Western Alliance Bancorporation — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Unless otherwise indicated, figures are consolidated and in U.S. dollars; financial statement amounts are in millions. Western Alliance is a multi-bank holding company serving businesses and consumers primarily in Arizona, Nevada, and California. Centennial Bank was acquired April 30, 2013, so its results are included from that date.
Financial performance and condition
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Interest income | $89.3 | $77.8 | $172.4 | $155.3 |
| Net interest income | $82.2 | $70.8 | $158.4 | $140.9 |
| Net interest margin | 4.36% | 4.46% | 4.36% | 4.49% |
| Provision for credit losses | $3.5 | $13.3 | $8.9 | $26.4 |
| Net income | $34.0 | $14.0 | $55.0 | $25.3 |
| Net income available to common shareholders | $33.7 | $12.6 | $54.3 | $22.2 |
| Diluted EPS | $0.39 | $0.15 | $0.63 | $0.27 |
At June 30, total assets were $8.59 billion, loans held for investment net of allowance were $6.29 billion, deposits were $7.00 billion, and stockholders’ equity was $799.5 million. Loans increased $705.7 million and deposits $546.1 million from December 31, 2012. Total liabilities were $7.79 billion.
Six-month operating cash flow was $86.5 million; investing activities used $364.3 million and financing activities provided $456.1 million. Cash and cash equivalents ended the period at approximately $383.0 million. Management reported $808.9 million in liquid assets and judged liquidity adequate for expected cash needs over the next 90–120 days. Available borrowing capacity included $951.6 million at the FHLB and $559.2 million at the FRB.
Borrowings included $294.7 million of FHLB advances, $50.0 million drawn on revolving credit lines, $75.0 million of senior notes due 2015 bearing 10% interest, and $39.9 million of junior subordinated debt carried at fair value. The company also had $51.9 million in customer repurchase agreements and $129.5 million in securities sold short. The company-level total capital ratio was 12.0%, Tier 1 risk-based capital was 10.8%, and leverage was 9.9% at June 30. Western Alliance Bank’s total capital ratio was below the well-capitalized threshold at quarter-end; a $20 million capital infusion on August 2 raised it to 10.54% pro forma.
Changes versus comparable periods
- Q2 net income rose $20.1 million year over year. Net interest income increased 16%, largely from loan growth and acquired loans; the margin nevertheless narrowed 10 basis points. For the first half, net interest income rose 12% and margin declined 13 basis points.
- Lower credit-loss provision and improved credit indicators supported earnings: annualized Q2 net charge-offs fell to 0.17% from 1.11%. Nonaccrual loans were $82.9 million, down from $104.7 million at year-end 2012; total nonperforming assets were $251.1 million, down from $268.0 million.
- Reported earnings included a $10.0 million Centennial bargain-purchase gain. Q2 mark-to-market losses were $3.3 million, versus gains of $0.6 million a year earlier. Merger/restructuring expense was $2.6 million in Q2.
- Available-for-sale securities had $18.9 million of net unrealized losses for the first half, contributing to accumulated other comprehensive loss of $10.8 million at June 30, compared with accumulated other comprehensive income of $8.2 million at year-end.
Management commentary, risks, and unusual items
- Centennial was acquired for $57.5 million in cash. The company recorded $489.5 million of assets and assumed $422.0 million of liabilities; the resulting $10.0 million bargain-purchase gain is nonrecurring. Acquisition accounting values, including certain loans and foreclosed assets, remained subject to measurement-period adjustment.
- Management revised its allowance methodology in Q2 to use gross rather than net charge-offs in historical loss factors; it said this change increased the allowance by $7.2 million. The reported allowance was $96.3 million, or 1.50% of gross loans. Management cited improving credit quality, but stressed estimates may change with economic conditions, collateral values, or regulatory review.
- Credit exposure remains concentrated in commercial real estate, construction and development, and the company’s Nevada, Arizona, and California markets. Commercial real estate-related loans were approximately 59% of total loans. The filing also identifies interest-rate, funding, deposit-concentration, regulatory, cyber-security, and acquisition-integration risks.
- Unfunded credit commitments and letters of credit totaled $1.78 billion; the related loss-contingency liability was $1.8 million. Management stated routine litigation was not expected to have a material effect and reported no material pending legal proceedings.
- The MOU affecting Bank of Nevada was terminated effective July 9, 2013. The filing provides no formal earnings or financial guidance. Interest-rate sensitivity models showed net interest income down 1.6% under a 100-basis-point decline and up 1.6% under a 100-basis-point increase; management cautioned these are assumption-based estimates, not forecasts.
Important facts for investors to verify
- How much of reported earnings growth is sustainable excluding the $10.0 million acquisition gain and considering merger costs and fair-value marks.
- Centennial integration progress, final acquisition-date valuations, and the acquired loan portfolio’s credit performance.
- Whether the revised allowance methodology and $96.3 million reserve remain adequate as loans expand, especially given real-estate concentration and collateral sensitivity.
- Western Alliance Bank’s post-infusion capital position, as well as the effect of deposit mix, brokered deposits, and rising borrowing balances on liquidity and funding costs.
- The cash flow statement reports operating cash flow of $86.5 million, while the MD&A states $88.5 million; the filing text does not reconcile this difference. Verify the reported figure against the filed statements.