Western Alliance Bancorporation — Q3 2019 Form 10-Q
Business context and period. Western Alliance Bancorporation is a Phoenix-based bank holding company whose banking subsidiary serves customers through regional divisions and specialized national business lines. This unaudited filing covers the three and nine months ended September 30, 2019; comparisons are primarily with the same 2018 periods, and balance-sheet comparisons are with December 31, 2018.
Financial performance and condition
- Q3 earnings: Net income was $127.4 million, up 14.6% from $111.1 million; diluted EPS was $1.24 versus $1.05. For the first nine months, net income was $371.1 million, up 17.2%, and diluted EPS was $3.59 versus $3.00.
- Revenue and margin: Q3 net interest income rose 13.8% to $266.4 million; nine-month net interest income rose 14.3% to $768.4 million. Net interest margin declined to 4.41% from 4.68% in Q3 2018 and to 4.56% from 4.69% for the nine-month period, reflecting higher deposit and funding costs. Q3 non-interest income was $19.4 million versus $4.4 million, including a $3.2 million securities-sale gain versus a $7.2 million loss in the prior-year quarter.
- Costs and operating measures: Q3 non-interest expense increased 10.6% to $126.0 million; deposit costs and salaries were notable increases. Management-reported operating PPNR, a non-GAAP measure, was $159.9 million, up 12.7%; the GAAP efficiency ratio was 43.1% versus 46.6%, while the operating efficiency ratio was 42.4% versus 41.5%.
- Balance-sheet growth: Total assets were $26.3 billion, up 13.9% from year-end. Loans were $20.2 billion, up 13.8%; growth was led by commercial and industrial, non-owner-occupied commercial real estate, and residential real estate lending. Deposits reached $22.4 billion, up 17.0%, including growth in savings/money-market and non-interest-bearing balances.
- Credit quality: The allowance for credit losses was $165.0 million, or 0.82% of gross loans, versus $152.7 million, or 0.90%, at year-end. Q3 provision was $4.0 million versus $6.0 million; net recoveries were $0.6 million. Non-accrual loans rose to $50.3 million from $27.7 million, and total nonperforming loans, including accruing troubled debt restructurings, rose to $95.3 million from $64.8 million. Commercial real estate represented approximately 47% of loans.
- Cash flow and liquidity: Nine-month operating cash flow was $534.5 million, investing cash outflow was $2.78 billion, and financing cash inflow was $2.61 billion, principally reflecting loan growth funded by deposit growth. The company reported $3.4 billion in liquid assets, including $872.1 million of cash and $2.6 billion of unpledged marketable securities; management considered liquidity adequate for near-term needs. Available FHLB and Federal Reserve borrowing capacity was approximately $4.0 billion and $1.4 billion, respectively.
- Debt and capital: At quarter-end, other borrowings were zero, customer repurchase agreements were $15.0 million, and qualifying debt was $388.9 million. The company’s regulatory CET1 ratio was 10.3%, total capital ratio 12.6%, and leverage ratio 10.4%; the bank and parent exceeded well-capitalized thresholds. Stockholders’ equity was $2.92 billion. Management-reported tangible common equity ratio was 10.1%.
Material changes, outlook and risks
- Growth in earning assets supported higher interest income, but deposit repricing and funding costs compressed margins. Average cost of interest-bearing deposits increased to 1.30% in Q3 from 0.97% a year earlier.
- Q3 non-interest expense included a $3.4 million loss on sales/valuations of repossessed and other assets, primarily OREO valuation adjustments. The comparable 2018 period included a $7.6 million charitable foundation contribution, contributing to lower reported prior-year earnings and expenses.
- The effective tax rate was 18.30% for Q3 2019 versus 6.32% in Q3 2018; the filing attributes the prior-year rate partly to a discrete federal NOL carryback benefit. No earnings or growth guidance is provided in the supplied filing text.
- Management expected adoption of the current expected credit loss standard (CECL) on January 1, 2020 to affect the CET1 ratio by less than 25 basis points, based on then-current assumptions; this estimate excluded potential qualitative-factor updates.
- Management identified risks including economic and financial-market conditions, real-estate and geographic concentration, credit losses, deposit competition and reliance on low-cost funding, interest-rate and LIBOR uncertainty, regulatory compliance, cybersecurity and third-party systems. The filing notes CRE exposure and a concentration in Arizona, Nevada, and California. Off-balance-sheet credit commitments and letters of credit totaled $9.86 billion; these amounts are not necessarily expected funding needs. Routine litigation was not expected to have a material effect, and no material change to previously disclosed risk factors was reported.
- Interest-rate simulations showed modeled next-12-month net interest income changes of -4.8% under an immediate 100-basis-point decline and +7.0% under an immediate 100-basis-point increase. These are scenario estimates, not forecasts; the filing cautions that assumptions and actual results may differ.
Important facts for investors to verify
- Whether margin pressure persists as deposit costs reprice and loan growth continues.
- Drivers and subsequent developments in non-accrual loans, impaired loans, TDRs, and OREO valuations.
- Loan concentration, especially CRE exposure and geographic concentration, alongside the allowance’s coverage and CECL adoption effects.
- Composition, pricing, and durability of deposit growth, including brokered and other higher-cost deposits, and ongoing liquidity capacity.
- How much reported earnings growth depends on securities gains, fair-value movements, and other nonrecurring items; compare non-GAAP operating measures with GAAP results.