If you don't pay much attention to the financial sector, it's easy to think that looking at the top few banks in the nation can tell you all you need to know about current conditions in the banking sector. But when you look at what's happening at a more local level, you can get a much different viewpoint. Western Alliance Bancorporation (WAL -3.64%) is located in the economically active areas of Arizona, California, and Nevada, and having concentrated exposure to thriving communities has been a big driver of long-term growth for the regional bank.
Coming into Thursday's first-quarter financial report, Western Alliance shareholders expected that the bank's forward momentum would continue into 2018, with solid growth in both overall revenue and net income. Western Alliance didn't disappoint on that front, and what it said about its customer base suggests that the bank will see further growth for the rest of the year and beyond.
Western Alliance rides into the sunset
Western Alliance's first-quarter results continued the solid gains the bank was able to produce throughout 2017. Net operating revenue soared 20% to $226.9 million, easily topping the 16% growth rate that most of those following the stock were expecting to see. Net income of $100.9 million was up an even stronger 38% from year-ago levels, and earnings of $0.96 per share were higher than the consensus forecast among investors for $0.93 per share.
Fundamentally, Western Alliance remained strong. When you take out various provisions the bank made, operating pre-provision net revenue climbed 26% to $127.6 million. Total loans rose to $15.56 billion, up 14% over the past year, and total deposit growth of 13% brought Western Alliance's total to $17.35 billion. Internal returns were particularly strong, with return on assets climbing from 1.69% to 1.99%, and return on tangible common equity soaring more than 2.5 percentage points to 20.46%. The bank's tangible common equity ratio was higher by nearly half a percentage point, to 9.8%, and tangible book value jumped $3 per share to $18.86. Western Alliance's operating efficiency ratio improved to 42.7%.
The only mark against Western Alliance came in its net interest margin, but even there, the figure slipped only slightly, to 4.6%. Meanwhile, nonperforming assets fell by a quarter to 0.33%, and annualized net loan charge-offs remained stable compared to year-ago levels, indicating consistent and improving credit quality.
CEO Ken Vecchione, who took over for former chief executive Robert Sarver in March, gave an explanation for why 2018 started off so strong. "The economy continues to expand," Vecchione said, "and we believe that the benefits of the tax reform act are just beginning to be realized for our business customers." The CEO noted that the bank's interests are aligned with those of its corporate customers, so as they reap rewards from lower tax rates, Western Alliance is likely to profit as well.
Can Western Alliance keep up the pace?
Certainly, Western Alliance itself has seen a boost from the new tax laws. The bank saw its effective tax rate plunge by eight percentage points to just over 17%, saving about $3.7 million in income tax expense as a result. That works out to just $0.04 or so per share on Western Alliance's bottom line, but that's still an important indication of how much the bank's corporate clients could be seeing their own earnings improve.
Western Alliance is also seeing a lot of activity in its national business lines. The bank provides specialized services to niche markets like homeowners associations, hotel franchises, public and nonprofit entities, and technology and innovation-based financing. Loans in that area were up almost 4% in just the past quarter alone, and the largest driver was the catch-all "other national business lines" category, which includes corporate finance, mortgage warehouse lending, and resort financing. Those areas are particularly important to the western region, and Western Alliance will continue to be a major player in those areas in addition to its traditional regional exposure.
Western Alliance shareholders seemed pleased by the report, and the stock climbed about 1% in pre-market trading on Friday following the Thursday evening announcement. With conditions continuing to improve in its region, Western Alliance should continue to enjoy strong momentum moving forward through 2018.