Western Alliance Bancorporation (WAL) is a diversified commercial bank that has demonstrated consistent growth and profitability over the years. The company reported annual net income of $722.4 million and annual revenue of $4.33 billion in its latest fiscal year. However, the company's annual operating cash flow was -$328.6 million, and its annual free cash flow was -$442.9 million.
Business Overview
Western Alliance Bancorporation is headquartered in Phoenix, Arizona, and operates through its wholly-owned banking subsidiary, Western Alliance Bank (WAB). WAB provides a full spectrum of customized loan, deposit, and treasury management capabilities, including 24/7 funds transfer and other digital payment offerings. The company operates several full-service banking divisions, including Alliance Bank of Arizona (ABA), Bank of Nevada (BON), First Independent Bank (FIB), Bridge Bank, and Torrey Pines Bank (TPB).In addition to its traditional banking services, Western Alliance also provides an array of specialized financial services across the country, including mortgage banking services through its subsidiary, AmeriHome, and digital payment services for the class action legal industry. The company's non-bank subsidiaries include CS Insurance Company (CSI), a captive insurance company, and Western Alliance Trust Company, N.A. (WATC), which provides corporate trust services and levered loan administration solutions.
Geographic Breakdown and Revenue Diversification
Western Alliance's operations are primarily concentrated in the western United States, with a strong presence in Arizona, California, and Nevada. The company has been successful in diversifying its revenue streams, with its commercial banking and consumer-related segments contributing significantly to its overall performance.In the latest quarter, the company's Commercial segment, which provides commercial banking and treasury management products and services to small and middle-market businesses, as well as specialized banking services to sophisticated commercial institutions and investors within niche industries, accounted for 49% of the company's total revenue. The Consumer Related segment, which offers both commercial banking services to enterprises in consumer-related sectors and consumer banking services, such as residential mortgage banking, contributed 40% of the total revenue.
Financials
Western Alliance has demonstrated consistent financial performance, with a strong focus on asset quality and risk management. The company's net interest margin (NIM) was 3.63% in the latest quarter, reflecting the company's ability to effectively manage its interest rate risk and deploy its assets into higher-yielding investments.The company's loan portfolio is well-diversified, with a focus on commercial and industrial (C&I) loans, which accounted for 39% of the total loan portfolio as of the latest quarter. The company's non-performing assets ratio was 0.53% as of the end of the latest quarter, indicating a relatively low-risk loan portfolio.
Western Alliance's capital position remains strong, with a Common Equity Tier 1 (CET1) ratio of 11.0% as of the latest quarter, well above the regulatory minimum. The company's tangible common equity ratio was 6.8%, providing a solid cushion to absorb potential losses and support future growth.
Liquidity
Western Alliance maintains a strong liquidity position, with unencumbered high-quality liquid assets (HQLA) comprising 53% of its securities and cash as of the latest quarter. The company's deposit base is also well-diversified, with non-interest-bearing demand deposits accounting for 28% of total deposits.The company has access to various funding sources, including the Federal Home Loan Bank (FHLB) and the Federal Reserve Bank (FRB), as well as repurchase agreements and brokered deposits. As of the latest quarter, the company had additional available credit with the FHLB of approximately $8.0 billion.
Outlook
For the full year 2024, Western Alliance expects loans to grow by $4.5 billion, compared to its previous guidance of $4.0 billion. The company also expects deposits to grow by $14 billion, which is $3 billion above its previous forecast. The company's net interest income is now expected to grow 9% to 14% from the Q4 2023 annualized jumping-off point, with the net interest margin expected to remain in the 360 basis point area for the remainder of the year.Non-interest income is expected to increase 15% to 25% from adjusted 2023 baseline levels, driven by growth in commercial banking fees and incremental improvement in other fee segments. Non-interest expense, inclusive of the earnings credit rate (ECR)-related deposit costs, is now expected to rise 9% to 13% from an annualized adjusted Q4 baseline of $1.74 billion, primarily due to the greater ECR-related deposits.
Asset quality is expected to normalize from historic lows, with net charge-offs expected to remain low by industry standards at 15 to 20 basis points of average loans for the year.
Risks and Challenges
While Western Alliance has demonstrated strong financial performance, the company is not without its risks and challenges. The company's significant exposure to the commercial real estate (CRE) market, which accounted for 32% of its total loan portfolio as of the latest quarter, could pose a risk if the CRE market were to experience a downturn.Additionally, the company's reliance on its mortgage banking business, which contributed 13% of its total revenue in the latest quarter, could expose it to volatility in the housing market and interest rate fluctuations.
The company's continued growth and expansion into new business lines and geographic regions may also present integration and execution risks that the management team will need to navigate effectively.