Western Alliance Bancorporation — FY 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. This is an annual filing, not a standalone fourth-quarter report; quarterly Q4 figures are included below. Western Alliance is a Phoenix-based bank holding company operating primarily in Arizona, California and Nevada. Results include Bridge Bank from July 1, 2015, following the June 30 acquisition.
Financial performance and condition
| Metric | FY 2015 / Dec. 31, 2015 | Prior comparable |
|---|---|---|
| Net interest income | $492.6 million | $384.9 million in 2014 |
| Provision for credit losses | $3.2 million | $4.7 million in 2014 |
| Net income | $194.2 million; $193.5 million available to common shareholders | $148.0 million; $146.6 million available to common shareholders in 2014 |
| Diluted EPS | $2.03 | $1.67 in 2014 |
| Net interest margin | 4.51% | 4.42% in 2014 |
| Efficiency ratio (TEB, non-GAAP) | 45.8% | 49.1% in 2014 |
| Operating cash flow | $212.8 million | $163.3 million in 2014 |
| Cash and cash equivalents | $224.6 million | $164.4 million at year-end 2014 |
| Total assets | $14.28 billion | $10.60 billion at year-end 2014 |
| Loans, including loans held for sale | $11.14 billion | $8.40 billion at year-end 2014 |
| Deposits | $12.03 billion | $8.93 billion at year-end 2014 |
| Stockholders’ equity | $1.59 billion | $1.00 billion at year-end 2014 |
Q4 2015 unaudited results: net interest income was $143.3 million, provision for credit losses was $2.5 million, net income was $58.5 million, net income available to common shareholders was $58.4 million, and diluted EPS was $0.57.
Cash flows: investing activities used $1.37 billion, principally reflecting loan funding and securities purchases; financing activities provided $1.21 billion, including $1.36 billion of net deposit growth and $148.2 million of net proceeds from subordinated debt issuance. Net cash and cash equivalents increased $60.2 million during 2015.
Liquidity and debt: management reported $1.26 billion of liquid assets, including $1.04 billion of unpledged marketable securities, and said liquidity was adequate for expected needs over the next 90–120 days. Available credit included $1.54 billion from the FHLB and $1.21 billion from the Federal Reserve, subject to collateral and other terms. Year-end borrowings included $150 million of FHLB advances, $38.2 million of customer repurchase agreements and $210.3 million of qualifying debt. The bank issued $150 million of subordinated notes in June, bearing 5.00% fixed interest through June 2020 and a floating rate thereafter.
Capital and credit: Western Alliance reported a 9.7% Common Equity Tier 1 ratio, 10.2% Tier 1 capital ratio and 12.2% total capital ratio; the bank subsidiary’s corresponding ratios were 9.3%, 9.3% and 11.4%. Non-accrual loans were 0.44% of gross loans, versus 0.81% in 2014; nonperforming assets were 0.65% of total assets, versus 1.18%. Net recoveries were 0.06% of average loans. The allowance for credit losses was $119.1 million, or 1.07% of gross loans.
Material changes and unusual items
- Bridge acquisition added approximately $2.23 billion of assets, $1.44 billion of loans and $1.74 billion of deposits at acquisition. Consideration included 12.5 million common shares and $36.5 million cash; the company recorded $266.4 million of goodwill. Bridge contributed results for the second half of 2015, so reported growth includes both acquired and organic activity.
- Year-end loans increased 32.6% and deposits increased 34.7%; management attributed $2.74 billion loan growth and $3.10 billion deposit growth partly to Bridge and partly to organic growth. C&I loans rose to $5.11 billion and represented 46.1% of HFI loans. CRE-related loans, including construction and land development, were about 49% of total loans.
- Net interest income rose $107.7 million year over year, primarily from higher average loan balances. Non-interest expense increased $53.3 million, including $8.8 million of acquisition/restructuring expense; salaries, data processing, professional fees and occupancy also increased.
- The company redeemed its remaining $70.5 million of SBLF preferred stock for $70.7 million including accrued dividends, completing the redemption. It also issued shares through an ATM offering for $28.3 million net proceeds. Common dividends were not paid, and management said none were anticipated in the foreseeable future.
- Basel III capital rules took effect in 2015; the capital conservation buffer begins phasing in during 2016. The company also crossed the $10 billion asset threshold, bringing additional regulatory obligations, including company- and bank-level stress testing in 2016. Debit interchange fee restrictions applied beginning July 2015; debit interchange income was $1.4 million, versus $2.0 million in 2014.
- The company early-adopted an accounting change for fair-value changes attributable to its own credit risk on certain junior subordinated debt, moving the applicable effect from earnings to other comprehensive income. It reported a $16.3 million opening-equity reclassification; prior 2015 quarterly figures were adjusted.
Outlook, risks and contingencies
The filing provides no specific earnings or balance-sheet guidance. Management described continued emphasis on business lending relationships and low-cost core deposits. A core banking platform conversion was planned for 2016, with execution, customer retention, costs and control integration identified as risks. Management stated that interest-rate exposure was within approved limits; its model projected 12-month net interest income increases of 4.9% under an immediate 100-basis-point rise and a 1.9% decrease under a 100-basis-point fall. These are scenario estimates, not forecasts, and depend on assumptions.
Key exposures include commercial lending concentrations, particularly CRE, construction and C&I; regional economic and real-estate conditions in Arizona, California and Nevada; deposit competition and potential funding-cost increases; interest-rate and market-value movements; and integration of Bridge and new specialty lending businesses. The company also cited cybersecurity, third-party service-provider, regulatory-compliance and natural-disaster risks. Outstanding commitments to extend credit were $3.62 billion and standby letters of credit were $50.7 million; these may not be fully drawn. Management said routine litigation was not expected to materially affect results and disclosed no material pending legal proceedings. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Separate acquisition-driven growth from organic loan, deposit, revenue and earnings growth; confirm Bridge’s ongoing contribution and integration costs.
- Review credit performance by portfolio and segment, especially C&I growth, CRE concentrations, criticized assets, acquired-loan marks and allowance coverage.
- Assess deposit mix, including reciprocal and brokered deposits, large time-deposit maturities, and the sensitivity of funding costs to competition and rates.
- Check capital headroom against the phased-in Basel III conservation buffer and the effects of 2016 stress testing and other requirements for institutions above $10 billion in assets.
- Monitor execution and cost of the planned core-system conversion, and confirm any updated guidance or material developments after the filing date.