Western Alliance Bancorporation — Q1 2014 Form 10-Q
Business and period. Unaudited results cover the three months ended March 31, 2014, compared with the three months ended March 31, 2013; balance-sheet comparisons are with December 31, 2013. The Phoenix-based bank holding company provides commercial banking across Arizona, Nevada and California, plus specialty finance. Its bank subsidiaries consolidated under one charter on December 31, 2013; the resulting segment structure changed, and prior-year segment data was not recast.
Financial results and position
| Metric | Q1 2014 / March 31, 2014 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $90.8 million | $76.2 million in Q1 2013 |
| Net interest margin | 4.41% | 4.36% in Q1 2013 |
| Net income | $31.1 million; $30.7 million available to common shareholders | $20.9 million; $20.5 million available to common shareholders in Q1 2013 |
| Diluted EPS | $0.35 | $0.24 in Q1 2013 |
| Net interest income after credit provision | $87.3 million | $70.8 million in Q1 2013 |
| Assets | $9.75 billion | $9.31 billion at December 31, 2013 |
| Loans, before allowance | $7.11 billion | $6.80 billion at December 31, 2013 |
| Deposits | $8.15 billion | $7.84 billion at December 31, 2013 |
| Stockholders’ equity | $894.8 million | $855.5 million at December 31, 2013 |
Interest income rose 18.8% year over year to $98.7 million, primarily reflecting higher loan balances; interest expense increased 14.8% to $7.9 million. Pre-tax, pre-provision operating earnings, a company-defined non-GAAP measure, were $44.4 million versus $35.1 million. Return on average assets was 1.35% versus 1.07%; return on average tangible common equity was 17.55% versus 13.93%. The efficiency ratio was 51.0% versus 54.6%.
Non-interest income was $4.8 million, nearly unchanged year over year. Non-interest expense increased 6.0% to $49.7 million, including higher compensation, technology-related legal and professional costs, data processing, and other expenses. A $2.5 million net gain on sales and valuations of repossessed and other assets, primarily from selling two properties, helped offset expense growth.
Credit quality, cash flow, debt and liquidity
- The provision for credit losses fell to $3.5 million from $5.4 million. Net recoveries were $0.35 million, compared with $5.37 million of net charge-offs in Q1 2013. The allowance was $103.9 million, or 1.46% of gross loans.
- Nonaccrual loans were $70.4 million, or 0.99% of gross loans, versus $75.7 million and 1.11% at year-end. Nonperforming assets declined to $216.5 million from $233.5 million; foreclosed and repossessed assets were $56.5 million, down from $66.7 million.
- Commercial real estate represented approximately 56% of loans. Lending is concentrated in Arizona, Nevada and California; management identifies real-estate values and local economic conditions as key credit sensitivities.
- Operating cash flow was $40.0 million; investing activities used $288.9 million, chiefly reflecting $322.6 million of net loan fundings; financing activities provided $409.3 million, including $310.9 million of deposit growth and $98.1 million of net borrowing growth. Cash and cash equivalents ended at $465.9 million.
- Borrowings included $273.5 million of FHLB advances, $64.3 million carrying value of other long-term debt, and $42.8 million of junior subordinated debt. Customer repurchase agreements were $57.4 million; securities sold short were $109.8 million. Management reported $1.20 billion of liquid assets and said liquidity was adequate for expected needs over the next 90–120 days. Available FHLB and FRB credit was approximately $1.03 billion and $1.00 billion, respectively.
- Regulatory capital ratios for the holding company were 12.4% total risk-based capital, 11.1% Tier 1 risk-based capital and 9.9% leverage. The company and bank met well-capitalized requirements.
Material changes, outlook and risks
- Loans grew 4.5% and deposits 4.0% from year-end. Specialty Finance loans increased $271.2 million; management attributed overall growth and improved earnings to business expansion, higher net interest income and improved credit quality.
- Q1 2014 included a $654,000 after-tax loss from discontinued PartnersFirst affinity credit-card operations; Q1 2013 had $38,000 of income from those operations.
- Adoption of updated accounting for low-income housing tax-credit investments changed presentation and recast prior-period figures; Q1 2013 net income was adjusted from $21.0 million to $20.9 million. The filing says adoption did not significantly affect cash flows.
- The company entered a $109.8 million Treasury short transaction to mitigate interest-rate exposure on floating-rate loans at their rate floors. Management said modeled interest-rate exposures remained within board limits; projections depend on assumptions and may differ from actual outcomes.
- No specific earnings or growth guidance is provided. Risks include CRE and geographic concentration, credit losses exceeding estimates, dependence on low-cost deposits and borrowing access, interest-rate and market risk, competition, regulatory requirements, cybersecurity, and execution of expansion and the bank consolidation. Management reported no material change to previously disclosed risk factors, no material pending legal proceedings, and effective disclosure controls.
Investor verification points
- Assess whether loan and deposit growth can continue without weakening underwriting or funding costs; monitor CRE concentrations and criticized, impaired and nonaccrual loans.
- Review the sustainability of lower credit provisions and net recoveries, and the adequacy of the $103.9 million allowance against portfolio growth.
- Separate recurring operating performance from property-sale gains, fair-value movements and the discontinued-operations loss.
- Verify liquidity measures and funding composition, including brokered deposits, pledged collateral, short-term borrowings and the Treasury short position.
- Track capital ratios, integration of the consolidated bank, and the assumptions supporting realization of the $78.3 million net deferred tax asset.