Western Alliance Bancorporation (WAL 0.45%) reported second-quarter results on July 20, turning in another solid quarter. The regional bank, which operates in several western U.S. states, delivered double-digit earnings growth and saw its net interest margin (the spread between interest expenses and interest income) widen and non-performing assets decline.
At the same time, Western Alliance is starting to see its cost of funds climb slightly as interest rates inch higher, though so far, it's been able to more than offset those increases with higher interest income from its loan portfolio. Let's take a closer look at how it was able to deliver another quarter of double-digit earnings growth.
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National business lines, higher net interest margin making up for regional challenges, higher expenses
Western Alliance operates full-service commercial banks in Arizona, Nevada, and California under five regional bank subsidiaries, accounting for $8.72 billion of its gross loan balances at the quarter's end. That was up $144 million from the first quarter and $891 million from last year. However, Western Alliance also operates a number of national business lines under its "NBL" business segment. This unit reported $7.41 billion in gross loans at the quarter's end, up $432 million sequentially and $1.26 billion year over year.
The regional segment generates more income than the NBL segments -- $86 million in pre-tax income versus $48.7 million respectively -- but the NBL segments are driving a lot of the growth. Pre-tax income increased $6.1 million from NBL versus $1.3 million from the regional banks. The higher growth from NBL was in large part due to a $5.4 million decrease in pre-tax income from its Bank of Nevada subsidiary.
From a consolidated view, total loans increased $2.15 billion, 15.4% higher year over year, to $16.14 billion. Total deposits ticked up $2.06 billion, to $18.1 billion, a 13% increase. This helped drive tangible book value higher. At $19.78 per share, tangible book value is up 18.4% from last year and almost 5% higher than at the end of the first quarter.
Loan quality continues to be high, with non-performing assets 0.29% of total assets, down from 0.32% last year and 0.33% in the first quarter.
Net interest margin also inched higher, climbing to 4.7%. That's an improvement from 4.61% last year and 4.6% in the first quarter. This increase also helped make up for higher operating expenses versus last year. Western Alliance reported an efficiency ratio -- the percentage of revenue it spends on operating expenses -- of 42.1%, up from 41.2% (lower is better) last year. Its operating efficiency was better in the second quarter than the first quarter result of 42.7%.
Can Western Alliance keep banking big growth?
While many banks count on personal loans and mortgages to drive growth, Western Alliance's success in recent years has been driven by its steady focus on commercial and industrial (C&I) lending. C&I lending accounted for over 75% of the company's loan portfolio growth from the first quarter to the second and an even bigger portion of loan book growth over the past year.
Thanks to a relatively healthy economy, low interest rates (on a historical basis, even though they are expected to continue climbing), and some of the lowest tax rates in decades, Western Alliance is in a great position to profit if companies continue to invest in their businesses in the years ahead.
