Business context and reporting period
Western Alliance Bancorporation (WAL), a Phoenix-based bank holding company, filed this Form 10-K for the fiscal year ended December 31, 2014. Its principal banking subsidiary, Western Alliance Bank, serves Arizona, Nevada and California through regional divisions and operates specialized commercial-finance businesses nationally. The bank reported $10.48 billion in assets at year-end and 40 branch locations.
Following the December 2013 consolidation of three bank subsidiaries into Western Alliance Bank, the company changed its reportable segments to Arizona, Nevada, California, Central Business Lines and Corporate & Other. Management said prior segment results could not practicably be recast, limiting segment comparisons.
Financial performance and condition
| Metric | 2014 | 2013 |
|---|---|---|
| Total assets, year-end | $10.60 billion | $9.31 billion |
| Loans, net of deferred fees and costs | $8.40 billion | $6.80 billion |
| Deposits | $8.93 billion | $7.84 billion |
| Net interest income | $384.9 million | $332.9 million |
| Net income available to common stockholders | $146.6 million | $113.6 million |
| Diluted EPS | $1.67 | $1.31 |
| Net interest margin | 4.42% | 4.39% |
| Return on average assets | 1.50% | 1.35% |
Net income was $148.0 million, compared with $115.0 million in 2013. Fourth-quarter 2014 net income available to common stockholders was $40.1 million, or $0.46 per diluted share, versus $31.1 million, or $0.36, in fourth-quarter 2013.
Net interest income increased 15.6%, primarily reflecting higher average loan balances. The average yield on earning assets edged down 1 basis point, while lower average funding costs contributed to a 3-basis-point increase in net interest margin. Provision for credit losses fell to $4.7 million from $13.2 million. Non-interest income was $25.4 million and non-interest expense was $208.1 million; expense rose 6.0%, including higher staffing, data-processing and other operating costs. The efficiency ratio, on management’s tax-equivalent basis, improved to 49.2% from 52.5%.
Operating cash flow was $163.3 million, investing cash use was $1.39 billion, and financing cash provided was $1.08 billion. Cash and cash equivalents ended the year at $164.4 million, down from $305.5 million. Management reported $862.5 million in liquid assets and additional available borrowing capacity, including approximately $935 million at the FHLB and $1.15 billion at the Federal Reserve discount window.
Year-end other borrowings were $390.3 million and junior subordinated debt had a fair value of $40.4 million. The company reported a 9.7% leverage ratio, 10.5% Tier 1 risk-based capital ratio and 11.7% total risk-based capital ratio; it and the bank met applicable well-capitalized requirements. Common stockholders’ equity was not separately stated in the cited balance-sheet summary; total stockholders’ equity was $1.00 billion.
Material changes and notable items
- Loans grew 23.5% and deposits 13.9%. Commercial and industrial lending expanded substantially; CRE-related loans were approximately 54% of total loans, down from 58%.
- Credit indicators improved: non-accrual loans declined to $67.7 million from $75.7 million; nonperforming assets fell to $214.7 million from $233.5 million. The company recorded $5.4 million of net recoveries, versus $8.6 million of net charge-offs in 2013. The allowance was $110.2 million, or 1.31% of gross loans, versus 1.47%.
- In May 2014, the company reclassified all held-to-maturity securities to available-for-sale after changing its intent regarding CDO holdings. The transfer included $275.3 million amortized cost and produced a $9.0 million after-tax unrealized gain in accumulated other comprehensive income. No securities impairment charges were recorded in 2014.
- WAL redeemed half of its SBLF Series B preferred shares in December for $70.7 million, leaving $70.5 million outstanding, and raised $13.7 million net through an at-the-market common-stock offering.
- The company shut down its remaining affinity credit-card operations in second-quarter 2014; the discontinued business recorded a $1.2 million net loss for the year.
Outlook, risks and contingencies
The filing provides no specific earnings or growth guidance. Management described continued growth in net interest income and lending, while emphasizing uncertainty from economic conditions and market competition. The company is concentrated in Arizona, California and Nevada and has substantial commercial, real-estate-secured lending exposure; local economic or property-value declines could increase credit losses. Deposit competition, funding costs, interest-rate movements, cyber and operational risks, and fair-value volatility are also identified risks.
Crossing $10 billion in assets brings added oversight and compliance obligations. The company said CFPB examinations would apply to the bank, its first company-run stress test was expected in 2016, and debit interchange-fee limits were to begin July 1, 2015; it earned $2.0 million in debit interchange fees in 2014. The 10% Senior Notes had $58.4 million principal remaining and mature in September 2015. The SBLF preferred dividend rate was 1% through first-quarter 2016 and would rise to 9% if the shares were not redeemed. WAL did not anticipate paying common dividends in the foreseeable future. Management said routine litigation was not expected to materially affect results; no material pending legal proceedings were reported. McGladrey LLP issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether rapid loan growth—especially in commercial and specialized lending—maintains underwriting quality, and how CRE, C&I and geographic concentrations perform.
- Whether credit improvement and net recoveries persist, and whether the allowance remains appropriate after the revised 10-year loss-history methodology and FDIC-related presentation changes.
- Deposit composition and stability, including growth in large certificates of deposit, reciprocal deposits and brokered deposits, and the company’s usable liquidity under stress.
- Capital levels and regulatory costs after the $10 billion asset threshold, including stress testing, CFPB oversight, FDIC assessments and debit interchange limits.
- Repayment or refinancing of the 10% Senior Notes due in September 2015 and the remaining SBLF preferred stock before its potential dividend-rate increase.
- How much earnings growth reflects recurring banking operations versus fair-value gains, asset-sale gains, acquisition-related comparisons and other unusual items.