Western Alliance Bancorporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; income and cash-flow comparisons are to Q1 2017, while balance-sheet changes are generally compared with December 31, 2017. Western Alliance is a Phoenix-based bank holding company serving customers through Western Alliance Bank, regional banking divisions, and specialized national business lines.
Financial results and condition
| Metric | Q1 2018 / March 31, 2018 | Comparable period / prior year-end |
|---|---|---|
| Net income | $100.9 million | $73.3 million in Q1 2017 |
| Diluted EPS | $0.96 | $0.70 in Q1 2017 |
| Net interest income | $214.2 million | $179.3 million in Q1 2017 |
| Net interest margin | 4.60% | 4.63% in Q1 2017; 4.72% excluding the TCJA-related tax-equivalent adjustment effect |
| Non-interest income / expense | $11.6 million / $98.1 million | $10.6 million / $87.8 million in Q1 2017 |
| Provision for credit losses | $6.0 million | $4.3 million in Q1 2017 |
| Total assets | $20.76 billion | $20.33 billion at December 31, 2017 |
| Loans, gross of allowance | $15.56 billion | $15.09 billion at December 31, 2017 |
| Deposits | $17.35 billion | $16.97 billion at December 31, 2017 |
| Stockholders’ equity | $2.29 billion | $2.23 billion at December 31, 2017 |
- Growth and profitability: Net income rose 37.6% year over year. Management reported net operating revenue of $226.9 million, up 19.9%, and operating pre-provision net revenue of $127.6 million, up 26.4% (both non-GAAP measures). Return on average assets was 1.99%, versus 1.69%.
- Margins and costs: Net interest income increased 19.5%, principally reflecting higher average loan and securities balances and higher asset yields. Deposit and funding costs also rose; average cost of interest-bearing deposits increased 23 basis points. The efficiency ratio was 42.4%, versus 44.0%; the operating efficiency ratio was 42.7%, versus 44.4%.
- Cash flow and liquidity: Operating cash flow was $88.3 million, investing cash flow was negative $347.3 million, and financing cash flow was positive $281.6 million. Cash, cash equivalents, and restricted cash increased $22.6 million to $439.4 million. Management reported $2.69 billion of liquid assets, including $2.25 billion of unpledged marketable securities, and said liquidity was adequate for projected 90–120 day needs. Available credit included $2.20 billion from the FHLB, $1.22 billion from the FRB, and $145 million of correspondent-bank lines; these lines had no outstanding balances.
- Debt and capital: At quarter-end, short-term FHLB advances were $300 million, customer repurchase agreements were $21.7 million, and qualifying debt was $363.9 million. Western Alliance reported a 10.5% Common Equity Tier 1 ratio, 10.5% Tier 1 leverage ratio, and 13.2% total capital ratio; the bank’s respective ratios were 10.8%, 10.4%, and 12.3%. The company and bank exceeded regulatory well-capitalized thresholds.
- Credit quality: Nonperforming loans were $81.1 million, down from $86.4 million at year-end; nonperforming assets were $111.3 million, down from $114.9 million. Non-accrual loans were 0.24% of gross loans, versus 0.29% at year-end. Annualized net charge-offs were 0.04% of average loans; the allowance was $144.7 million, or 0.93% of gross loans.
Material changes versus comparable periods
- Year-over-year interest income increased $42.4 million and interest expense increased $7.5 million, producing a $34.9 million increase in net interest income. Higher loan balances, a rising-rate environment, and increased securities balances contributed to interest income growth.
- Non-interest expense increased $10.3 million year over year. Salaries and benefits rose $10.5 million as staffing increased 9.8% to 1,713 employees; other expense increased $2.8 million, including a higher reserve for unfunded commitments. Lower legal and professional fees partly offset these increases.
- Loans grew $466.5 million during the quarter, led by construction and land development loans (+$325.3 million) and commercial and industrial loans (+$103.0 million). Deposits grew $382.0 million.
- Accumulated other comprehensive loss widened to $41.7 million from $3.1 million at year-end, largely reflecting a $38.9 million after-tax unrealized loss on available-for-sale securities. Management attributed unrealized losses primarily to market interest-rate increases and reported no impairment charges or securities considered other-than-temporarily impaired.
- The effective tax rate fell to 17.10% from 25.03%, primarily due to the lower federal statutory tax rate effective in 2018. Adoption of new accounting guidance for equity securities resulted in a $1.1 million fair-value loss recognized in earnings in Q1.
Outlook, commentary, and risks
- The filing provides no specific earnings, loan-growth, deposit-growth, or margin guidance. Management’s outlook statements are subject to forward-looking risks and assumptions.
- Interest-rate sensitivity modeling showed projected net interest income down 6.8% under an immediate 100-basis-point rate decrease, outside the company’s guideline of negative 5.0%. The board and management accepted the breach, expecting higher deposit costs over time to increase their sensitivity to falling rates. Modeled net interest income rose under the disclosed rate-increase scenarios. These simulations rely on assumptions and are not forecasts of actual results.
- Credit exposure is concentrated in real estate and the company’s Arizona, Nevada, and California markets. CRE-related loans represented approximately 52% of total loans. Management identifies local real estate conditions, credit losses, deposit competition and funding costs, interest-rate changes, and dependence on low-cost deposits among material risks.
- Unfunded commitments to extend credit, credit-card commitments and guarantees, and standby letters of credit totaled $6.87 billion. The filing notes that many commitments may expire undrawn; amounts do not necessarily represent future cash requirements.
- Management stated routine litigation and associated defense costs were not expected to materially affect the company. No material changes to previously disclosed risk factors were reported. Disclosure controls were assessed as effective, with no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether loan and deposit growth can continue without further margin pressure as funding costs rise.
- Trends in CRE and C&I credit quality, criticized/problem loans, allowance adequacy, and the sizable unfunded commitment exposure.
- The sensitivity of earnings and capital to interest-rate changes, including the accepted down-rate guideline breach and the assumptions behind management’s modeling.
- The effect of continued interest-rate-driven securities valuation losses on accumulated other comprehensive loss and reported capital.
- Liquidity and deposit composition, including reciprocal, brokered, and other rate-sensitive deposits, and the continued availability of secured borrowing capacity.