Western Alliance Reports Fourth Quarter and Full Year 2016 Financial Results

Western Alliance Reports Fourth Quarter and Full Year 2016 Financial Results

Western Alliance Bancorporation (NYSE:WAL):

CEO COMMENTARY:

“Western Alliance achieved another year of record performance with earnings per share of $2.50, up 23% from 2015,” said Robert Sarver, Chairman and Chief Executive Officer of Western Alliance Bancorporation. “For the fourth quarter 2016, operating EPS was 70 cents, also up 23% from 57 cents in the prior year period. Loans and deposits each climbed over $2 billion during the year, while the interest margin remained steady and operating efficiency again improved. For the year, net loan losses were only 0.02% of total loans while non-performing assets declined.” Sarver continued, “Putting it all together, our exceptional team delivered for shareholders with a nearly 18% return on tangible equity¹ and a 21% increase in tangible book value per share¹ in 2016. With our solid level of capital and earnings momentum, Western Alliance is well positioned to continue its strong growth and high returns in 2017.”

¹ See reconciliation of Non-GAAP Financial Measures.

Income Statement

Net interest income was $175.3 million in the fourth quarter 2016, an increase of $2.8 million from $172.5 million in the third quarter 2016, and an increase of $32.0 million, or 22.3%, compared to the fourth quarter 2015. Net interest income in the fourth quarter 2016 includes $7.0 million of total accretion income from acquired loans, compared to $8.8 million in the third quarter 2016, and $5.0 million in the fourth quarter 2015. For 2016, net interest income was $657.2 million, an increase of $164.6 million, or 33.4%, from $492.6 million in 2015. Net interest income for 2016 includes $29.3 million (of which, $13.3 million related to the acquisition of HFF) of total accretion from acquired loans, compared to $17.1 million in 2015.

The Company’s net interest margin in the fourth quarter 2016 was 4.57%, an increase from 4.55% the third quarter 2016, and a decrease from 4.67% in the fourth quarter 2015. The increase in net interest margin from the third quarter 2016 primarily relates to an increase in yield from other interest earning assets resulting from an increase in dividends on FHLB stock. The decrease in net interest margin from the fourth quarter 2015 primarily relates to 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. For 2016, net interest margin was 4.58%, compared to 4.51% in 2015. The increase in net interest margin from the prior year relates primarily to an increase in loan yield resulting from additional income from the HFF acquisition, partially offset by higher costs of deposits and qualifying debt.

Operating non-interest income was $10.5 million for the fourth quarter 2016, compared to $10.7 million for the third quarter 2016, and $9.4 million for the fourth quarter 2015.¹ For 2016, operating non-interest income was $41.8 million, an increase of $12.6 million, or 43.2%, compared to $29.2 million in 2015.¹

Net operating revenue was $185.8 million for the fourth quarter 2016, an increase of $2.6 million, compared to $183.2 million for the third quarter 2016, and an increase of $33.0 million, or 21.6%, compared to $152.8 million for the fourth quarter 2015.¹ For 2016, net operating revenue was $699.0 million, an increase of $177.2 million, or 34.0%, compared to $521.8 million in 2015.¹

Operating non-interest expense was $82.7 million for the fourth quarter 2016, compared to $82.4 million for the third quarter 2016, and $72.8 million for the fourth quarter 2015.¹ The Company’s operating efficiency ratio¹ on a tax equivalent basis was 42.4% for the fourth quarter 2016, an improvement from 43.0% for the third quarter 2016, and from 45.2% for the fourth quarter 2015. For 2016, operating non-interest expense was $318.7 million, an increase of $64.9 million, or 25.6%, compared to $253.8 million in 2015.¹

Net income was $69.8 million for the fourth quarter 2016, an increase of $2.7 million from $67.1 million for the third quarter 2016, and an increase of $11.3 million, or 19.3%, from $58.5 million for the fourth quarter 2015. Earnings per share was $0.67 for the fourth quarter 2016, compared to $0.64 for the third quarter 2016, and $0.57 for the fourth quarter 2015. Excluding acquisition / restructure expense, net income and earnings per share for the fourth quarter 2016 was $73.7 million and $0.70, respectively, compared to $68.8 million and $0.66, respectively, for the third quarter 2016. There were no acquisition / restructure expenses in the fourth quarter 2015. For 2016, net income was $259.8 million, an increase of $65.6 million, or 33.7%, compared to $194.2 million in 2015. Earnings per share for 2016 was $2.50, an increase of 23.2%, compared to $2.03 in 2015.

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 fourth quarter 2016, the Company’s operating PPNR was $103.1 million, up from $100.8 million in the third quarter 2016, and up 29.0% from $79.9 million in the fourth quarter 2015.¹ The non-operating items¹ for the fourth quarter 2016 consisted primarily of acquisition / restructure expenses of $6.0 million related to the HFF acquisition and system conversion costs. For 2016, operating PPNR was $380.3 million, an increase of $112.3 million, or 41.9%, from $268.0 million in 2015.¹

The Company had 1,557 full-time equivalent employees and 48 offices at December 31, 2016, compared to 1,446 employees and 47 offices at December 31, 2015.

Balance Sheet

Gross loans totaled $13.21 billion at December 31, 2016, an increase of $175 million from $13.03 billion at September 30, 2016, and an increase of $2.07 billion from $11.14 billion at December 31, 2015. The year-over-year increase is comprised of $1.28 billion from HFF 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 December 31, 2016, the allowance for credit losses was 0.95% of total loans, compared to 0.94% at September 30, 2016, and 1.07% at December 31, 2015. The allowance for credit losses as a percent of total loans, adjusted to include credit discounts on acquired loans¹, was 1.30% at December 31, 2016, compared to 1.37% at September 30, 2016, and 1.25% at December 31, 2015.

Deposits totaled $14.55 billion at December 31, 2016, an increase of $107 million from $14.44 billion at September 30, 2016, and an increase of $2.52 billion from $12.03 billion at December 31, 2015. The increase from both the prior quarter and from December 31, 2015 is the result of organic deposit growth. Non-interest bearing deposits were $5.63 billion at December 31, 2016, compared to $5.62 billion at September 30, 2016, and $4.09 billion at December 31, 2015. Non-interest bearing deposits comprised 38.7% of total deposits at December 31, 2016, compared to 38.9% at September 30, 2016, and 34.0% at December 31, 2015. The proportion of savings and money market balances to total deposits increased to 42.1% from 41.3% at September 30, 2016, and decreased from 44.0% at December 31, 2015. Certificates of deposit as a percentage of total deposits were 10.0% at December 31, 2016, compared to 11.0% at September 30, 2016, and 13.4% at December 31, 2015. The Company’s ratio of loans to deposits was 90.8% at December 31, 2016, compared to 90.2% at September 30, 2016, and 92.6% at December 31, 2015.

Borrowings totaled $80 million at December 31, 2016, an increase from zero at September 30, 2016, and a decrease of $70 million from $150 million at December 31, 2015. The increase from the prior quarter is due to FHLB overnight advances. The decrease from the prior year is due primarily to the payoff of short-term FHLB advances.

Qualifying debt totaled $368 million at December 31, 2016, a decrease from $383 million at September 30, 2016, and an increase of $158 million from $210 million at December 31, 2015. The increase from the prior year is primarily related to the issuance of $175 million in subordinated debt in June 2016.

Stockholders’ equity at December 31, 2016 was $1.89 billion, compared to $1.86 billion at September 30, 2016, and $1.59 billion at December 31, 2015. 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 December 31, 2016, 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 $15.17 at December 31, 2016, up 21.0% from December 31, 2015.

Total assets increased to $17.20 billion at December 31, 2016, from $17.04 billion at September 30, 2016, and increased 20.5% from $14.28 billion at December 31, 2015. 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 $1.0 million for the fourth quarter 2016, compared to $2.0 million for the third quarter 2016, and $2.5 million for the fourth quarter 2015. Net loan (recoveries) charge-offs in the fourth quarter 2016 were $(0.8) million, or (0.03)% of average loans (annualized), compared to $1.2 million, or 0.04%, in the third quarter 2016, and $0.5 million, or 0.02%, in the fourth quarter 2015.

Nonaccrual loans decreased $0.3 million to $40.3 million during the quarter. Loans past due 90 days and still accruing interest totaled $1.1 million at December 31, 2016, compared to $2.8 million at September 30, 2016, and $3.0 million at December 31, 2015. Loans past due 30-89 days and still accruing interest totaled $6.3 million at quarter end, a decrease from $18.4 million at September 30, 2016, and a decrease from $34.5 million at December 31, 2015.

Repossessed assets totaled $47.8 million at quarter end, a decrease of $1.8 million from $49.6 million at September 30, 2016, and an increase of $3.9 million from $43.9 million at December 31, 2015. Adversely graded loans and non-performing assets totaled $342.9 million at quarter end, an increase of $8.0 million from $334.9 million at September 30, 2016, and a decrease of $9.9 million from $352.8 million at December 31, 2015.

As the Company’s asset quality improved and its capital increased, the ratio of classified assets to Tier I capital plus the allowance for credit losses, a common regulatory measure of asset quality, improved to 11.8% at December 31, 2016, from 12.3% at September 30, 2016, and from 15.1% at December 31, 2015.¹

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, First Independent Bank, Torrey Pines Bank, and Bridge Bank.

The Company's National Business Lines ("NBL") segment provides specialized banking services to niche markets. With the purchase of the HFF loan portfolio, management has created a new HFF operating segment, which is now included as one of the Company's NBL reportable segments. The Company's other NBL reportable segments include Homeowner Associations ("HOA") Services, 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 newly created 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 $7.54 billion at December 31, 2016, an increase of $3 million during the quarter, and an increase of $44 million during the year. Arizona, Nevada, and Northern California had loan growth during the quarter of $18 million, $28 million, and $23 million, respectively, which was offset by a decrease of $67 million in Southern California. The growth in loans during the year was primarily driven by an increase of $144 million in Arizona, which was partially offset by decreases of $93 million and $12 million, respectively, in Northern California and Nevada. Total deposits for the regional segments were $11.50 billion, an increase of $97 million during the quarter, and an increase of $1.79 billion during the year. Nevada, Southern California, and Northern California generated increased deposits during the quarter of $20 million, $128 million, and $39 million, respectively, which was partially offset by a decrease of $89 million in Arizona. Each of the regional segments generated increased deposits during the year, with Arizona contributing the largest increase of $963 million, followed by Southern California and Nevada with increases of $480 million and $349 million, respectively.

Pre-tax income for the regional segments was $76.4 million for the three months ended December 31, 2016, a decrease of $4.2 million from the three months ended September 30, 2016, and an increase of $11.2 million from the three months ended December 31, 2015. Nevada and Northern California had the largest decreases in pre-tax income of $3.1 million and $2.2 million, respectively, compared to the three months ended September 30, 2016, which were partially offset by increases in Arizona and Southern California of $0.9 million, $0.2 million, respectively. All regional segments had increases in pre-tax income from the three months ended December 31, 2015, with Arizona and Southern California contributing the largest increases of $8.3 million and $4.0 million, respectively. For the year ended December 31, 2016, the regional segments reported total pre-tax income of $296.9 million, an increase of $69.0 million compared to the year ended December 31, 2015. All regional segments had increases in pre-tax income, with Arizona and Northern California contributing the largest increases of $33.0 million and $14.3 million, respectively.

The NBL segments reported gross loan balances of $5.65 billion at December 31, 2016, an increase of $178 million during the quarter, and an increase of $2.05 billion during the year. The increase in loans for the NBL segments compared to the prior quarter relates primarily to the Other NBLs and Technology & Innovation segments, which increased loans by $103 million and $77 million, respectively. During the year, the increases were driven by the HFF (as a result of the purchase), Other NBLs, and Technology & Innovation segments, which increased loans by $1.29 billion, $497 million, and $241 million, respectively. Total deposits for the NBL segments were $2.93 billion, an increase of $48 million during the quarter, and an increase of $794 million during the year. The HOA Services segment increased deposits by $77 million during the quarter, which was partially offset by decreased deposits for the Technology & Innovation segment of $29 million. The increase of $794 million during the year is the result of growth in the HOA Services and Technology & Innovation segments of $598 million and $196 million, respectively.

Pre-tax income for the NBL segments was $40.5 million for the three months ended December 31, 2016, an increase of $2.5 million from the three months ended September 30, 2016, and an increase of $15.3 million from the three months ended December 31, 2015. The increase in pre-tax income from the prior quarter relates primarily to the Other NBLs segment, which increased $2.9 million. This increase was offset by decreases in pre-tax income from the Technology & Innovation and HOA Services segments of $0.4 million and $0.2 million, respectively. The HFF and HOA Services segments had the largest increases in pre-tax income of $10.4 million and $3.2 million, respectively, from the three months ended December 31, 2015, which were offset by decreases in pre-tax income of $0.4 million and $0.7 million from the Public & Nonprofit and Technology & Innovation segments, respectively. Pre-tax income for the NBLs for the year ended December 31, 2016 totaled $140.0 million, compared to $78.6 million for the year ended December 31, 2015. The largest increases in pre-tax income compared to the year ended December 31, 2015 were in the HFF (as a result of the purchase), Technology & Innovation, and HOA Services segments, which increased $30.0 million, $23.7 million, and $10.1 million, respectively.

Conference Call and Webcast

Western Alliance Bancorporation will host a conference call and live webcast to discuss its fourth quarter 2016 financial results at 12:00 p.m. ET on Friday, January 27, 2017. Participants may access the call by dialing 1-888-317-6003 and using passcode 8260547 or via live audio webcast using the website link https://services.choruscall.com/links/wal170127.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 January 27th through 9:00 a.m. ET February 27th by dialing 1-877-344-7529 passcode: 10099229.

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.

Early Adoption of Accounting Standards

During the first quarter 2016, the Company elected to early adopt Accounting Standards Update ("ASU") 2016-09, Improvements to Employee Share-Based Payment Accounting. The amendments in this ASU require that all excess tax benefits and tax deficiencies be recognized as income tax expense or benefit in the income statement rather than as additional paid-in capital as required under previous generally accepted accounting principles. Due to the early adoption of ASU 2016-09, during the three months ended March 31, 2016, the Company recognized a $3.9 million tax benefit as a reduction of income tax expense (that previously would have been reflected as additional paid-in capital). For the year ended December 31, 2016, the Company recognized a tax benefit of $4.1 million as a result of the new guidance.

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, 2015 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 $17 billion in assets, Western Alliance Bancorporation (NYSE:WAL) is one of the country’s top-performing banking companies. 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, Bridge Bank, First Independent Bank and Torrey Pines 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.