WESTERN ALLIANCE BANCORPORATION annual report, FY2013

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Western Alliance Bancorporation — FY2013 Form 10-K

Business context and reporting period

Western Alliance Bancorporation (WAL) is a Phoenix-based bank holding company serving businesses and other customers primarily in Arizona, Nevada and California. This filing covers the fiscal year ended December 31, 2013; the quarterly data also report fourth-quarter results. On December 31, 2013, the company consolidated its three bank subsidiaries under the WAB Consolidated charter. The former banks were to continue as regional divisions in 2014.

Financial results and condition

  • Earnings: Net income was $114.5 million, including $113.1 million available to common shareholders; diluted EPS was $1.31. FY2012 net income was $72.8 million and diluted EPS was $0.83. Fourth-quarter 2013 net income was $31.4 million, or $31.0 million available to common shareholders; diluted EPS was $0.36.
  • Interest income and margins: Net interest income rose 14.7% to $332.9 million from $290.3 million. Net interest margin was 4.39%, down 10 basis points from 4.49%, as loan yields eased and funding costs increased. The non-GAAP efficiency ratio improved to 52.5% from 55.4%.
  • Credit costs and asset quality: Provision for credit losses declined to $13.2 million from $46.8 million; net charge-offs fell to $8.6 million from $50.6 million. Nonaccrual loans were $75.7 million, or 1.11% of gross loans, versus $104.7 million, or 1.83%, a year earlier. Nonperforming assets were $233.5 million versus $268.0 million. The allowance was $100.1 million, equal to 1.47% of loans.
  • Balance-sheet growth: Assets increased 22.1% to $9.31 billion. Loans, net of deferred fees and costs, grew 19.1% to $6.80 billion; deposits rose 21.4% to $7.84 billion. Commercial and industrial loans were 32.8% of loans, and CRE-related loans, including construction and land development, were approximately 58%.
  • Liquidity and funding: Cash and cash equivalents were $305.5 million. Management reported $1.25 billion of liquid assets, including $938.0 million of unpledged marketable securities, and considered liquidity adequate for the next 90–120 days. Available FHLB and Federal Reserve borrowing capacity was approximately $1.39 billion and $588.2 million, respectively. Deposits funded most assets; 28.1% of deposits were non-interest-bearing.
  • Debt and capital: Other borrowings were $341.1 million, customer repurchase agreements $71.2 million, and junior subordinated debt at fair value $41.9 million. WAL’s total risk-based capital ratio was 12.4%, Tier 1 risk-based ratio 11.1%, and leverage ratio 9.8%; the bank subsidiary’s respective ratios were 11.7%, 10.5%, and 9.5%. Both met the filing’s well-capitalized thresholds.
  • Cash flow: Operating activities provided $165.0 million; investing activities used $1.17 billion, principally reflecting loan growth and securities purchases; financing activities provided $1.11 billion, largely from deposit growth. Cash and cash equivalents increased $100.9 million.

Material changes versus FY2012

  • Common earnings rose to $113.1 million from $69.0 million. Pre-tax, pre-provision operating earnings, a non-GAAP measure, increased to $161.2 million from $134.0 million.
  • Loan and deposit growth reflected both organic expansion and the April 2013 acquisition of Centennial. WAL paid $57.5 million and recognized a $10.0 million bargain purchase gain.
  • Reported non-interest income fell to $17.2 million from $44.7 million, partly because the 2012 comparison included a $17.6 million Western Liberty bargain purchase gain. 2013 also included a $6.5 million net mark-to-market loss and $1.2 million net securities-sale loss.
  • Non-interest expense increased 3.9% to $196.3 million, including $5.8 million of merger/restructuring expense. Better real-estate recoveries and gains on repossessed-asset sales offset some expense growth.
  • Accumulated other comprehensive income moved from positive $8.2 million to a loss of $21.5 million, primarily reflecting unrealized losses on available-for-sale securities.
  • The informal regulatory MOU covering Bank of Nevada was terminated effective July 9, 2013.

Outlook, commentary, risks and unusual items

The filing provides no quantified earnings or growth guidance. Management emphasized continued loan and deposit growth and improved credit quality. It also noted that Nevada real estate conditions remained weaker than in Arizona and California, and that weakness in Nevada loan exposures could persist through 2014.

Key risks include the concentration in real-estate-related and commercial lending, exposure to regional economies, potential losses exceeding the allowance, deposit competition, and sensitivity of earnings to interest rates. The filing also highlights operational and integration risks from the bank consolidation, evolving regulation, cybersecurity and third-party service-provider risks. At $9.31 billion of assets, the company was approaching the $10 billion threshold that can trigger additional regulatory requirements, including stress testing and expanded consumer oversight.

Other notable items include the $10.0 million Centennial bargain purchase gain, the $5.6 million fair-value loss on junior subordinated debt, and the 18.0% effective tax rate, which benefited from low-income housing tax credits and other tax items. The company reported no material pending legal proceedings, no common dividends, and no common-share repurchases in 2013. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.

Important facts for investors to verify

  1. Whether credit quality and charge-offs continue to improve, and whether the $100.1 million allowance remains adequate as the loan portfolio grows.
  2. The extent to which earnings growth reflects recurring banking operations versus acquisition gains, fair-value movements, tax benefits and other unusual items.
  3. Integration progress following the charter consolidation, including any resulting costs, customer attrition or control and reporting issues.
  4. Loan and deposit growth quality, CRE and geographic concentrations, and the company’s ability to maintain low-cost funding and liquidity.
  5. Effects of interest-rate changes on net interest margin, securities values and capital, along with the implications of approaching $10 billion in assets.