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Western Alliance Keeps Gaining Ground

By Dan Caplinger - Jul 21, 2017 at 10:11AM

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The regional bank's second-quarter results showed continued progress in growth.

Most Americans know a lot about too-big-to-fail Wall Street banks, but smaller regional players tend to fly under the radar. Western Alliance Bancorporation (WAL 2.00%) is far from being a household name in most of the country, but its operations in California, Nevada, and Arizona are particularly focused on lending for municipal finance, hotel franchising, and homeowners' associations. With its expertise in those areas, Western Alliance is building a name for itself in a competitive industry and has found a potential path toward stronger growth.

Coming into the bank's second-quarter financial report, Western Alliance shareholders had wanted to see ongoing growth in key metrics and signs of expanding opportunities for the future. Western Alliance largely delivered on that front, and the company boasted not only a larger asset base but also strong credit quality and favorable prospects ahead. Let's look more closely at Western Alliance and what its results say about its future.

Western Alliance subsidiary Alliance Bank logo.

Image source: Western Alliance Bancorporation.

Western Alliance moves forward

Western Alliance's second-quarter results showed a payoff from the growth efforts that the bank has made recently. Net operating revenue climbed more than 18% to $203.2 million, only narrowly missing the consensus forecast among those following the stock. Net income soared nearly 30% to $80 million, and that produced earnings of $0.76 per share, topping the $0.73 per share that most investors had expected to see.

Looking more closely at Western Alliance's results, the bank saw impressive growth in a number of areas. Total loans climbed by more than $1.11 billion, finishing just below the $14 billion mark. Total deposits jumped almost 13% to $16.03 billion, outpacing loan growth by more than $700 million.

From a performance standpoint, Western Alliance generally did a good job. Net interest margin narrowed slightly to 4.61%, down from 4.63% a year ago, but returns on average assets were up 0.08 percentage points to 1.70%, and return on tangible common equity climbed by about a quarter percentage point to 18.14%. Tangible book value climbed 17% from this time last year, and operating efficiencies improved by nearly 2 percentage points to 41%.

Credit quality measures also looked good for Western Alliance. Nonperforming assets amounted to just 0.32% of total assets, down from 0.54% in the second quarter of 2016. The bank managed to collect net recoveries on loans that more than offset charge-offs for new bad loans, which reflected its diligence in pursuing borrowers to maximize what they pay back.

What's coming for Western Alliance?

CEO Robert Sarver was pleased with the way that Western Alliance performed. "We delivered excellent results this quarter," Sarver said, "marked by robust revenue growth coupled with flat expenses, solid deposit and loan increases, and continued healthy credit quality." The CEO pointed to a good balance of business growth and efficiency gains to help drive results going forward.

Even within a relatively small region, Western Alliance is seeing different business conditions affecting its results. Arizona had the largest loan growth in its service area, while Nevada saw loans decline. Yet deposit growth has come primarily from Arizona and Nevada. Northern California was the only area to show declines in pre-tax profit, with Arizona and Nevada again outperforming. It will be interesting to see whether those trends continue into the future.

Western Alliance's specialty arenas have generally done well for the bank. In terms of pre-tax income, growth in the public and nonprofit finance division and the homeowners' association business contributed to gains, even as the hotel franchise finance business suffered falling pre-tax income. Western Alliance's technology and innovation segment has also produced impressive results.

Western Alliance shareholders didn't have a huge reaction to its latest financial news, and the stock eased downward by 1% in morning trading following the announcement. In the long run, though, Western Alliance has captured an interesting opportunity, and further expansion could push the bank into the upper echelons of the U.S. financial sector in the years to come.

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

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