Western Alliance Bancorporation — Q1 2015 Form 10-Q
Business context and reporting period. The company is a Phoenix-based bank holding company operating Western Alliance Bank and regional banking divisions in Arizona, Nevada and California, alongside specialized business lending platforms. This unaudited filing covers the three months ended March 31, 2015; balance-sheet comparisons are with December 31, 2014, and operating results with Q1 2014. Amounts below are in U.S. dollars.
Key financial results and condition
| Metric | Q1 2015 / March 31, 2015 | Comparable period / prior date |
|---|---|---|
| Net interest income | $103.1 million | $90.8 million, Q1 2014 |
| Net interest margin | 4.35% | 4.41%, Q1 2014 |
| Provision for credit losses | $0.7 million | $3.5 million, Q1 2014 |
| Net income | $40.2 million | $31.1 million, Q1 2014 |
| Net income available to common stockholders | $40.0 million; diluted EPS $0.45 | $30.7 million; diluted EPS $0.35, Q1 2014 |
| Operating cash flow | $61.1 million | $40.0 million, Q1 2014 |
| Total assets | $11.25 billion | $10.60 billion, December 31, 2014 |
| Loans, before allowance | $8.82 billion | $8.40 billion, December 31, 2014 |
| Deposits | $9.66 billion | $8.93 billion, December 31, 2014 |
| Allowance for credit losses | $112.1 million; 1.27% of gross loans | $110.2 million; 1.31%, December 31, 2014 |
| Stockholders’ equity | $1.05 billion | $1.00 billion, December 31, 2014 |
Net interest income grew 13.6% year over year, primarily as average loan balances increased; the company reported a 6-basis-point decline in net interest margin. Pre-tax, pre-provision operating earnings, a non-GAAP measure, rose to $54.5 million from $44.4 million. The efficiency ratio on a tax-equivalent basis improved to 46.7% from 50.9%.
Net cash used in investing activities was $347.0 million, principally reflecting net loan funding. Financing activities provided $613.9 million, including a $731.4 million increase in deposits and a $122.7 million net reduction in borrowings. Cash and cash equivalents ended the quarter at $492.4 million, up from $164.4 million at year-end.
At March 31, total borrowings were $275.2 million, including $200.0 million of long-term FHLB advances and $75.2 million of short-term borrowings. The short-term balance included $58.3 million carrying value of 10% Senior Notes due September 2015. The company reported $1.08 billion in liquid assets and additional available credit of approximately $1.06 billion from the FHLB and $1.21 billion from the Federal Reserve. Management considered liquidity adequate for the next 90–120 days and parent-company liquidity adequate for more than 12 months under its stated assumptions.
Under Basel III, Western Alliance Bancorporation reported a 9.0% common equity Tier 1 ratio, 10.2% Tier 1 capital ratio and 11.3% total capital ratio. Western Alliance Bank reported 9.5%, 9.5% and 10.6%, respectively. Both were classified as well-capitalized under applicable regulatory standards.
Material changes versus prior periods
- Assets rose 6.1% from year-end; loans increased $420.3 million, or 5.0%, and deposits increased $731.3 million, or 8.2%.
- Common-stockholder earnings increased $9.3 million year over year. Lower credit-loss provision and higher net interest income contributed; non-interest expense also increased $4.5 million, primarily from salaries and benefits.
- Non-accrual loans declined to $60.7 million from $67.7 million at year-end. Total nonperforming loans declined to $136.1 million from $157.5 million. Nonperforming assets were $199.8 million, down from $214.7 million.
- Net recoveries were $1.2 million in Q1 2015 versus $0.3 million in Q1 2014. Management attributed the lower provision and reduced allowance ratio to improved asset quality and a loan mix shift toward higher-rated credits.
- Other assets acquired through foreclosure increased to $63.8 million from $57.2 million. Management reported 68 properties at quarter-end, compared with 67 at year-end.
- Return on average assets was 1.49%, versus 1.33% in Q1 2014. Return on average tangible common equity was 17.21%, versus 17.31%.
Outlook, risks and unusual items
- Acquisition: On March 9, 2015, the company agreed to acquire Bridge Capital Holdings. Consideration is 0.8145 Western Alliance common shares plus $2.39 cash per Bridge share. Closing was expected in 2015, subject to shareholder and regulatory approvals; the filing provides no earnings or integration guidance.
- Credit and concentration risks: Commercial real estate-related loans represented approximately 54% of total loans. Lending is concentrated in Arizona, Nevada and California, and collateral values depend significantly on real estate markets in those states. Management warns actual losses may exceed estimates.
- Funding and interest-rate risks: The filing identifies reliance on low-cost deposits, potential deposit withdrawals, brokered-deposit retention, access to FHLB/Federal Reserve funding, and rate competition as risks. Wholesale brokered deposits were $416.1 million at quarter-end. Management said modeled interest-rate exposure was within Board-approved limits; the simulations depend on assumptions and may not predict actual results.
- Debt maturity: The 10% Senior Notes, with $58.4 million remaining principal, mature in September 2015. The filing does not specify a refinancing or repayment plan.
- Commitments and contingencies: Off-balance-sheet commitments and letters of credit totaled $2.48 billion, including $2.39 billion of commitments to extend credit. Management stated routine litigation was not expected to have a material effect; no material pending legal proceedings were reported.
- Investment and valuation items: No securities impairment charges were recorded, and management did not consider securities other-than-temporarily impaired. AFS securities had $9.2 million of gross unrealized losses, primarily attributed to interest-rate movements, credit spreads and market liquidity; further impairment cannot be ruled out. Certain CDO securities and junior subordinated debt use Level 3 valuation inputs.
- The former affinity credit-card business was discontinued in 2014; Q1 2014 included a $0.7 million after-tax discontinued-operations loss, while Q1 2015 had none. No company-wide earnings or revenue guidance is provided in the supplied filing text.
- Other identified risks include cybersecurity and internet fraud, regulatory compliance, competition, employee retention, expansion execution, and environmental exposure from acquired properties. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Bridge Capital transaction approvals, closing timing, final consideration and expected impact on capital, earnings and integration costs.
- Repayment or refinancing arrangements for the $58.4 million remaining principal on the 10% Senior Notes due September 2015.
- Whether rapid loan and deposit growth is sustainable, including the mix and retention of brokered and other rate-sensitive deposits.
- Commercial real estate and geographic concentration trends, nonperforming assets, foreclosed-property valuations and the adequacy of the credit-loss allowance.
- Interest-rate sensitivity assumptions and effects on net interest margin, funding costs and deposit pricing as market rates change.
- Actual future credit losses, securities impairment, and use and realization of deferred tax assets and tax-credit investments.