Western Alliance Bancorporation — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Western Alliance is a Phoenix-based bank holding company serving businesses and other customers primarily in Arizona, Nevada and California, with national business lines. Figures below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Financial performance and condition
- Q2 earnings: Net income was $35.5 million and net income available to common stockholders was $35.2 million, or $0.40 per diluted share, compared with $34.1 million, $33.7 million and $0.39, respectively, in Q2 2013. For the first half, common income was $65.9 million, or $0.76 per diluted share, versus $54.3 million and $0.63.
- Revenue and margins: Q2 net interest income rose 14.3% to $93.9 million; net interest margin was 4.39%, up from 4.36% a year earlier. First-half net interest income was $184.7 million and margin was 4.40%, versus $158.4 million and 4.36%. Q2 non-interest income was $5.8 million, down $6.0 million year over year; first-half non-interest income was $10.6 million, also down $6.0 million.
- Expenses and credit costs: Q2 non-interest expense increased 8.0% to $52.4 million; first-half expense rose 7.0% to $102.2 million. Provision for credit losses was $0.5 million in Q2 and $4.0 million for the first half, compared with $3.5 million and $8.9 million in the respective 2013 periods.
- Cash flow: First-half operating cash flow was $60.5 million, down from $86.5 million. Investing activities used $601.8 million, primarily reflecting $719.7 million of net loan fundings; financing activities provided $615.0 million, including $631.6 million of deposit growth. Cash and cash equivalents ended the period at $379.3 million, up $73.8 million from year-end.
- Balance sheet and funding: Total assets were $10.02 billion, up 7.7% from December 31, 2013. Loans, net of deferred fees and costs, grew 10.9% to $7.54 billion; deposits increased 8.1% to $8.47 billion. Stockholders’ equity was $957.7 million, versus $855.5 million at year-end.
- Debt and liquidity: Other borrowings totaled $337.5 million, and junior subordinated debt at fair value was $42.7 million; customer repurchase agreements were $53.7 million. The company reported $1.13 billion in liquid assets and approximately $1.00 billion of available FHLB capacity and $1.05 billion of available FRB capacity. Management considered liquidity adequate for projected needs over the next 90–120 days and parent-company liquidity sufficient for more than 12 months under its stated stress assumptions.
- Capital: The company reported regulatory total capital of 12.5% of risk-weighted assets, Tier 1 capital of 11.2%, and a leverage ratio of 10.0% at June 30; it and the Bank met well-capitalized requirements. The non-GAAP tangible common equity ratio was 7.9%, compared with 7.4% at year-end.
Material changes versus comparable periods
- Loan growth and deposit growth were substantial during the first half. Higher loan balances drove much of the increase in interest income; larger average interest-bearing deposits also increased interest expense.
- Credit quality indicators improved from year-end: nonaccrual loans declined to $64.3 million from $75.7 million, nonperforming assets to $216.3 million from $233.5 million, and nonaccrual loans to gross loans to 0.85% from 1.11%. The allowance for credit losses was $105.9 million, or 1.40% of gross loans, versus $100.1 million at year-end.
- Q2 2013 included a $10.0 million bargain purchase gain from the Centennial Bank acquisition; no comparable gain was recorded in 2014. This largely explains lower reported non-interest income despite improved fair-value results.
- The company reclassified all $275.3 million of HTM securities to AFS after its investment committee changed its intent regarding potential CDO sales. The transfer generated a $9.0 million after-tax unrealized gain in accumulated other comprehensive income.
- Effective January 1, 2014, the company adopted new accounting for low-income housing tax credit investments, retrospectively adjusting prior-period presentation. It also reorganized reporting segments after consolidating its bank subsidiaries; prior segment results were not recast and are not directly comparable.
Outlook, management commentary, risks and unusual items
- The filing provides no specific numerical earnings or growth guidance. Management highlighted continued loan and deposit growth, improved credit quality, and higher pre-tax, pre-provision operating earnings, a non-GAAP measure: $47.4 million in Q2 versus $40.1 million, and $91.8 million for the first half versus $75.2 million.
- Key risks include the concentration of commercial real estate, construction and commercial lending; geographic exposure to Arizona, Nevada and California; potential credit losses exceeding estimates; reliance on low-cost deposits and access to wholesale borrowing; interest-rate and market volatility; regulatory requirements; and execution risks from growth and the bank consolidation.
- Commercial real estate-related loans were approximately 55% of total loans. Potential problem loans totaled $133.0 million, up from $110.6 million at year-end. Management noted that allowance estimates depend on collateral values and economic conditions and may be revised; regulators may also require additional reserves.
- The discontinued affinity credit card business generated a net loss of $0.5 million in Q2 and $1.2 million in the first half. Routine litigation was reported as not expected to have a material financial impact; no material pending legal proceedings were disclosed.
- Other notable events: the parent reincorporated from Nevada to Delaware on May 29, 2014; the company established a $100 million at-the-market common stock program and sold 115,866 shares for $2.8 million gross proceeds in the first half; and WAEF was contributed to the Bank effective July 1, 2014.
Important facts for investors to verify
- Whether loan growth, particularly in commercial real estate and national business lines, remains consistent with underwriting standards and funding capacity.
- Whether the improvement in nonaccruals and net recoveries persists, and whether the $105.9 million allowance adequately reflects portfolio and collateral risks.
- The effect of interest-rate changes on net interest income and economic value of equity; management’s simulations depend on assumptions and are not forecasts.
- The quality, liquidity and valuation of securities, including the reclassified HTM portfolio and securities with unrealized losses; management reported no other-than-temporary impairment at quarter-end.
- The durability of earnings excluding the 2013 acquisition gain and fair-value changes, and the impact of rising compensation, legal, data-processing and other operating costs.
- Deposit composition and concentration, including CDARS/ICS and brokered deposits, alongside the availability of contingent borrowing capacity.