Western Alliance Bancorporation — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Western Alliance is a Phoenix-based bank holding company operating through Western Alliance Bank and regional and specialized banking divisions. Results include Bridge Bank from July 1, following the June 30 acquisition; year-over-year comparisons therefore include only three months of Bridge results in 2015.
Financial performance
- Q3 earnings: Net income was $59.1 million and net income available to common shareholders was $59.0 million, versus $40.9 million and $40.6 million, respectively, in Q3 2014. Diluted EPS was $0.58, up from $0.46.
- Nine-month earnings: Net income was $134.0 million, compared with $107.5 million; diluted EPS was $1.44 versus $1.22.
- Revenue and margin: Q3 net interest income rose 40.1% to $137.4 million. Net interest margin was 4.59%, versus 4.43% a year earlier. For nine months, net interest income was $349.2 million, up 23.5%, and margin was 4.45% versus 4.41%. Management attributed growth mainly to larger loan balances, including Bridge, and Q3 accretion income on acquired loans.
- Non-interest items and costs: Q3 non-interest income was $13.8 million, up from $6.1 million, including a $5.4 million net gain on assets and liabilities measured at fair value. Non-interest expense increased 46.2% to $72.9 million, reflecting Bridge-related costs and staffing, technology, occupancy, insurance and other expenses. Acquisition/restructure expense was $0.8 million in Q3 and $8.8 million year to date. Management reported Q3 pre-tax, pre-provision operating earnings of $73.7 million, up 42.2% year over year, and an efficiency ratio of 46.8% versus 47.1%.
- Credit costs and quality: Provision for credit losses was zero in Q3 and $0.7 million for nine months, compared with $0.4 million and $4.4 million in 2014. The allowance was $117.1 million, or 1.09% of gross loans, versus $110.2 million and 1.31% at year-end 2014. Nonperforming loans were $133.9 million, down from $157.5 million; nonperforming assets, as defined in the financial statements, were $191.6 million versus $214.7 million.
- Balance sheet and funding: Total assets were $14.0 billion, loans held for investment net of allowance were $10.65 billion, and deposits were $11.61 billion. Since December 31, 2014, assets grew 31.7%, loans 28.5%, and deposits 30.0%, with Bridge accounting for $2.23 billion of assets, $1.44 billion of loans and $1.74 billion of deposits at acquisition. Cash and cash equivalents were $325.4 million at quarter-end.
- Cash flow and liquidity: Nine-month operating cash flow was $137.6 million; investing cash outflow was $977.2 million and financing cash inflow was $1.00 billion. Management reported $1.36 billion of liquid assets and said liquidity was adequate for expected cash needs over the next 90–120 days. Available credit included $1.41 billion from the FHLB and $1.79 billion from the Federal Reserve, plus unused correspondent-bank lines.
- Debt and capital: The company issued $150 million of subordinated debt in June, carrying a 5.00% fixed rate through June 2020 and then a floating rate. The $58.2 million senior notes matured in September; $200 million of long-term FHLB advances were repaid during Q2. At September 30, Western Alliance reported Basel III total capital, Tier 1 and common equity Tier 1 ratios of 12.1%, 10.1% and 9.1%; the bank’s ratios were 11.1%, 9.0% and 9.0%. Both were classified as well-capitalized. Stockholders’ equity was $1.58 billion; tangible common equity ratio was 8.9% and tangible book value per share was $11.86.
Material changes, outlook and risks
- Bridge acquisition: The company paid $36.5 million in cash and issued approximately 12.45 million shares; recorded consideration was $467.6 million and acquisition goodwill was $266.1 million. Purchase accounting remained preliminary and subject to measurement-period adjustments. Management cited stronger Northern California presence and growth opportunities in technology and international services.
- One-time and variable items: Management said Q3 earnings included a total benefit of $0.05 per share from fair-value gains, non-recurring tax benefits and accelerated loan accretion, partly offset by acquisition/restructure expenses. A non-cash, non-recurring $7.7 million debt valuation loss was recorded in Q2; it did not affect regulatory capital.
- Credit and concentration risks: About 51% of loans were CRE-related. The company’s lending is concentrated in Arizona, Nevada and California, making performance sensitive to regional conditions and real estate values. Unfunded commitments and letters of credit totaled $3.81 billion; these amounts are not equivalent to expected cash draws. Management also identified deposit withdrawals, reliance on low-cost funding, interest-rate changes, competition, cybersecurity and execution of expansion strategies as risks.
- Interest-rate exposure: Management said modeled exposure was within Board limits. Its static-balance-sheet simulation projected net interest income up 4.2% for an immediate 100-basis-point increase and down 1.6% for a 100-basis-point decrease; the filing cautions actual results may differ materially from model assumptions.
- Guidance and contingencies: The filing provides no specific earnings or financial guidance. Management said routine litigation was not expected to have a material effect; no material legal proceedings or material changes to previously disclosed risk factors were reported. The filing notes that the Bridge business was excluded from the quarter’s internal-control assessment under SEC guidance for recently acquired businesses; disclosure controls were reported effective.
Important facts for investors to verify
- How much reported earnings growth reflects Bridge, recurring operating performance, acquired-loan accretion and fair-value or tax items.
- Whether Bridge integration delivers anticipated growth and cost benefits, and whether purchase-accounting values or goodwill require further adjustment.
- Trends in criticized loans, nonperforming assets, charge-offs and the allowance relative to rapid loan growth and real-estate concentration.
- The durability and cost of deposit growth, including brokered and network deposits, and the availability of secured borrowing capacity.
- Capital and margin sensitivity under actual interest-rate, funding and credit conditions versus management’s modeled scenarios.