WAL - Western Alliance Bancorporation Reports Third Quarter 2018 Financial Results

Western Alliance Bancorporation (NYSE:WAL):

THIRD QUARTER 2018 FINANCIAL RESULTS

CEO COMMENTARY

“Western Alliance posted another solid quarter of earnings and balance sheet growth. Our strong commitment and deep relationship with our clients helps foster an environment where addressing their needs aligns well with our growth expectations,” said Chief Executive Officer, Kenneth Vecchione.

“Loan growth of $595 million was fully funded by deposit growth of $821 million, while net interest margin expanded two basis points to 4.72%. Asset quality was stable with net loan losses of 0.08% of total loans during the quarter and nonperforming assets of 0.26% of total assets. Our financial results have steadily climbed quarter-over-quarter, with net income of $111.1 million and earnings per share of $1.05 for the quarter, which has us well-positioned as we head into the final quarter of 2018.”

¹ See reconciliation of Non-GAAP Financial Measures.

Income Statement

Net interest income was $234.0 million in the third quarter 2018, an increase of $9.9 million from $224.1 million in the second quarter 2018, and an increase of $32.5 million, or 16.1%, compared to the third quarter 2017. 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 third quarter 2018 includes $3.3 million of total accretion income from acquired loans, compared to $5.1 million in the second quarter 2018, and $7.5 million in the third quarter 2017.

The Company’s net interest margin in the third quarter 2018 was 4.72%, an increase from 4.70% in the second quarter 2018, and from 4.65% in the third quarter 2017. Adjusting net interest margin to include the effects of the Tax Cuts and Jobs Act ("TCJA"), which reduced the tax equivalent adjustment from tax-exempt securities and loans, results in adjusted net interest margin¹ of 4.53% for the third quarter 2017.

Operating non-interest income was $12.9 million for the third quarter 2018, compared to $14.1 million for the second quarter 2018, and $10.1 million for the third quarter 2017.¹ The decrease in operating non-interest income from the second quarter 2018 primarily relates to a decrease in income from equity investments. The increase in operating non-interest income for the third quarter 2018 compared to the same quarter in the prior year is due primarily to increases in lending related income of $1.3 million, card income of $0.6 million, and income from equity securities of $0.5 million.

Net operating revenue was $246.9 million for the third quarter 2018, an increase of $8.7 million, compared to $238.2 million for the second quarter 2018, and an increase of $35.2 million, or 16.6%, compared to $211.7 million for the third quarter 2017.¹

Operating non-interest expense was $105.0 million for the third quarter 2018, compared to $102.7 million for the second quarter 2018, and $89.0 million for the third quarter 2017.¹ The Company’s operating efficiency ratio¹ on a tax equivalent basis was 41.5% for the third quarter 2018, compared to 42.1% for the second quarter 2018, and 40.0% for the third quarter 2017. Adjusting the operating efficiency ratio¹ to include the effects of the lower statutory corporate federal tax rate would result in an operating efficiency ratio of 41.0% for the third quarter 2017.

Income tax expense was $7.5 million for the third quarter 2018, compared to $25.3 million for the second quarter 2018, and $34.9 million for the third quarter 2017. Income tax expense for the second and third quarters of 2018 includes the effect of the Tax Cuts and Jobs Act, which lowered the statutory corporate tax rate from 35% to 21%. In addition, income tax expense for the third quarter 2018 includes the effect of management’s election to carryback to prior tax years the 2017 federal net operating losses ("NOL"), which resulted from the acceleration of deductions and deferral of revenue at the end of 2017. In the carryback taxable years to which the NOL will apply, the federal income tax rate was higher compared to those years to which the NOL would apply if it were carried forward.

Net income was $111.1 million for the third quarter 2018, an increase of $6.4 million from $104.7 million for the second quarter 2018, and an increase of $28.3 million, or 34.1%, from $82.8 million for the third quarter 2017. Earnings per share was $1.05 for the third quarter 2018, compared to $0.99 for the second quarter 2018, and $0.79 for the third quarter 2017.

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 2018, the Company’s operating PPNR was $141.9 million, up from $135.5 million in the second quarter 2018, and up 15.6% from $122.7 million in the third quarter 2017.¹ The non-operating income items¹ for the third quarter 2018 consisted of net losses on sales of investment securities of $7.2 million and net unrealized losses on assets measured at fair value of $1.2 million. The non-operating or non-recurring expense items¹ for the third quarter 2018 consisted of a $7.6 million charitable contribution and a $1.2 million adjustment related to the Company's 401(k) plan and other miscellaneous items. These amounts were partially offset by a net gain on sales and valuations of repossessed and other assets of $0.1 million.

The Company had 1,795 full-time equivalent employees and 47 offices at September 30, 2018, compared to 1,773 employees and 47 offices at June 30, 2018, and 1,673 employees and 47 offices at September 30, 2017.

¹ See reconciliation of Non-GAAP Financial Measures.

Balance Sheet

Gross loans totaled $16.73 billion at September 30, 2018, an increase of $595 million from $16.14 billion at June 30, 2018, and an increase of $2.21 billion from $14.52 billion at September 30, 2017. The increase from the prior quarter was driven by an increase of $282 million in residential real estate loans, $209 million in commercial and industrial loans, and $129 million in construction and land development loans. From September 30, 2017, loans increased across all loan types, with the largest increases in commercial and industrial loans of $750 million, residential real estate loans of $450 million, and construction and land development loans of $441 million. At September 30, 2018, the allowance for credit losses to gross loans held for investment was 0.90%, compared to 0.91% at June 30, 2018, and 0.94% at September 30, 2017. At September 30, 2018, the allowance for credit losses to total organic loans was 0.97%, compared to 0.99% at June 30, 2018, and 1.06% at September 30, 2017. 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 $17.2 million at September 30, 2018, compared to $19.7 million at June 30, 2018, and $32.8 million at September 30, 2017.

Deposits totaled $18.91 billion at September 30, 2018, an increase of $821 million from $18.09 billion at June 30, 2018, and an increase of $2.00 billion from $16.90 billion at September 30, 2017. The increase from the prior quarter was driven by an increase of $590 million from savings and money market accounts and $114 million from demand deposits. From September 30, 2017, deposits increased across all deposit types, with the largest increases in savings and money market accounts of $759 million, demand deposits of $572 million, and non-interest bearing demand deposits of $406 million. Non-interest bearing deposits were $8.01 billion at September 30, 2018, compared to $7.95 billion at June 30, 2018, and $7.61 billion at September 30, 2017. Non-interest bearing deposits comprised 42.4% of total deposits at September 30, 2018, compared to 43.9% at June 30, 2018, and 45.0% at September 30, 2017. The proportion of savings and money market balances to total deposits was 37.3%, compared to 35.8% at June 30, 2018, and 37.3% at September 30, 2017. Certificates of deposit as a percentage of total deposits were 9.8% at September 30, 2018, compared to 10.0% at June 30, 2018, and 9.4% at September 30, 2017. The Company’s ratio of loans to deposits was 88.5% at September 30, 2018, compared to 89.2% at June 30, 2018, and 85.9% at September 30, 2017.

Borrowings were zero at September 30, 2018, compared to $75 million at June 30, 2018, and zero at September 30, 2017. The change in borrowings from the prior quarter is due to fluctuations in FHLB overnight advances.

Qualifying debt totaled $359 million at September 30, 2018, compared to $361 million at June 30, 2018, and $373 million at September 30, 2017.

Stockholders’ equity at September 30, 2018 was $2.49 billion, compared to $2.39 billion at June 30, 2018, and $2.15 billion at September 30, 2017.

At September 30, 2018, tangible common equity, net of tax, was 10.0% of tangible assets¹ and total capital was 13.5% of risk-weighted assets. The Company’s tangible book value per share¹ was $20.70 at September 30, 2018, up 18.1% from September 30, 2017.

Total assets increased 3.8% to $22.18 billion at September 30, 2018, from $21.37 billion at June 30, 2018, and increased 11.3% from $19.92 billion at September 30, 2017. The increase in total assets from the prior year relates primarily to organic loan growth.

Asset Quality

The provision for credit losses was $6.0 million for the third quarter 2018, compared to $5.0 million for both the second quarter 2018 and the third quarter 2017. Net loan charge-offs in the third quarter 2018 were $3.1 million, or 0.08% of average loans (annualized), compared to $2.6 million, or 0.07%, in the second quarter 2018, and $0.4 million, or 0.01%, in the third quarter 2017.

Nonaccrual loans increased $2.9 million to $36.9 million during the quarter and decreased $18.1 million during past twelve months. There were no loans past due 90 days and still accruing interest at each of the periods ended September 30, 2018 and June 30, 2018. At September 30, 2017, loans past due 90 days and still accruing interest totaled less than $0.1 million. Loans past due 30-89 days and still accruing interest totaled $9.4 million at quarter end, an increase from $1.5 million at June 30, 2018, and an increase from $5.2 million at September 30, 2017.

Repossessed assets totaled $20.0 million at September 30, 2018, a decrease of $7.5 million from $27.5 million at June 30, 2018, and a decrease of $9.0 million from $29.0 million at September 30, 2017. Adversely graded loans and non-performing assets totaled $358.3 million at September 30, 2018, a decrease of $10.2 million from $368.5 million at June 30, 2018, and a decrease of $47.9 million from $406.2 million at September 30, 2017.

As the Company’s capital increased, the ratio of classified assets to Tier I capital plus the allowance for credit losses, a common regulatory measure of asset quality, was 10.2% at September 30, 2018, compared to 10.1% at June 30, 2018, and 10.8% at September 30, 2017.¹

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, 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 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 $8.98 billion at September 30, 2018, an increase of $257 million during the quarter, and an increase of $1.03 billion during the last twelve months. The growth in loans during the quarter was driven by increases across all regional segments, with the largest increases in Southern California and Nevada of $88 million and $86 million, respectively. All regional segments contributed to the growth in loans during the last twelve months. The largest increases were $462 million in Arizona, $251 million in Nevada, and $243 million in Southern California. Total deposits for the regional segments were $13.68 billion, an increase of $562 million during the quarter, and an increase of $485 million during the last twelve months. During the quarter, Southern California and Northern California had the largest increases in deposits of $248 million and $167 million, respectively. During the last twelve months, Northern California and Arizona had increased deposits of $416 million and $134 million, respectively, which were partially offset by a decrease in deposits of $103 million in Nevada.

Pre-tax income for the regional segments was $87.2 million for the three months ended September 30, 2018, an increase of $1.3 million from the three months ended June 30, 2018, and an increase of $1.1 million from the three months ended September 30, 2017. Nevada, Northern California and Southern California had increases in pre-tax income of $1.8 million, $0.5 million, and $0.3 million respectively, compared to the three months ended June 30, 2018, which were partially offset by a decrease of $1.3 million in Arizona. Northern California and Arizona had increases in pre-tax income from the three months ended September 30, 2017 of $3.2 million and $0.7 million, respectively. These increases were partially offset by decreases of $1.9 million and $0.8 million in Nevada and Southern California, respectively. For the nine months ended September 30, 2018, the regional segments reported total pre-tax income of $259.1 million, an increase of $15.9 million compared to the nine months ended September 30, 2017. Arizona and Northern California had increases of $12.4 million and $6.1 million, respectively. These increases were partially offset by decreases of $2.1 million and $0.5 million in Southern California and Nevada, respectively.

The NBL segments reported gross loan balances of $7.75 billion at September 30, 2018, an increase of $335 million during the quarter, and an increase of $1.18 billion during the last twelve months. The largest increase in loans from the prior quarter relates to the Other NBLs segment, which increased loans by $461 million. This increase was partially offset by decreases in the Technology & Innovation and Public & Nonprofit Finance segments, which had decreases in loans from the prior quarter of $99 million and $46 million, respectively. During the last twelve months, the largest drivers of the increase in loans were Other NBLs, HFF, and Technology & Innovation segments, with increases of $970 million, $163 million, and $57 million, respectively. These increases were partially offset by a decrease in Public & Nonprofit Finance of $54 million. Total deposits for the NBL segments were $4.84 billion, an increase of $335 million during the quarter, and an increase of $1.23 billion during the last twelve months. The increase in deposits from the prior quarter primarily relates to the Technology & Innovation segment, which had an increase in deposits of $326 million. The increase of $1.23 billion during the last twelve months is the result of growth in both the Technology & Innovation and HOA Services segments of $860 million and $371 million, respectively.

Pre-tax income for the NBL segments was $51.4 million for the three months ended September 30, 2018, an increase of $2.7 million from the three months ended June 30, 2018, and an increase of $5.8 million from the three months ended September 30, 2017. The increase in pre-tax income from the prior quarter relates to the Technology & Innovation, HOA Services, and Public & Nonprofit Finance segments, which increased by $2.7 million, $1.7 million, and $0.5 million, respectively. These increases were partially offset by decreases in pre-tax income from the Other NBLs and HFF segments, which had decreases of $1.4 million and $0.8 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 NBL segments, which had increases of $5.2 million, $3.0 million, and $2.8 million, respectively. These increases were partially offset by decreases in pre-tax income for the Public & Nonprofit Finance and HFF segments, which decreased by $3.0 million and $2.0 million, respectively. Pre-tax income for the NBL segments for the nine months ended September 30, 2018 totaled $146.8 million, an increase of $21.1 million compared to the nine months ended September 30, 2017. The largest increases were in the Technology & Innovation, Other NBLs, and HOA Services segments. These segments had increases of $11.3 million, $11.1 million, and $6.6 million, respectively. These increases were partially offset by a decrease of $8.6 million in the Public & Nonprofit Finance segment.

Conference Call and Webcast

Western Alliance Bancorporation will host a conference call and live webcast to discuss its third quarter 2018 financial results at 12:00 p.m. ET on Friday, October 19, 2018. Participants may access the call by dialing 1-888-317-6003 and using passcode 7454025 or via live audio webcast using the website link https://services.choruscall.com/links/wa181019.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 19th through 9:00 a.m. ET November 19th by dialing 1-877-344-7529 passcode: 10124472.

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 2018, the Company adopted Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers, ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities and ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.

The amendments in ASU 2014-09 create a common revenue standard and clarify the principles for recognizing revenue that can be applied consistently across various transactions, industries, and capital markets. Although this new accounting guidance brings considerable changes to how many companies account for revenue and disclose revenue-related information, the effect on the Company has not been significant as substantially all of the Company's revenue is generated from interest income related to loans and investment securities, which are not within the scope of this guidance. For the Company's revenue streams that are within the scope of this guidance, the guidance was adopted on January 1, 2018 using the modified retrospective method. Upon adoption, the Company's accounting policies did not change materially as the principles of revenue recognition in the ASU are largely consistent with current practices applied by the Company.

The amendments in ASU 2016-01 require that equity investments be measured at fair value with changes in fair value recognized in net income, rather than accumulated other comprehensive income. Upon adoption of the new accounting guidance, on January 1, 2018, the Company recorded a cumulative-effect adjustment of $0.4 million to decrease accumulated other comprehensive income with a corresponding increase to opening retained earnings. During the nine months ended September 30, 2018, the Company recognized a loss of $3.0 million related to fair value changes in equity securities.

The amendments in ASU 2018-02 allow a reclassification from accumulated other comprehensive income to retained earnings from tax effects resulting from the TCJA so that tax effects of items within other comprehensive income reflect the current tax rate. Previously, the effect of a change in tax laws or rates on deferred tax liabilities and assets were included in income from continuing operations even in situations in which the related income tax effects of items in accumulated other comprehensive income were originally recognized in comprehensive income. Upon adoption of the new accounting guidance, on January 1, 2018, the Company recorded a cumulative-effect adjustment of $0.6 million to decrease accumulated other comprehensive income with a corresponding increase to opening retained earnings.

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, 2017 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 is ranked #2 on the Forbes 2018 “Best Banks in America” list. Its primary subsidiary, Western Alliance Bank, Member FDIC, is the go-to bank for business and succeeds 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 with offices in key markets nationwide. For more information, visit westernalliancebank.com

^{(4), (5)} See Non-GAAP Financial Measures footnotes.

^{(6), (7), (8), (9)} See Non-GAAP Financial Measures footnotes.

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