Western Alliance Bancorporation — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Western Alliance Bancorporation is a Phoenix-based bank holding company operating Western Alliance Bank and specialized lending businesses across Arizona, Nevada, California, and national markets.
Financial performance and position
| Metric | Q2 2015 / June 30, 2015 | Comparable period / prior date |
|---|---|---|
| Net interest income | $108.7 million | $93.9 million in Q2 2014 |
| Net income | $34.7 million | $35.5 million in Q2 2014 |
| Net income available to common stockholders | $34.5 million; diluted EPS $0.39 | $35.2 million; diluted EPS $0.40 in Q2 2014 |
| Six-month net income available to common stockholders | $74.5 million; diluted EPS $0.84 | $65.9 million; diluted EPS $0.76 in first half 2014 |
| Net interest margin | 4.41% | 4.39% in Q2 2014; 4.35% in Q1 2015 |
| Total assets | $13.47 billion | $10.60 billion at December 31, 2014 |
| Total loans, including held-for-sale loans | $10.36 billion | $8.40 billion at December 31, 2014 |
| Total deposits | $11.41 billion | $8.93 billion at December 31, 2014 |
| Stockholders’ equity | $1.51 billion | $1.00 billion at December 31, 2014 |
| Regulatory capital | WAL: 9.1% common equity Tier 1; 12.2% total capital | Both WAL and the bank exceeded applicable well-capitalized thresholds |
Q2 non-interest income was a loss of $2.2 million, primarily reflecting a $7.7 million non-cash fair-value loss on junior subordinated debt. Non-interest expense rose 17.2% year over year to $61.2 million, including $7.8 million of acquisition and restructuring expense. Management reported non-GAAP operating net income of $43.5 million, or $0.49 per share, excluding specified items and Bridge’s operating performance; this is not GAAP net income. Pre-tax, pre-provision operating earnings were $59.9 million versus $47.4 million in Q2 2014. The reported efficiency ratio was 44.6% on management’s operating, tax-equivalent basis, versus 49.3% a year earlier.
For the first six months, operating cash flow was $77.0 million, investing cash flow was negative $95.5 million, and financing cash flow was positive $612.5 million. Ending cash and cash equivalents were $758.3 million, substantially affected by cash acquired in the Bridge transaction.
Material changes and acquisition
- On June 30, 2015, the company completed its acquisition of Bridge Capital Holdings and Bridge Bank. The transaction added approximately $1.45 billion of loans and $1.74 billion of deposits; Bridge’s operating results begin appearing in Western Alliance’s income statement on July 1, 2015.
- Consideration was approximately $467.6 million, including 12.45 million Western Alliance shares and $36.5 million cash. Preliminary purchase accounting recorded $259.6 million of goodwill and $15.0 million of identifiable intangible assets; substantially all acquired fair values remained subject to adjustment during the measurement period.
- Reported asset, loan, and deposit increases from year-end primarily reflect the acquisition. Management cited $95 million of organic loan growth in Q2 and flat organic deposits during the quarter; first-half organic growth was approximately $515 million in loans and $734 million in deposits.
- Allowance for credit losses was $115.1 million, or 1.11% of gross loans, compared with $110.2 million, or 1.31%, at year-end. First-half provision was $0.7 million versus $4.0 million a year earlier, and the company recorded net recoveries.
- Nonperforming loans were $147.9 million, down from $157.5 million at year-end. Non-accrual loans were $59.4 million, or 0.58% of gross loans, versus $67.7 million, or 0.81%, at year-end. Nonperforming assets were $207.2 million.
Debt, liquidity, risks and outlook
- The company issued $150 million of subordinated debt on June 29, 2015, due 2025, with a 5.00% fixed rate through June 2020 and a subsequent floating rate. It also had $58.4 million of 10% senior notes maturing in September 2015. Other borrowings were $69.4 million; qualifying debt was $208.4 million.
- Management reported $1.52 billion of liquid assets and available credit of approximately $1.53 billion from the FHLB and $1.63 billion from the Federal Reserve, in addition to $170 million of correspondent-bank and federal-funds credit lines. Management considered liquidity adequate for expected near-term needs and the parent’s standalone liquidity adequate for over 12 months.
- Off-balance-sheet commitments to extend credit, credit-card commitments and financial guarantees, and standby letters of credit totaled $3.36 billion. The filing notes that not all commitments are expected to be drawn.
- Commercial real estate-related loans represented approximately 51% of total loans. Management identified credit and collateral valuation risk, particularly given real-estate and geographic concentrations in Arizona, Nevada, and California. Other disclosed risks include deposit outflows and reliance on low-cost funding, interest-rate and market volatility, cybersecurity and third-party infrastructure, competition, regulation, and integration and expansion risks.
- The filing provides no specific earnings or growth guidance. Management stated that interest-rate exposure was within Board-approved limits. Its modeled next-12-month net interest income increased 4.1% under an immediate 100-basis-point rate increase and decreased 1.9% under a 100-basis-point decrease; actual results could differ as assumptions and customer behavior change.
- Management reported no material pending legal proceedings and no material changes to previously disclosed risk factors. The filing states disclosure controls were effective; Bridge was excluded from the quarter’s internal-control assessment under the applicable acquired-business guidance.
Important facts for investors to verify
- How Bridge integration, preliminary purchase accounting, goodwill, and expected synergies develop after its results enter the income statement.
- Whether organic loan and deposit trends continue, and how deposit composition, brokered deposits, and acquisition-related funding affect liquidity costs.
- Credit performance of the expanded loan portfolio, especially CRE and construction exposure, acquired-loan credit marks, and trends in criticized, impaired, and nonperforming loans.
- Repayment or refinancing of the $58.4 million senior notes due September 2015 and the company’s resulting funding costs and capital position.
- How much reported earnings variability reflects recurring operations versus fair-value changes, acquisition costs, and other non-GAAP adjustments.