WESTERN ALLIANCE BANCORPORATION quarterly report, Q2 FY2016

Business context and reporting period

Western Alliance Bancorporation is a Phoenix-based bank holding company serving Arizona, Nevada, and California through regional banks and specialized national business lines. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2016; comparisons are with the corresponding 2015 periods unless otherwise noted.

Financial results and position

For the six months ended June 30, net income was $122.9 million versus $79.9 million; diluted EPS was $1.19 versus $0.90. Net interest margin was 4.60% versus 4.38%. Operating cash flow was $115.1 million; investing activities used $1.88 billion, including the GE portfolio purchase; financing activities provided $2.24 billion. Cash and cash equivalents ended the period at $696.2 million.

At June 30, total assets were $16.73 billion, up 17.2% from year-end 2015; loans held for investment, before allowance, were $12.86 billion, and deposits were $14.20 billion. Stockholders’ equity was $1.80 billion. The allowance for credit losses was $122.1 million, or 0.95% of gross loans; the adjusted allowance including acquired-loan credit marks was 1.42% (non-GAAP).

Reported liquidity included $1.88 billion in liquid assets, comprising $696.4 million in cash, cash equivalents, and money market investments and $1.19 billion in unpledged marketable securities. Management said liquidity was adequate for estimated cash-flow needs over the next 90–120 days. Available credit included approximately $1.55 billion from the FHLB and $1.08 billion from the FRB; there were no outstanding FHLB or FRB borrowings at quarter-end.

Regulatory capital ratios at June 30 were 12.9% total capital and 9.6% Common Equity Tier 1 for the parent, and 12.2% and 10.4%, respectively, for the bank. The company reported both entities above well-capitalized thresholds. The tangible common equity ratio was 9.1% and tangible book value per share, net of tax, was $14.25.

Material changes versus prior periods

• Q2 net income rose $22.1 million year over year. Management attributed higher interest income chiefly to loan growth, including the Bridge acquisition and the April 2016 GE hotel-franchise portfolio purchase, as well as organic growth and higher average loan yields.
• On April 20, 2016, the bank paid $1.27 billion in cash for GE Capital’s domestic select-service hotel franchise loan portfolio. The acquired loans had a preliminary fair value of $1.28 billion; the purchase created a new HFF business segment. Acquisition and restructuring expense was $3.7 million in Q2.
• Non-interest expense increased 33.6% in Q2 to $81.8 million, reflecting additional staffing and operating costs associated with growth and acquisitions, technology initiatives, and other expenses. Acquisition/restructuring costs were lower than in the prior-year quarter.
• Loans increased $1.74 billion and deposits $2.17 billion from December 31, 2015. CRE-related loans rose to about 54% of total loans from 49% at year-end, partly reflecting the acquired hotel portfolio.
• In June, the company issued $175 million of subordinated debentures bearing 6.25% interest, due in 2056 and redeemable beginning in 2021. It also sold 1.6 million shares through its ATM offering for approximately $56.8 million gross proceeds; the offering reached its $100 million aggregate limit and expired.
• Non-accrual loans declined to $39.7 million from $48.4 million at year-end; total nonperforming assets were $161.5 million versus $166.1 million. Impaired loans declined to $116.5 million from $128.9 million. Six-month net charge-offs were $2.0 million, compared with net recoveries of $4.1 million in the prior-year period.

Outlook, risks, contingencies and unusual items

The filing provides no specific earnings or growth guidance. Management’s forward-looking statements are subject to economic and market conditions, interest-rate changes, real-estate and credit risks, competition for deposits, geographic and loan concentrations, regulatory requirements, technology and information-security risks, and execution of expansion and systems initiatives. Management reported that interest-rate sensitivity was within Board-approved limits; its model estimated next-12-month net interest income would change by 6.1% under an immediate 100-basis-point rate increase and decline by 3.6% under a 100-basis-point decrease. These are scenario estimates based on assumptions, not forecasts.

CRE concentration, including construction and land-development lending, and exposure to Arizona, Nevada, and California are material credit risks. The company reported $4.00 billion of unfunded commitments and letters of credit; the related loss-contingency liability was $10.8 million, including $7.0 million associated with the GE purchase. Management said routine litigation was not expected to materially affect financial position, results, or cash flows, and reported no material pending legal proceedings. No material changes to previously disclosed risk factors were reported. Management concluded disclosure controls were effective and reported no material quarter-over-quarter change in internal control over financial reporting.

Unusual or accounting-sensitive items include preliminary GE acquisition fair values, acquired-loan credit and interest-rate marks, and a $3.9 million tax benefit from early adoption of share-based payment guidance in the first half. No investment-security impairment charges were recorded in the periods presented; management cautioned that future impairment could occur.

Most important facts for investors to verify

• How much of reported loan and earnings growth is attributable to the GE and Bridge acquisitions versus organic growth, and how the HFF portfolio performs after integration.
• Whether CRE, construction, and geographic concentrations—and the higher 54% CRE share—remain manageable as the acquired portfolio seasons.
• Credit quality trends, including charge-offs, nonperforming assets, acquired-loan marks, the allowance, and the $10.8 million unfunded-commitment liability.
• Whether deposit growth is sustainable and the cost and stability of brokered, CDARS, and ICS funding.
• The effect of the new subordinated debt, acquisition integration and systems costs, and interest-rate movements on future margins, expenses, and capital.
• Reconcile non-GAAP operating PPNR, efficiency, and adjusted-allowance measures with GAAP results and the company’s stated calculation methods.