Western Alliance Bancorporation — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Financial statements are unaudited. Western Alliance is a bank holding company serving business and regional banking markets, principally in Arizona, Nevada, and California.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net interest income | $172.5 million | $137.4 million | $481.9 million | $349.2 million |
| Net income | $67.1 million | $55.9 million | $190.0 million | $135.7 million |
| Diluted EPS | $0.64 | $0.55 | $1.84 | $1.45 |
| Net interest margin | 4.55% | 4.59% | 4.58% | 4.45% |
| Operating pre-provision net revenue | $100.8 million | $73.6 million | $277.3 million | $188.0 million |
- Q3 net interest income rose 25.6% year over year; net income available to common shareholders rose $11.4 million. For nine months, net income available to common shareholders increased $54.9 million.
- Q3 return on average assets was 1.58% versus 1.64%; return on average tangible common equity was 17.50% versus 19.00%. The efficiency ratio improved to 43.0% from 46.9% (management-defined, non-GAAP).
- At September 30, 2016, total assets were $17.04 billion, up 19.4% from year-end 2015; loans, including held-for-sale loans, were $13.03 billion, up $1.89 billion; deposits were $14.44 billion, up $2.41 billion. Growth reflected organic expansion and the HFF portfolio acquisition.
- Cash and cash equivalents were $356.1 million. Nine-month operating cash flow was $214.5 million, investing cash outflow $2.57 billion, and financing cash inflow $2.49 billion. Investing outflow included the $1.27 billion HFF acquisition and securities purchases; financing inflow was largely deposit growth.
- Liquidity included $2.05 billion in liquid assets, including $1.69 billion of unpledged marketable securities. No FHLB or FRB borrowings were outstanding; available credit was approximately $2.03 billion from the FHLB and $1.57 billion from the FRB. Management said liquidity was adequate for anticipated near-term needs and Parent liquidity could support operations for over twelve months under its stated assumptions.
- Qualifying debt was $382.9 million, versus $210.3 million at year-end 2015, following a $175 million subordinated-debt issuance at 6.25%. Total capital ratio was 13.1% at the holding company and 12.5% at the bank; both were above applicable well-capitalized thresholds. Tangible common equity ratio was 9.3%.
- Allowance for credit losses was $122.9 million, or 0.94% of gross loans; management’s acquisition-adjusted allowance ratio was 1.37% (non-GAAP). Nine-month provision was $7.0 million versus $0.7 million; annualized net charge-offs were 0.04% of average loans.
Material changes and notable items
- On April 20, 2016, the Bank acquired GE Capital’s domestic select-service hotel franchise loan portfolio for $1.27 billion cash. The acquired loans had a preliminary fair value of $1.28 billion, and HFF contributed $21.2 million of Q3 loan interest income. Acquisition fair values remained preliminary at quarter-end.
- Net interest margin declined four basis points year over year in Q3, as deposit and qualifying-debt costs rose and securities yields fell; nine-month margin increased 13 basis points year over year.
- Q3 non-interest expense rose 16.6% year over year to $85.0 million, including $2.7 million of acquisition/restructuring expense. Costs reflected HFF staffing, technology and core-conversion work, and growth-related expenses. The company reported that core conversion activities were substantially completed after quarter-end.
- Credit indicators improved from year-end: non-accrual loans declined to $40.6 million from $48.4 million; nonperforming assets declined to $147.7 million from $166.1 million; impaired loans fell to $104.8 million from $128.9 million. No new TDR loans were reported for the 2016 quarter or nine-month period, although two TDR loans totaling $5.7 million defaulted during the nine months.
- The company recorded a $4.1 million tax benefit during the first nine months from early adoption of share-based-payment accounting guidance. Nine-month effective tax rate increased to 28.31% from 24.88%; management attributed the rise mainly to pre-tax income growth without proportional increases in favorable tax items.
- AFS securities had $11.9 million of gross unrealized losses, primarily associated with rates, credit spreads, and liquidity. Management recorded no impairment charges and did not consider securities other-than-temporarily impaired at quarter-end.
Outlook, risks, and contingencies
The filing provides no specific earnings or growth guidance. Management stated that modeled interest-rate exposure was within Board-approved limits. Its simulation estimated next-12-month net interest income would rise 6.2% with an immediate 100-basis-point increase and fall 4.6% with a 100-basis-point decrease; results depend on assumptions and are not forecasts. Key disclosed risks include commercial real estate and construction lending concentrations, geographic concentration, credit losses exceeding estimates, deposit retention and funding access, interest-rate and market exposure, competition, cybersecurity and technology, regulatory compliance, and execution of growth and system-conversion plans. CRE-related loans were approximately 54% of total loans.
Off-balance-sheet commitments to extend credit, credit-card commitments/guarantees, and standby letters of credit totaled $4.08 billion; the company cautioned that commitments may not be fully drawn. The related loss contingency was $11.0 million, including $7.0 million associated with HFF. Management said routine litigation was not expected to have a material effect; no material pending legal proceedings or material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- How much future earnings and loan growth depend on the HFF acquisition, its preliminary purchase accounting, and successful integration.
- Whether deposit growth remains stable and cost-effective, particularly given higher deposit costs and brokered or network deposits.
- Credit performance in CRE, construction, and commercial lending, including the adequacy of reserves, acquisition credit marks, and the $11.0 million off-balance-sheet loss contingency.
- Whether reported profitability remains strong after acquisition, conversion, and other non-recurring costs, and how non-GAAP operating measures reconcile to GAAP results.
- The sensitivity of margins, liquidity, and capital to interest-rate changes, deposit withdrawals, and actual funding conditions.