Record Results Reward Western Alliance

Dan Caplinger, The Motley Fool

2019 has been a challenging year for banks, no matter whether they're among the largest institutions in the world or a tiny local bank. An abrupt shift in the trend of interest rates forced regional bank Western Alliance Bancorporation (NYSE: WAL) and most of the rest of the financial industry to change gears and focus on parts of their business that can prosper in low-rate environments. Many feared that narrowing net interest spreads would have a negative impact on earnings.

Coming into Thursday's second-quarter financial report, Western Alliance shareholders were hopeful that the regional bank would be able to buck industry trends and see solid growth. Western Alliance's results confirmed its ability to stay ahead of its peers, and the bank is hopeful that it can remain among the most profitable banks in the entire industry.

Welder working on metal sculpture with Alliance Bank logo in it.

Image source: Western Alliance.

Asset growth lifts Western Alliance

Western Alliance's second-quarter results showed continuing upward momentum. Net operating revenue climbed 12% to $267.3 million, which held up well despite the shifting rate environment. Net income of $122.9 million was higher by 17% from year-ago levels, and the resulting earnings of $1.19 per share topped the consensus forecast among those following the stock by $0.03 per share.

The thing that Western Alliance was most proud of was its reaching the milestone of $25 billion in total assets for the first time. Investments and cash made up almost $5 billion of that total, but loan growth was also impressive, rising by $3.1 billion to $19.25 billion at the end of the second quarter. Deposit growth was even stronger at nearly $3.4 billion, giving the bank $21.4 billion in funds on deposit. Tangible book value had a strong gain of $1.45 per share over the past three months to $24.65 per share, and that represented a nearly 25% jump compared to the same figure a year ago.

Most of Western Alliance's key metrics were similarly encouraging. Capital measures like the tangible common equity ratio remained healthy at 10.2%, and net loan charge-offs came in at just 0.03%, down by more than half from year-ago levels. Nonperforming assets remained under control at 0.27% of total assets, and operating efficiency improved slightly over the past 12 months.

Just about the only negative came from the net interest margin front, which was down from 4.71% a year ago to 4.59% now. However, that didn't stop net interest income from rising by 14% over the same period, which is a testament to the growth initiatives that Western Alliance has put in place.

Western Alliance is aiming higher

CEO Ken Vecchione celebrated the news. "We remain among the most profitable banks in our industry," Vecchione said, and "as our loan growth trajectory continues, asset quality remains strong and stable." The CEO also noted that the bank's shareholder-friendly approach to capital allocation has resulted in higher dividends and stock buybacks.

It's always interesting to see where Western Alliance got the bulk of its growth, especially given how dynamic its coverage area is. Loan growth came primarily from Arizona, Nevada, and Southern California, as Northern California was the sole laggard with declining loan balances. Arizona saw by far the largest rise in deposits, with Nevada coming in second and both California regions lagging behind. In terms of pre-tax income, the same trends applied, with Arizona and Nevada outperforming both Southern and Northern California.

In terms of coverage area, hotel franchise finance was responsible for a big part of the jump in loan growth, as were the bank's other national business lines. Homeowners association services and the tech and innovation segment had upward impacts on pre-tax income, helping to overcome downward pressure from the hotel and public and nonprofit finance sectors.

Western Alliance shareholders were pleased with what they saw, and the stock climbed more than 4% Friday morning following Thursday night's announcement. With the regional economy in Arizona, California, and Nevada remaining strong, Western Alliance is in a good position to keep benefiting from growth opportunities even if interest rates remain a noticeable drag on its profits.

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool recommends Western Alliance Bancorp. The Motley Fool has a disclosure policy.