Western Alliance Bancorporation — Q1 2012 Form 10-Q
Business context and reporting period. The bank holding company provides banking, lending, equipment finance, and investment advisory services through subsidiaries operating primarily in Arizona, Nevada, and California. This unaudited report covers the three months ended March 31, 2012; income and cash-flow comparisons are against Q1 2011, while balance-sheet comparisons are generally against December 31, 2011.
Financial performance and position
- Earnings: Net income was $11.3 million, versus $5.2 million a year earlier. After $1.8 million of preferred dividends and accretion, net income available to common shareholders was $9.5 million, or $0.12 per diluted share, versus $2.7 million, or $0.03, in Q1 2011.
- Revenue and margin: Net interest income rose 14.7% to $70.1 million. Net interest margin was 4.53%, up from 4.35%. Net interest income after the $13.1 million credit-loss provision was $57.0 million. Non-interest income declined 13.2% to $5.9 million.
- Expenses and profitability: Non-interest expense fell 2.6% to $46.9 million. Return on average assets was 0.67% versus 0.33%; return on average equity was 6.97% versus 3.41%. The filing does not provide a clear efficiency-ratio value.
- Loans and credit: Gross loans were $4.93 billion, up $146 million from year-end and $648 million year over year. Commercial real estate represented approximately 61% of loans. The allowance was $98.1 million, or 1.99% of gross loans, compared with $99.2 million and 2.07% at year-end. Net charge-offs were $14.1 million, or 1.18% annualized, versus $14.6 million and 1.39% in Q1 2011.
- Asset quality: Nonaccrual loans rose to $103.5 million from $90.4 million at year-end; nonaccrual loans were 2.10% of gross loans. Nonperforming assets totaled $290.0 million, down from $294.6 million. Impaired loans increased to $212.8 million from $209.5 million.
- Deposits and liquidity: Deposits increased $240.5 million, or 4.3%, to $5.90 billion; non-interest-bearing demand deposits rose $199.5 million. Cash and cash equivalents were $179.8 million at quarter-end. Management reported $871.4 million in liquid assets and judged liquidity adequate for anticipated cash needs over the next 90–120 days. Available borrowing capacity was approximately $1.10 billion at FHLB and $748.2 million at FRB.
- Debt and capital: Balance-sheet other borrowings were $193.4 million; this included $120.0 million of short-term FHLB advances. Customer repurchase agreements were $114.4 million, and senior notes due 2015 carried a 10% coupon, with $73.4 million remaining net principal. Junior subordinated debt was carried at $37.3 million fair value versus $66.5 million unpaid principal. The company reported regulatory capital ratios of 12.5% total risk-based, 11.3% Tier 1 risk-based, and 9.8% leverage, and said it and its banks met applicable capital requirements.
- Cash flow: Operating activities provided $36.4 million, investing activities used $81.7 million, and financing activities provided $70.1 million. Cash and cash equivalents increased $24.8 million during the quarter.
Material changes versus comparable periods
- Common-shareholder earnings rose to $9.5 million from $2.7 million. Lower funding costs and higher average earning assets supported net interest income growth; the average cost of interest-bearing deposits fell to 0.46% from 0.81%.
- Provision for credit losses increased to $13.1 million from $10.0 million, primarily reflecting loan growth, partly offset by improved asset quality. The allowance declined despite the higher provision, as charge-offs and portfolio changes affected the balance.
- Non-interest expense decreased by $1.2 million, principally from lower repossessed-asset losses and FDIC insurance costs; salaries and benefits increased $3.8 million.
- Compared with year-end, nonaccrual loans and impaired loans increased, while foreclosed assets declined to $81.4 million from $89.1 million. Nonperforming assets decreased overall.
Outlook, commentary, risks, and unusual items
- The filing gives no specific earnings or revenue guidance. Management said it was pursuing prudent loan and deposit growth and projected, based on current assumptions, full use of net operating loss carryforwards by the end of 2013.
- Management identified real-estate and commercial-real-estate concentration, potential credit losses, funding costs and deposit stability, interest-rate and market risk, and the realization of deferred tax assets as important risks. Real estate values in the company’s markets had fallen substantially from prior peaks.
- Management reported a three-year cumulative pretax loss position, a negative factor in assessing the $55.3 million net deferred tax asset, but concluded positive recent results and forecasts supported its realization. That conclusion could change if projected taxable income weakens.
- The IRS had proposed a $136.7 million taxable-income adjustment concerning 2008 CDO deductions and a related approximately $40 million federal tax refund claim. The IRS appeals conferee conceded the deduction, but the matter remained subject to Joint Committee on Taxation approval; no reserve was recorded.
- Bank of Nevada remained under a regulatory memorandum of understanding, including restrictions on dividends to the parent without prior approval and enhanced oversight. The company stated the bank was in compliance.
- The allowance methodology was changed in Q1; management estimated the changes reduced provision and allowance by approximately $2.6 million compared with the prior methodology. The FDIC also directed a change in impairment methodology for certain troubled debt restructurings.
- The discontinued affinity credit-card operation recorded a $0.2 million net loss, compared with a $0.6 million loss in Q1 2011. The filing reported no material pending legal proceedings and no material changes to previously disclosed risk factors.
Key facts for investors to verify
- Whether rising nonaccrual and impaired loans, particularly in commercial real estate and commercial and industrial lending, lead to higher future provisions or charge-offs.
- The impact of the allowance-methodology change and the FDIC-directed TDR impairment-method change on reported credit costs and reserve adequacy.
- Whether growth in deposits and loans is sustainable and how liquidity, uninsured deposits, and borrowing capacity evolve.
- Whether forecasts supporting the $55.3 million deferred tax asset remain achievable, including the projected NOL utilization by the end of 2013.
- The final outcome and timing of IRS and Joint Committee review of the CDO deduction and related refund claim.
- Compliance with Bank of Nevada’s memorandum of understanding and any related limits on subsidiary dividends or operations.