Western Alliance Bancorporation — Q1 2019 Form 10-Q
Business and period: Western Alliance Bancorporation is a Phoenix-based bank holding company operating Western Alliance Bank and regional banking divisions, alongside specialized national business lines. This unaudited filing covers the three months ended March 31, 2019; comparisons are with Q1 2018 unless otherwise noted.
Financial results and position
- Earnings: Net income was $120.8 million, up 19.7% from $100.9 million. Diluted EPS was $1.16 versus $0.96. Return on average assets was 2.12% versus 2.02%; return on average tangible common equity was 20.49% versus 20.74%.
- Revenue and margins: Net interest income rose 15.5% to $247.3 million. Net interest margin increased to 4.71% from 4.66%. Non-interest income was $15.4 million, up $3.8 million, including $2.8 million of unrealized fair-value gains versus a $1.1 million loss a year earlier. Non-interest expense rose 15.0% to $112.9 million. The reported efficiency ratio was 42.0%; the operating efficiency ratio was 42.4% versus 42.7%.
- Credit costs and asset quality: Provision for credit losses declined to $3.5 million from $6.0 million. Annualized net charge-offs were 0.03% of average loans versus 0.04%. Nonperforming loans increased to $96.4 million from $64.8 million at year-end; nonaccrual loans rose to $43.9 million from $27.7 million. The allowance was $155.0 million, or 0.86% of gross loans, compared with 0.93% at year-end.
- Balance sheet and funding: Total assets were $23.79 billion, up 3.0% from December 31, 2018. Loans were $18.12 billion, up $406.1 million (2.3%); deposits were $20.21 billion, up $1.03 billion (5.4%). CRE-related loans represented approximately 49% of total loans. Wholesale brokered deposits were $710.3 million.
- Cash flow and liquidity: Operating cash flow was $151.3 million; investing cash outflow was $351.5 million; financing cash inflow was $487.2 million. Cash, cash equivalents and restricted cash ended at $785.6 million. Management reported $3.11 billion in liquid assets and said liquidity was adequate for expected cash needs over the next 90–120 days. Available credit included $955 million in correspondent-bank lines, $2.97 billion from the FHLB and $1.32 billion from the FRB; no balances were outstanding on those lines at quarter-end.
- Debt and capital: There were no other borrowings outstanding at March 31; qualifying debt was $374.0 million and customer repurchase agreements were $15.1 million. The company reported a 10.7% Common Equity Tier 1 ratio, 13.2% total capital ratio and 10.3% tangible common equity ratio. The company and bank exceeded well-capitalized thresholds.
Material changes and notable items
- Year-over-year net interest income growth reflected higher average earning assets and loan yields, partly offset by rising funding costs. Interest expense increased 114.1%; average cost of interest-bearing deposits rose 62 basis points.
- Loan growth was led by residential real estate, construction and land development, and non-owner-occupied CRE. Secondary-market loan purchases were $530.5 million, compared with $141.5 million in Q1 2018.
- Impaired loans rose to $143.4 million from $112.3 million at year-end; accruing troubled debt restructurings increased to $52.5 million from $36.5 million. Management reported no TDR payment defaults during the quarter.
- The company repurchased 940,915 shares for $37.9 million under its $250 million repurchase authorization; $176.4 million remained available at March 31.
- Adoption of lease accounting on January 1, 2019 added operating lease assets and liabilities; subsequent office lease extension contributed to quarter-end balances of $72.8 million and $77.8 million, respectively. Adoption did not materially affect earnings or cash flows.
Outlook, risks and contingencies
- The filing provides no specific earnings or balance-sheet guidance. Management noted that interim results are not necessarily indicative of full-year results.
- In interest-rate simulations, projected net interest income fell 6.5% under a 100-basis-point rate decrease, outside the company’s stated guideline. The Board and ALCO accepted the breach; management attributed it to floating-rate asset sensitivity and slower deposit-cost repricing. Modeled results depend on assumptions and may differ from actual outcomes.
- Key disclosed risks include real-estate and geographic concentration, credit losses exceeding estimates, dependence on low-cost deposits and external borrowing capacity, interest-rate and LIBOR uncertainty, competition, cybersecurity and third-party risks, and regulatory and operational risks. CRE exposure was approximately 49% of loans, with substantial lending in Arizona, Nevada and California.
- Management said routine litigation was not expected to materially affect financial position, results or cash flows; no material pending legal proceedings or material changes to previously disclosed risk factors were reported. The company was implementing the expected-credit-loss standard, effective for it in 2020.
Important facts for investors to verify
- Whether the rise in nonperforming and impaired loans—particularly C&I and Technology & Innovation exposures—continues, and whether the allowance remains adequate as loan balances grow.
- Deposit pricing, deposit mix and brokered-deposit levels, given the sharp increase in interest expense and the company’s reliance on deposits for funding.
- Whether net interest margin and earnings remain resilient if rates decline, given the disclosed 100-basis-point downside sensitivity.
- The durability of reported earnings after excluding fair-value gains and other potentially variable non-interest items.
- Use of the remaining share-repurchase authorization and the effect of repurchases on capital and tangible book value.