Western Alliance Bancorporation — FY 2016 Form 10-K
Business and period. Western Alliance Bancorporation (WAL), a Phoenix-based bank holding company, provides commercial banking and specialized lending through Western Alliance Bank and its divisions. This annual filing covers the fiscal year ended December 31, 2016; fourth-quarter results are also noted below. Amounts are U.S. dollars.
Financial performance and condition
| Metric | 2016 | 2015 |
|---|---|---|
| Net interest income | $657.2 million | $492.6 million |
| Non-interest income | $42.9 million | $29.8 million |
| Net income available to common shareholders | $259.8 million | $193.5 million |
| Diluted EPS | $2.50 | $2.03 |
| Net interest margin | 4.58% | 4.51% |
| Return on average assets | 1.61% | 1.56% |
| Non-interest expense | $330.9 million | $260.6 million |
| Provision for credit losses | $8.0 million | $3.2 million |
- Operating net revenue, a non-GAAP measure, was $699.1 million, up 34.0%. Operating pre-provision net revenue was $380.4 million versus $267.9 million; the filing defines these as non-GAAP measures.
- Fourth-quarter net income available to common shareholders was $69.8 million, or $0.67 diluted EPS.
- At year-end, total assets were $17.20 billion, up 20.5%; loans were $13.21 billion, up 18.6%; and deposits were $14.55 billion, up 20.9%. Management attributed asset growth to the HFF acquisition, organic loan growth and increased investment securities; deposit growth was organic.
- Cash and cash equivalents were $284.5 million. Operating cash flow was $280.6 million; investing cash flow was negative $2.89 billion, including the $1.27 billion HFF portfolio purchase; financing cash flow was positive $2.67 billion, mainly reflecting deposit growth and debt issuance.
- Year-end stockholders’ equity was $1.89 billion; tangible common equity ratio was 9.4%. WAL’s regulatory CET1, Tier 1 leverage and total capital ratios were 10.0%, 9.9% and 13.2%, respectively. WAB’s corresponding ratios were 10.8%, 10.3% and 12.6%; both were above the stated well-capitalized thresholds.
- Borrowings included $80 million of FHLB advances and $41.7 million of customer repurchase agreements. Qualifying debt was $367.9 million, including $175 million of subordinated debentures issued in June 2016 at 6.25% and due in 2056, and $150 million of 2015 subordinated notes. The company reported $2.0 billion of liquid assets and substantial additional secured borrowing availability.
- Credit quality improved on several measures: nonperforming assets were $142.8 million, or 0.51% of assets, versus $166.1 million, or 0.65%, in 2015. Non-accrual loans were $40.3 million, or 0.31% of gross loans. Net charge-offs were 0.02% of average loans, compared with net recoveries in 2015. The allowance was $124.7 million, or 0.95% of gross loans; management’s acquisition-accounting-adjusted ratio was 1.30%.
Changes, outlook and key risks
- Growth and comparability: Earnings available to common shareholders rose about 34% year over year. Growth reflects both expansion and acquisitions: 2016 includes a full year of Bridge operations, compared with six months in 2015, and HFF results from April 20, 2016. The GE Capital hotel-franchise finance loan portfolio was purchased for $1.27 billion; its preliminary loan fair values remained subject to the acquisition measurement period at year-end.
- Costs and unusual items: Non-interest expense rose 27.0%, including higher staffing and operating costs from acquisitions and growth. Acquisition/restructuring expense was $12.4 million, including costs associated with the HFF purchase and a fourth-quarter core-system conversion. The effective tax rate increased to 28.07% from 24.87%; early adoption of share-based payment guidance generated a $4.1 million tax benefit in 2016.
- Management commentary and outlook: Management emphasized continued growth in business deposits and loans, maintaining a low cost of funds, and managing interest-rate risk. The filing provides no specific earnings or financial guidance. Its model estimated next-12-month net interest income would increase 6.3% under an immediate 100-basis-point rate increase and decrease 4.3% under a 100-basis-point decrease; results depend on assumptions and actual outcomes may differ.
- Risk concentrations: CRE-related loans, including construction and land development, were approximately 53% of total loans, up from 49%. The business is concentrated in Arizona, California and Nevada, and depends on regional real-estate and economic conditions. The filing also highlights specialized commercial lending, deposit competition and funding costs, interest-rate sensitivity, acquisition integration, regulatory requirements, cybersecurity and third-party service providers, and natural-disaster exposure.
- Liquidity, commitments and other matters: Management considered liquidity adequate for expected near-term needs and reported over twelve months of parent-company liquidity under its stated stress assumptions. Unfunded credit commitments, card commitments/guarantees and standby letters of credit totaled $4.62 billion; amounts may expire unused and are not equivalent to immediate funding needs. The related loss contingency was $7.0 million. No material pending legal proceedings were reported. WAL has never paid common cash dividends and does not anticipate doing so in the foreseeable future.
- The auditor gave an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Important facts for investors to verify
- HFF portfolio performance, credit marks, final acquisition valuations and the contribution of acquired versus organic growth to earnings.
- Whether credit quality and allowance coverage remain adequate as CRE exposure grows; review problem loans, acquired-loan marks, and the 53% CRE-related concentration.
- Deposit mix and stability, including reciprocal and brokered deposits, and the effect of higher rates on funding costs and net interest margin.
- Execution and ongoing costs following the core-system conversion, and whether expense growth moderates as acquisitions are integrated.
- Liquidity and capital resilience if a significant portion of the $4.62 billion in commitments is drawn or deposits leave; assess debt-service obligations and dividend constraints.