Western Alliance Bancorporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. Comparisons are with Q1 2016 unless otherwise noted. Western Alliance Bancorporation is a Phoenix-based bank holding company serving customers through Western Alliance Bank and regional banking divisions and specialized national business lines.
Financial performance and condition
- Profit: Net income available to common stockholders was $73.4 million, versus $61.3 million; diluted EPS was $0.70, versus $0.60. Return on average assets was 1.69%, compared with 1.70%.
- Revenue and margins: Net interest income increased to $179.3 million from $145.7 million. Net interest margin was 4.63%, up from 4.58%; excluding acquired-loan accretion, the non-GAAP margin was 4.48%, versus 4.42%. Non-interest income declined to $10.5 million from $13.1 million. Management-reported non-GAAP operating revenue was $189.2 million, up 19.9%.
- Expenses and operating leverage: Non-interest expense increased 16.2% to $87.8 million, including higher salaries and benefits and legal, professional and directors’ fees. The reported efficiency ratio improved to 44.0% from 45.1%; the non-GAAP operating efficiency ratio improved to 44.4% from 45.6%. Operating PPNR, a non-GAAP measure, rose 23.0% to $100.9 million.
- Credit: Provision for credit losses was $4.3 million, compared with $2.5 million. Net charge-offs were $1.3 million, or 0.04% annualized of average loans, versus $2.3 million and 0.08%. The allowance was $127.6 million, or 0.94% of gross HFI loans; the adjusted ratio including acquired-loan credit marks was 1.26% (non-GAAP). Nonperforming loans were $87.4 million, down from $95.0 million at year-end; non-accrual loans were $34.5 million. Impaired loans increased to $113.7 million from $99.2 million.
- Balance sheet and funding: Total assets grew 5.4% from year-end to $18.12 billion. Loans, including loans held for sale, rose 3.4% to $13.66 billion; deposits increased 5.5% to $15.36 billion, primarily from organic growth. Cash and cash equivalents were $647.0 million at quarter-end.
- Cash flow: Operating activities provided $88.0 million; investing activities used $435.5 million, chiefly reflecting net loan funding; financing activities provided $710.0 million, principally from deposit growth. Cash and cash equivalents increased $362.5 million during the quarter. In Q1 2016, the respective cash flows were $71.3 million provided, $155.5 million used and $890.5 million provided.
- Debt, liquidity and capital: Qualifying debt was $366.9 million. There were no short-term FHLB advances at quarter-end; customer repurchase agreements were $35.7 million. Management reported $2.34 billion of liquid assets and approximately $2.29 billion of available FHLB credit and $1.03 billion of available FRB credit, plus $168.3 million of correspondent-bank lines, with no outstanding balances on those lines. WAL’s Common Equity Tier 1 ratio was 10.0%, total capital ratio 13.1%, and Tier 1 leverage ratio 10.2%; the Bank exceeded applicable well-capitalized thresholds.
Material changes versus comparable periods
- Net interest income growth reflected higher average earning assets, including loan growth, and the April 2016 acquisition of GE Capital’s $1.27 billion hotel franchise finance portfolio. The acquired portfolio contributed $21.7 million of Q1 2017 loan interest income; therefore, year-over-year growth includes acquisition-related effects as well as organic growth.
- Interest expense rose to $13.0 million from $8.5 million, reflecting increased average interest-bearing deposits and qualifying debt costs. The average cost of interest-bearing deposits increased to 0.37% from 0.31%.
- Non-interest income declined mainly because Q1 2016 included a $2.5 million gain on loan sales; lending-related income and gains on loan sales were $0.5 million in Q1 2017.
- Non-interest expense rose $12.3 million, with management citing infrastructure investment to support growth and higher deposit earnings credits.
- Total nonperforming assets, including foreclosed assets, were $132.6 million at March 31, versus $142.8 million at year-end. A separate management-highlight ratio of 0.44% refers to non-accrual loans and repossessed assets, not the broader nonperforming-loan total that includes accruing restructured loans.
Outlook, risks and contingencies
- The filing provides no specific earnings or revenue guidance. Management said liquidity was adequate for near-term needs and that the Company’s interest-rate risk profile was within Board-approved limits.
- Interest-rate simulations estimated net interest income changes over 12 months of -4.5% for a 100-basis-point rate decline and +4.9% for a 100-basis-point increase. Modeled EVE declined 1.2% for a 100-basis-point increase and 11.0% for a 400-basis-point increase. Management cautioned that results depend on assumptions and actual outcomes may differ.
- Credit and concentration risks include significant commercial real estate exposure: CRE-related loans were approximately 53% of total loans. Lending is concentrated in Arizona, Nevada and California. Management noted that substantially all CRE loans were secured by first liens with initial loan-to-value ratios generally no higher than 75%.
- Other cited risks include economic and real estate-market conditions, loan losses exceeding estimates, deposit competition and withdrawals, interest-rate changes, access to funding, cybersecurity and third-party risks, growth execution, and regulatory compliance. The Company reported no material change to previously disclosed risk factors.
- Off-balance-sheet commitments to extend credit, credit-card commitments and financial guarantees, and standby letters of credit totaled $5.17 billion. These contractual amounts are not equivalent to expected funding needs; the related loss contingency was $6.4 million. Management said routine litigation was not expected to have a material effect; no material pending legal proceedings were reported.
Most important facts for investors to verify
- How much of loan and earnings growth is organic versus attributable to the HFF acquisition and acquired-loan accretion.
- Whether the increase in impaired loans and problem loans is sustained or reverses, and whether the allowance and acquired-loan credit marks remain adequate.
- The extent and performance of CRE and geographically concentrated exposures, particularly under weaker local real estate conditions.
- The stability, pricing and composition of deposits, including brokered-classified deposits, and continued access to contingent borrowing capacity.
- The assumptions behind management’s non-GAAP measures and interest-rate sensitivity simulations; these are supplemental measures and modeled outcomes, not guarantees.