Western Alliance Bancorporation — Q3 2014 Form 10-Q
Business context and reporting period. Western Alliance Bancorporation is a Phoenix-based bank holding company serving businesses and other customers through Western Alliance Bank and its regional and specialty banking divisions. This unaudited filing covers the quarter and nine months ended September 30, 2014; balance-sheet comparisons are to December 31, 2013.
Financial performance and condition
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Interest income | $105.6 million | $92.7 million | $306.2 million | $265.1 million |
| Net interest income | $98.1 million | $84.6 million | $282.7 million | $242.9 million |
| Net interest margin | 4.43% | 4.41% | 4.41% | 4.38% |
| Net income available to common shareholders | $40.6 million | $28.2 million | $106.5 million | $82.5 million |
| Diluted EPS | $0.46 | $0.33 | $1.22 | $0.95 |
| Provision for credit losses | $0.4 million | — | $4.4 million | $8.9 million |
| Non-interest income | $6.2 million | $4.1 million | $16.8 million | $20.7 million |
| Non-interest expense | $50.0 million | $49.7 million | $152.2 million | $145.1 million |
Pre-tax, pre-provision operating earnings, a company-defined non-GAAP measure, were $51.8 million for Q3 versus $42.1 million, and $143.5 million for the first nine months versus $117.4 million. The efficiency ratio on a tax-equivalent basis improved to 47.2% from 51.6% for Q3 and to 49.2% from 52.7% year to date.
- Balance sheet: Total assets were $10.29 billion, up 10.5% from year-end. Loans, net of deferred fees and costs, were $7.93 billion, up 16.6%; deposits were $8.70 billion, up 11.0%. Stockholders’ equity was $1.00 billion, versus $855.5 million at year-end.
- Credit quality: The allowance for credit losses was $109.2 million, or 1.38% of gross loans, versus $100.1 million and 1.47% at year-end. Nine-month net recoveries were $4.7 million, compared with net charge-offs of $6.5 million in 2013. Nonaccrual loans were $75.1 million; total nonperforming assets were $220.7 million, down from $233.5 million.
- Cash flow and liquidity: For the first nine months, operating cash flow was $107.1 million, investing cash outflow was $990.3 million, and financing cash inflow was $836.4 million. Cash and cash equivalents ended at $258.8 million, down from $305.5 million at year-end. Management reported $999.5 million in liquid assets and stated liquidity was adequate for projected needs over the next 90–120 days. Available borrowing capacity included $867.9 million from the FHLB and $1.13 billion from the FRB; additional correspondent credit lines were undrawn.
- Debt and capital: Other borrowings totaled $330.8 million, including $210.1 million of long-term FHLB advances and $58.1 million carrying value of 10% senior notes, with $58.4 million principal remaining and maturity in 2015. Junior subordinated debt was $41.8 million; customer repurchase agreements were $53.0 million. The company reported a 12.2% total risk-based capital ratio, 11.0% Tier 1 risk-based ratio, and 10.1% leverage ratio, and said the company and bank met well-capitalized requirements.
Material changes and unusual items
- Loan growth and deposit growth were the main drivers of balance-sheet expansion and higher net interest income. Net interest income increased 16.0% in Q3 and 16.4% year to date; management attributed the gains primarily to higher average earning assets, partly offset by lower loan yields.
- Year-to-date non-interest income declined largely because 2013 included a $10.0 million bargain-purchase gain from the Centennial Bank acquisition. Q3 non-interest income increased year over year, including improved securities-sale results and fair-value gains, partly offset by lower bank-owned life insurance income and a $0.5 million loss on extinguishing senior-note debt.
- Q3 non-interest expense included a $0.7 million write-off of an internal software project no longer being pursued. Higher personnel, technology and operating costs were partly offset by gains from sales of foreclosed properties and lower merger/restructuring costs.
- In May 2014, the company transferred all held-to-maturity securities to available-for-sale after changing its intent regarding CDO holdings; the transfer included $275.3 million amortized cost and a $9.0 million after-tax unrealized gain in accumulated other comprehensive income. The company reported no securities impairment charges in the periods presented.
- The company shut down its remaining affinity credit-card operations during Q3. Discontinued operations recorded a $1.2 million net loss for the first nine months of 2014.
- Following the December 2013 consolidation of its bank subsidiaries, the company adopted new operating segments. Prior-year segment results were not recast, limiting segment-level comparability.
Outlook, risks and contingencies
The filing provides no specific earnings or financial guidance. Management said interest-rate exposure was within board-approved limits. Its simulation estimated next-12-month net interest income would change by negative 1.5% under a 100-basis-point rate decline and positive 2.2% under a 100-basis-point increase; these estimates depend on assumptions and are not forecasts of actual results.
Key disclosed risks include concentrated commercial real estate, construction and commercial lending; geographic concentration in Arizona, Nevada and California; potential credit losses exceeding estimates; dependence on low-cost deposits and access to borrowing; interest-rate and market volatility; and execution risks from growth, new business lines and the bank consolidation. CRE-related loans represented about 54% of total loans. Off-balance-sheet commitments to extend credit and letters of credit totaled $2.20 billion, with a $2.1 million recorded loss contingency. Management said routine litigation was not expected to have a material financial impact; the filing reported no material pending legal proceedings and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether rapid loan growth, particularly in commercial and real estate-related portfolios, is accompanied by sustained credit quality and adequate reserves.
- How deposit growth, deposit pricing, brokered deposits and available secured borrowing capacity affect funding costs and liquidity.
- Whether earnings growth persists after considering nonrecurring gains, fair-value movements, acquisition-related comparisons and other unusual items.
- The terms, maturity and refinancing implications of the 10% senior notes due in 2015, and any future common-stock sales under the amended ATM agreement, which permits offerings of up to approximately $97.2 million.
- How changes in interest rates, collateral values and local economic conditions could affect margins, securities values, loan losses and foreclosed assets.