Western Alliance Bancorporation — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Western Alliance is a bank holding company headquartered in Phoenix, Arizona, operating through regional banking divisions and specialized national business lines.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net interest income | $192.7 million | $163.7 million | $372.1 million | $309.4 million |
| Provision for credit losses | $3.0 million | $2.5 million | $7.3 million | $5.0 million |
| Non-interest income | $10.4 million | $8.6 million | $21.0 million | $21.7 million |
| Non-interest expense | $88.3 million | $81.8 million | $176.0 million | $157.3 million |
| Net income | $80.0 million | $61.6 million | $153.3 million | $122.9 million |
| Diluted EPS | $0.76 | $0.60 | $1.46 | $1.19 |
| Net interest margin | 4.61% | 4.63% | 4.62% | 4.60% |
Q2 net income increased 29.8% year over year; six-month net income rose 24.7%. Q2 net interest income increased 17.8%, while non-interest expense rose 7.9%. Management-reported non-GAAP operating revenue was $203.2 million in Q2, up 18.0%, and operating pre-provision net revenue was $115.2 million, up 22.0%. The Q2 efficiency ratio was 41.3%, versus 45.2% a year earlier; operating efficiency ratio was 41.2%, versus 43.0%.
Financial position, funding and capital
- At June 30, 2017, total assets were $18.84 billion, up 9.6% from year-end 2016. Loans held for investment before allowance were $13.97 billion, up 5.9% including held-for-sale loans; deposits were $16.03 billion, up 10.2%.
- Cash and cash equivalents were $606.7 million. Management reported $2.58 billion of liquid assets, including $1.98 billion of unpledged marketable securities, and considered liquidity adequate for projected needs. Available credit included $2.33 billion at the FHLB and $1.16 billion at the Federal Reserve; correspondent-bank lines totaled $168 million, with none drawn.
- Qualifying debt was $375.4 million; short-term FHLB borrowings were zero, compared with $80 million at December 31, 2016. The company also had $32.7 million in customer repurchase agreements. The filing describes $175 million of parent subordinated debentures and $150 million of bank subordinated debt, alongside junior subordinated debt.
- Stockholders’ equity was $2.06 billion. Company regulatory ratios included 10.3% Common Equity Tier 1, 13.4% total capital and 9.9% Tier 1 leverage. The company and bank exceeded the filing’s well-capitalized thresholds.
Cash flow and asset quality
For the six months, operating cash flow was $175.4 million, investing cash flow was negative $1.24 billion, and financing cash flow was positive $1.38 billion. Deposit growth provided $1.48 billion of financing; cash and cash equivalents increased $322.2 million to $606.7 million.
The allowance for credit losses was $131.8 million, compared with $124.7 million at year-end; the six-month provision was $7.3 million. Net charge-offs were $0.1 million for the first half, with net recoveries in Q2. Non-accrual loans declined to $30.1 million from $40.3 million at year-end, and nonperforming assets defined as non-accrual loans plus foreclosed assets were 0.32% of total assets. Including accruing restructured and 90-days-past-due loans, reported nonperforming loans were $78.3 million. Impaired loans increased to $105.6 million from $99.2 million.
Material changes and management commentary
- Growth in interest income reflected higher average loan and securities balances and rising rates. The April 2016 hotel-franchise loan portfolio acquisition contributed to year-over-year comparisons; management also cited organic loan growth.
- Q2 net interest margin was two basis points below Q2 2016 as deposit and funding costs increased, partly offset by higher asset yields. Six-month margin improved two basis points year over year.
- Expense increases reflected salaries and benefits, professional fees and deposit costs as the company expanded infrastructure and deposits. The prior-year comparison included $3.7 million of acquisition/restructuring expense; none was recorded in the first half of 2017.
- The portfolio remains concentrated in commercial real estate: approximately 52% of loans, with lending concentrated in Arizona, Nevada and California. Management noted collateral and local real-estate conditions as important credit considerations.
- Management stated that modeled net interest income and economic-value-of-equity sensitivity remained within Board limits. A 100-basis-point rate decline modeled a 5.7% reduction in next-12-month net interest income; increases of 100, 200, 300 and 400 basis points modeled gains of 6.3%, 13.0%, 20.0% and 26.9%, respectively. These are scenario estimates based on assumptions, not forecasts.
Outlook, risks and contingencies
The filing provides no specific earnings, growth or margin guidance. Management described liquidity as adequate and said the parent could meet obligations for more than twelve months without new funding under its stated stress assumptions. Forward-looking results remain subject to economic and financial-market conditions, real-estate exposure, credit losses, geographic and commercial real-estate concentrations, deposit competition and withdrawals, interest-rate changes, operational and cybersecurity risks, regulatory requirements and execution of growth strategies.
Off-balance-sheet commitments to extend credit, credit-card commitments and financial guarantees, and standby letters of credit totaled $5.43 billion; these amounts are not equivalent to expected funding needs because commitments may expire unused. The related loss contingency was $5.9 million. Management said routine litigation was not expected to materially affect financial position, results or cash flows; no material pending legal proceedings were reported. The filing also notes that regulators may apply broader Special Mention classification parameters to technology loans, which could raise reported Special Mention balances without necessarily changing expected collectability.
Most important facts for investors to verify
- Whether loan and deposit growth can continue without materially increasing funding costs or weakening underwriting.
- Trends in CRE and technology-related credit quality, criticized loans, impaired loans and allowance adequacy.
- The persistence of margin and earnings growth after excluding acquisition-related comparison effects and non-GAAP adjustments.
- Liquidity and deposit stability, including reciprocal, brokered and other large balances, and the availability of contingent borrowing capacity.
- Capital ratios, interest-rate sensitivity assumptions and the potential effect of changes in rates, real-estate values and local economic conditions.