6 million at December 31, 2018, and a decrease of $21.2 million from $378.7 million at March 31, 2018.

The ratio of classified assets to Tier 1 capital plus the allowance for credit losses, a common regulatory measure of asset quality, was 8.9% at March 31, 2019, compared to 9.4% at December 31, 2018, and 9.4% at March 31, 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

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 $9.17 billion at March 31, 2019, an increase of $58 million during the quarter, and an increase of $593 million during the last twelve months. The growth in loans during the quarter was driven by increases in the Southern California and Nevada segments, with loan growth of $89 million and $66 million, respectively. These increases were partially offset by a decrease of $103 million in the Northern California segment. All regional segments contributed to the growth in loans during the last twelve months. The largest increases were in the Nevada, Southern California, and Arizona segments, with loan growth of $250 million, $236 million, and $181 million, respectively. Total deposits for the regional segments were $14.13 billion, an increase of $856 million during the quarter, and an increase of $1.22 billion during the last twelve months. The increase in deposits during the quarter was driven by the Southern California, Arizona, and Northern California segments, with deposit growth of $446 million, $230 million, and $170 million, respectively. During the last twelve months, the Southern California, Nevada, Arizona, and Northern California segments had increases in deposits of $370 million, $359 million, $299 million, and $194 million, respectively

Pre-tax income for the regional segments was $88.3 million for the three months ended March 31, 2019, an increase of $1.6 million from the three months ended December 31, 2018, and an increase of $2.5 million from the three months ended March 31, 2018. The Arizona and Southern California segments had increases in pre-tax income of $1.6 million and $0.4 million, respectively, partially offset by decrease of $0.5 million in the Northern California segment, compared to the three months ended December 31, 2018. The Southern California, Northern California, and Arizona segments had the largest increases in pre-tax income from the three months ended March 31, 2018 of $1.7 million, $1.7 million, and $1.3 million, respectively, partially offset by a decrease of $2.3 million in the Nevada segment.

The NBL segments reported gross loan balances of $8.94 billion at March 31, 2019, an increase of $349 million during the quarter, and an increase of $1.96 billion during the last twelve months. The increase in loans from the prior quarter was driven by the Other NBLs and HFF segments, which had loan growth of $394 million and $85 million, respectively, partially offset by a decrease of $144 million in the Technology & Innovation segment. During the last twelve months, the largest drivers of loan growth were the Other NBLs and HFF segments, with increases of $1.82 billion, $186 million, respectively, partially offset by a decrease of $112 million in the Technology & Innovation segment. Total deposits for the NBL segments were $5.37 billion, an increase of $207 million during the quarter, and an increase of $1.16 billion during the last twelve months. The increase in deposits from the prior quarter is primarily attributable to the HOA Services segment, which increased deposits by $356 million, partially offset by a decrease of $154 million in the Technology & Innovation segment. The increase of $1.16 billion during the last twelve months is a result of growth in both the Technology & Innovation and HOA Services segments of $671 million and $488 million, respectively.

Pre-tax income for the NBL segments was $59.4 million for the three months ended March 31, 2019, an increase of $3.8 million from the three months ended December 31, 2018, and an increase of $12.8 million from the three months ended March 31, 2018. The increase in pre-tax income from the prior quarter relates to the Other NBLs and HOA Services segments, which increased by $4.0 million and $2.7 million, respectively. These increases were partially offset by decreases in pre-tax income from the Technology & Innovation, Public & Nonprofit Finance, and HFF segments, which had decreases of $1.4 million, $1.0 million, and $0.5 million, respectively. The drivers of the increase in pre-tax income from the same period in the prior year were the Technology & Innovation, HOA Services, and Other NBLs segments, which had increases of $7.4 million, $4.6 million, and $1.9 million, respectively. These increases were partially offset by decreases in pre-tax income for the HFF and Public & Nonprofit Finance segments, which decreased by $1.0 million and $0.2 million, respectively.

Conference Call and Webcast

Western Alliance Bancorporation will host a conference call and live webcast to discuss its first quarter 2019 financial results at 12:00 p.m. ET on Tuesday, April 23, 2019. Participants may access the call by dialing 1-888-317-6003 and using passcode 1255245 or via live audio webcast using the website link https://services.choruscall.com/links/wal190423.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 23rd through 9:00 a.m. ET May 23rd by dialing 1-877-344-7529 passcode: 10130331.

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. The accounting applied by a lessor is largely unchanged from that applied under previous GAAP. The Company elected to apply the package of practical expedients, which permitted the Company to forgo reassessment of 1) expired or existing contracts that may contain leases; 2) lease classification of expired or existing leases; and 3) initial direct costs for any existing leases. Upon adoption of this standard on January 1, 2019, the Company recorded a right-of-use asset and corresponding lease liability of $42.5 million and $46.1 million, respectively. No cumulative effect adjustment to retained earnings was recorded as of January 1, 2019. The new standard does not have a material impact on the Company's results of operations or cash flow.

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, 2018 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 $20 billion in assets, Western Alliance Bancorporation (NYSE:WAL) is one of the country’s top-performing banking companies and has ranked in the top 10 on the Forbes “Best Banks in America” list for four consecutive years, 2016-2019. Its primary subsidiary, Western Alliance Bank, Member FDIC, helps business clients realize their growth ambitions with local teams of experienced bankers who deliver superior service and a full spectrum of customized loan, deposit and treasury management capabilities. Business clients also benefit from a powerful array of specialized financial services that provide strong expertise and tailored solutions for a wide variety of industries and sectors. A national presence with a regional footprint, Western Alliance Bank operates individually branded, full-service banking divisions and has offices in key markets nationwide. For more information, visit westernalliancebank.com.

(1) See Reconciliation of Non-GAAP Financial Measures.

(1) Refer to Adoption of Accounting Standards for further discussion.