The Art of Simple M&A Lives at Western Alliance

Some deals offer lots of cost savings and give a bank a deeper presence in a coveted market. Others are opportunistic plays that feed the bottom line.

Western Alliance Bancorp.'s deal for the $581 million-asset Centennial Bank, which has one branch in California and hasn't made a new loan in four years, is more the latter.

The sale, which is set to close this quarter, is being overseen by the U.S. Bankruptcy Court for the Eastern District of Virginia. Western Alliance (WAL) in Phoenix has kept a low profile on the deal, probably because of the court's role in it, but executives sought to assure analysts that the transaction will be low risk and a moneymaker.

"On two occasions I've actually personally looked at the 12 largest loans in the company, and we're comfortable with our due diligence," Robert Sarver, the company's chief executive said in a conference call in late January. "We do think this deal will be accretive to the company, but we're not going to get into specifics until next quarter on it."

That's enough to satisfy its analysts, at least for now.

"This is not a franchise-building type of deal, and that's OK," says Brett Rabatin, an analyst at Sterne, Agee & Leach. "Right now, this is a world where adding earning assets is the most important thing."

The $7.62 billion-asset Western Alliance is buying Centennial for $70 million, or 60% of its tangible book value, from LandAmerica Financial Group, a title insurance company that filed for bankruptcy in 2008. Centennial is an industrial loan company, which makes loans like banks, but is limited in the types of deposits it can hold. They are way for nonfinancial companies to get into the banking world.

Financial deals are increasingly rare, observers say. The most recent examples of financial deals, as opposed to strategic ones, were for failed banks. While many of those banks did not add substance to the buyer's core business, they gave buyers the opportunity to make money on working out the loan portfolio.

It makes sense that Western Alliance pursued such a deal, analysts said. The company has a reputation of being different; some analysts describe its executives as ahead of the curve, while others say they try to go where the competition isn't.

"I'd say they are opportunistic and more forward -looking than some of their peers," says Terry McEvoy, an analyst with Oppenheimer & Co. "For instance, they started doing construction loans a few quarters ago and others will likely follow. They are opportunistic and they are willing to take on some risk."

Western Financial officials did not return calls for this story.

Deals done through bankruptcy courts have been on the rise, but those typically involve an insolvent banking holding company with a nearly collapsed bank as its sole asset.

Centennial is struggling. Its nonperforming assets make up 11.24% of its total assets, but it is exceedingly well capitalized with a total risk-based capital ratio of 21.67%.

Its sole branch is in Fountain Valley, Calif., in Orange County — an area that would bridge Western Alliance's presence in San Diego and Los Angeles. The branch, however, is largely wholesale-funded.

"It is not really a beachhead to build up a core franchise there," says John Moran, an analyst at Macquarie Equities Research.

Centennial's loan portfolio is running off about $25 million a quarter given the lack of new loans, but Western Alliance could build off those relationships given its experience in commercial real estate, Sarver said during the call.

"Some of those credits we will be retaining and renewing versus just let them run off," Sarver said.

Given the focus on loan growth in the industry, that is something the analysts will want to know more about when Western Alliance can share it.

"They're picking it up pretty cheap and it will likely give them some good yielding assets," Moran says. "And hopefully it gives them another platform for some incremental asset generation."