Western Alliance Bancorporation — 2019 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2019; quarterly figures below refer to Q4 2019. The Phoenix-based bank holding company operates Western Alliance Bank across Arizona, Nevada and California, alongside specialized national business lines. Its business is primarily commercial lending and deposit-taking.
Financial results and condition
- Profitability: Net income was $499.2 million, up from $435.8 million in 2018; diluted EPS rose to $4.84 from $4.14. Q4 net income was $128.1 million and diluted EPS was $1.25, compared with $119.1 million and $1.13 in Q4 2018.
- Revenue and margins: Net interest income increased 13.6% to $1.040 billion. Management-defined net operating revenue was $1.097 billion, up 13.1%. Net interest margin declined to 4.52% from 4.68%, mainly as deposit and funding costs rose. The operating efficiency ratio worsened to 42.7% from 41.9%.
- Expenses and taxes: Non-interest expense increased 13.4% to $482.8 million, including higher compensation, deposit costs, professional fees and data processing. Income tax expense rose to $105.1 million; the effective tax rate was 17.39%, versus 14.61% in 2018, which benefited from federal NOL carrybacks.
- Loans and asset quality: Loans reached $21.1 billion, up 19.3%; deposits grew 18.9% to $22.8 billion. Non-accrual loans increased to $56.0 million from $27.7 million; nonperforming assets were 0.26% of assets versus 0.20%. Net charge-offs improved to 0.02% of average loans from 0.06%. The allowance for credit losses was $167.8 million, or 0.80% of gross loans.
- Cash flow: Operating activities provided $717.8 million; investing activities used $3.723 billion, largely reflecting loan growth; financing activities provided $2.941 billion, including deposit growth. Cash and cash equivalents declined $64.0 million to $434.6 million.
- Debt, liquidity and capital: Year-end qualifying debt was $393.6 million. The company had no FHLB or Federal Reserve borrowings; customer repurchase agreements were $16.7 million. Management reported $2.9 billion of liquid assets and available credit of approximately $4.5 billion from the FHLB, $1.1 billion from the Federal Reserve and $1.2 billion from unsecured correspondent-bank lines. Western Alliance Bank’s total capital ratio was 11.9%, above the 10.0% well-capitalized threshold; its CET1 ratio was 10.6%.
- Shareholder returns: The company paid two quarterly dividends totaling $0.50 per share and repurchased 2.82 million shares for $120.1 million. A new repurchase authorization of up to $250 million runs through December 2020, subject to board discretion.
Material changes versus 2018
- Net income and diluted EPS increased, supported by loan growth and higher net interest income; however, higher funding costs reduced net interest margin.
- Loan growth was led by commercial and industrial loans, non-owner-occupied CRE and residential real estate. Residential loans increased to 10.2% of the portfolio from 6.8%.
- Non-interest income rose 51.0% to $65.1 million, substantially reflecting the swing from 2018 investment-security and fair-value losses to 2019 gains. 2019 included a $3.2 million gain on securities sales and a $5.1 million net fair-value gain.
- Non-accrual loans and nonperforming assets increased, even as charge-offs declined. CRE-related loans were approximately 45% of total loans, down from 49%.
- Stockholders’ equity increased to $3.017 billion from $2.614 billion. The company adopted lease accounting in 2019, recording $72.6 million of operating lease right-of-use assets and $78.1 million of lease liabilities at year-end.
Outlook, risks and unusual items
- The filing provides no specific earnings or growth guidance. Management states that actual results may differ materially from forward-looking statements.
- CECL became effective January 1, 2020. Adoption increased the loan allowance by $19 million, the unfunded-commitment allowance by $15 million and established a $3 million allowance on HTM securities; the after-tax cumulative adjustment to retained earnings was $25 million. The company noted potential for greater allowance and earnings volatility under CECL.
- Key disclosed risks include real-estate and CRE concentration, exposure to regional economies in Arizona, California and Nevada, specialized commercial lending, competition for lower-cost deposits, interest-rate sensitivity and the transition away from LIBOR. The filing also highlights cyber and operational risks, regulatory and compliance costs, and possible effects of natural disasters.
- Deposit funding includes $1.1 billion of wholesale brokered deposits at year-end, in addition to reciprocal deposit programs. Management identifies loss of core deposits or higher deposit costs as potential threats to liquidity and profitability.
- Unusual or non-recurring comparisons include a $7.6 million charitable foundation contribution in 2018 and 2019 gains from securities sales and fair-value changes. The auditor gave an unqualified opinion on the financial statements and internal control; the allowance’s qualitative reserve was identified as a critical audit matter. The filing reports no material pending legal proceedings.
Important facts for investors to verify
- Whether subsequent credit performance supports the allowance, particularly given increased non-accrual loans, CRE exposure and the CECL transition adjustment.
- Whether loan growth can continue without further deterioration in asset quality or pressure on capital and liquidity.
- How deposit pricing, brokered funding and reciprocal-deposit costs affect future net interest margin and earnings.
- How much of 2019 non-interest income growth is repeatable, separating recurring fees from securities-sale and fair-value gains.
- Whether capital, liquidity and shareholder-return plans remain appropriate as the balance sheet expands.