Western Alliance Bancorporation — Q1 2013 Form 10-Q
Business context and reporting period. Western Alliance Bancorporation is a bank holding company operating primarily in Arizona, Nevada, and California through Bank of Nevada, Western Alliance Bank, and Torrey Pines Bank, with equipment finance and other activities. This unaudited filing covers the quarter ended March 31, 2013; income and cash-flow comparisons are against Q1 2012, and balance-sheet comparisons are generally against December 31, 2012. Amounts below are in millions unless noted.
Financial performance and position
| Metric | Q1 2013 / March 31, 2013 | Comparable period / prior date |
|---|---|---|
| Interest income | $83.1 | $77.4 in Q1 2012 |
| Net interest income | $76.2 | $70.1 in Q1 2012 |
| Net interest margin | 4.36% | 4.53% in Q1 2012 |
| Provision for credit losses | $5.4 | $13.1 in Q1 2012 |
| Non-interest income | $3.9 | $5.9 in Q1 2012 |
| Non-interest expense | $46.9 | $46.9 in Q1 2012 |
| Net income / income available to common shareholders | $21.0 / $20.6; diluted EPS $0.24 | $11.3 / $9.5; diluted EPS $0.12 in Q1 2012 |
| Total assets | $8,174 | $7,623 at December 31, 2012 |
| Loans held for investment, before allowance | $5,827 | $5,678 at December 31, 2012 |
| Total deposits | $6,735 | $6,455 at December 31, 2012 |
| Cash and cash equivalents | $556 | $205 at December 31, 2012 |
| Stockholders’ equity | $781 | $760 at December 31, 2012 |
Cash flow. The consolidated cash-flow statement reports $35.9 million provided by operating activities, $183.0 million used in investing activities, and $498.8 million provided by financing activities, producing a $351.7 million increase in cash and cash equivalents. The MD&A separately states operating cash flow of $66.7 million for Q1 2013; the filing text does not reconcile this discrepancy.
Credit and asset quality. The allowance for credit losses was $95.5 million, or 1.63% of gross loans. Annualized net charge-offs to average loans were 0.38%, versus 1.18% in Q1 2012. Nonaccrual loans were $93.7 million, down from $104.7 million at year-end; nonperforming assets were $267.8 million, approximately 2.1% of assets. Troubled debt restructurings were $94.5 million, up from $84.6 million at year-end. Commercial real estate-related loans represented about 57% of total loans.
Debt and liquidity. The company reported a $200 million FHLB advance due January 2018 at 1.04%, a $20 million revolving-line balance, $75 million principal amount of 10% senior notes due 2015, and junior subordinated debt carried at $36.7 million fair value (unpaid principal of $66.5 million). Available borrowing capacity was approximately $993 million at the FHLB and $609 million at the Federal Reserve; liquid assets were reported at $903 million. Management considered liquidity adequate for anticipated cash needs over the next 90–120 days. The company and subsidiaries met regulatory capital requirements and were classified as well-capitalized; company total risk-based capital was 12.6% and Tier 1 leverage was 10.1%.
Material changes versus comparable periods
- Net income nearly doubled year over year, driven chiefly by higher net interest income and a lower credit-loss provision. Return on average assets rose to 1.08% from 0.67%; return on average equity rose to 10.92% from 6.97%.
- Net interest income increased 8.7%, while margin declined 17 basis points. Loan growth and lower deposit funding costs supported income, but lower loan yields weighed on margin.
- Non-interest income fell $2.0 million, principally reflecting the absence of investment advisory fees after the 2012 exit from that business and $0.9 million of affordable-housing investment amortization.
- Loans grew about $149 million from year-end on the balance-sheet presentation; deposits grew about $280 million. Commercial and industrial and commercial real estate lending drove loan growth.
- Net charge-offs and nonaccrual loans improved, but TDR balances increased. Total nonperforming assets were broadly unchanged from year-end.
Outlook, commentary, risks, and unusual items
- No specific earnings or financial guidance is provided. Management said the results of an interim period are not necessarily indicative of full-year results.
- On April 30, 2013, after quarter-end, the company completed its acquisition of Centennial Bank for $57.5 million and merged it into Western Alliance Bank. Centennial’s assets and liabilities are not included in March 31 balances. Management said the purchase was below tangible book value and expected to be accretive to capital at closing; the purchase accounting valuation remained in process.
- Bank of Nevada remained under a regulatory memorandum of understanding requiring enhanced oversight and prior regulatory approval for dividends to the parent and certain other actions. The company stated the bank was in compliance.
- Key disclosed risks include concentrated commercial real estate and geographic exposures, potential credit losses, interest-rate and funding risks, dependence on low-cost deposits and access to secured borrowing, regulatory requirements, and execution of expansion plans. Management noted that real-estate collateral values and economic conditions in its markets affect credit-loss estimates.
- The company entered a $132.6 million Treasury short/repo position during Q1 to mitigate modest liability-sensitive interest-rate exposure; management said it reduced quarterly margin by about five basis points. Securities unrealized losses were attributed mainly to interest rates, credit spreads, and liquidity; no new other-than-temporary impairment charges were recorded in the quarter.
- Commitments to extend credit, credit-card commitments and guarantees, and standby letters of credit totaled $1.58 billion. Routine litigation was not expected by management to have a material effect. The company also had $74.8 million invested in low-income housing partnerships and $46.6 million of related future unconditional equity commitments.
Most important facts for investors to verify
- Reconcile the filing’s conflicting Q1 operating cash-flow figures: $35.9 million in the cash-flow statement versus $66.7 million in MD&A.
- Track whether credit improvement continues, especially TDR growth, commercial real estate concentrations, criticized loans, and the adequacy of the $95.5 million allowance.
- Review Centennial’s final acquisition accounting, integration costs, realized capital effect, and contribution to earnings after closing.
- Assess margin sensitivity to rates and funding mix, including the Treasury short transaction, higher long-term borrowings, and deposit composition.
- Monitor Bank of Nevada’s regulatory memorandum, dividend restrictions, and compliance with its elevated capital requirements.