Western Alliance Bancorporation — Q3 2013 Form 10-Q
Business and period: Regional bank holding company serving businesses and consumers through banks in Arizona, Nevada and California. This unaudited filing covers the quarter and nine months ended September 30, 2013; comparisons are to 2012 unless otherwise noted. Centennial Bank was acquired April 30, 2013, so its results are included from that date.
Financial results and condition
Amounts below are in millions except per-share data, percentages and where noted.
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net interest income | $84.6 | $71.9 | $242.9 | $212.8 |
| Provision for credit losses | $0 | $8.9 | $8.9 | $35.3 |
| Noninterest income | $2.6 | $7.0 | $17.4 | $20.3 |
| Noninterest expense | $49.7 | $47.5 | $145.1 | $139.9 |
| Net income | $28.2 | $15.5 | $83.2 | $40.7 |
| Net income available to common shareholders | $27.8 | $15.1 | $82.1 | $37.3 |
| Diluted EPS | $0.32 | $0.18 | $0.95 | $0.45 |
| Net interest margin | 4.41% | 4.41% | 4.38% | 4.47% |
| Return on average assets | 1.30% | 0.85% | 1.35% | 0.77% |
| Return on average equity | 13.63% | 8.95% | 14.01% | 8.09% |
At September 30, 2013, total assets were $8.92 billion, gross loans $6.52 billion, deposits $7.28 billion and stockholders’ equity $826.3 million. Against December 31, 2012, assets increased 17%, gross loans 14% and deposits 13%. The allowance for credit losses was $97.9 million, or 1.50% of gross loans, versus $95.4 million and 1.67% at year-end.
Nine-month cash flows: operating activities provided $123.8 million; investing activities used $527.5 million; financing activities provided $708.1 million. Cash and cash equivalents ended the period at $509.0 million, up from $204.6 million at year-end.
Borrowings included $394.1 million of other borrowings and $39.4 million of junior subordinated debt; customer repurchase agreements were $55.5 million and securities sold short were $126.7 million. Long-term debt included a $200 million FHLB advance at 1.04%, due in 2018, and approximately $74 million of senior notes bearing 10% due in 2015. The company reported a 10.0% leverage ratio and 12.5% total capital-to-risk-weighted-assets ratio, above stated well-capitalized thresholds.
Management reported $1.04 billion of liquid assets at quarter-end and available borrowing capacity of approximately $1.05 billion at the FHLB and $598.3 million at the Federal Reserve. It considered liquidity adequate for expected near-term needs and stated the parent company could operate for over 12 months without new funding under its stated assumptions.
Material changes and notable items
- Q3 net interest income rose 17.5%, driven mainly by loan growth; the margin was unchanged year over year. Nine-month margin declined 9 basis points, to 4.38%, as asset yields fell, partly offset by lower funding costs.
- Earnings improved substantially, supported by higher net interest income and lower credit-loss provision. The nine-month results also included a $10.0 million Centennial bargain purchase gain; acquisition and restructuring costs were $3.8 million for the nine months. These items affect comparability.
- Q3 noninterest income fell 62% year over year, principally reflecting a swing from a securities-sale gain to a loss. Nine-month noninterest income also reflected securities and mark-to-market losses, partly offset by the Centennial gain.
- Credit indicators generally improved: nonaccrual loans were $76.6 million versus $104.7 million at year-end; nonperforming assets were $246.0 million versus $268.0 million. Net recoveries were $1.5 million in Q3, compared with net charge-offs of $9.0 million in Q3 2012. Troubled debt restructured loans increased to $87.4 million from $84.6 million.
- Commercial real estate-related loans represented approximately 59% of total loans, and lending is concentrated in Nevada, Arizona and California. Management changed its allowance methodology in Q2 2013 to use gross charge-offs rather than net charge-offs, increasing the allowance by $7.2 million at that time.
- Centennial was acquired for $57.5 million cash; the transaction added $351.5 million of loans at acquisition-date fair value and generated the bargain purchase gain. Purchase accounting estimates remained subject to measurement-period adjustment.
- The discontinued PartnersFirst credit-card business had $25.4 million of loans held for sale at quarter-end. Those receivables were sold October 1, 2013, with no significant gain or loss.
- Bank of Nevada’s regulatory MOU was terminated effective July 9, 2013. The company had applied to consolidate its three bank subsidiaries into one charter. It paid no common dividends during the periods shown.
Outlook, risks and contingencies
The filing provides no specific earnings or financial guidance. Management said the company’s interest-rate risk was within board-approved limits. Its model projected net interest income 0.6% above base under an immediate 100-basis-point rise and 1.5% below base under a 100-basis-point decline; management cautioned that assumptions and actual results may differ.
Principal disclosed risks include economic and financial-market conditions; concentration in real estate, commercial real estate and commercial and industrial lending; credit losses and collateral values; geographic concentration; interest-rate and funding risk, including dependence on low-cost deposits and access to FHLB/Federal Reserve borrowing; regulatory requirements; and execution, cost-control, cybersecurity and other operational risks. Unfunded commitments and letters of credit totaled $2.01 billion, with a $2.0 million related loss contingency. Management said routine litigation was not expected to have a material effect; no material pending legal proceedings were reported.
Important facts for investors to verify
- How much of reported earnings growth is sustainable after excluding the Centennial bargain purchase gain, provision changes and other unusual items?
- Whether credit quality and reserve adequacy remain sound as loans grow, especially in concentrated real estate markets; track TDRs, criticized loans, charge-offs and collateral values.
- Whether deposit growth and liquidity remain durable, including the composition of brokered, CDARS and ICS deposits and use of secured borrowing capacity.
- How Centennial integration, merger costs and any final purchase-accounting adjustments affect future results.
- Whether the three-bank consolidation proceeds and whether regulatory capital, interest-rate sensitivity and the PartnersFirst exit develop as described.