Western Alliance Bancorporation — Q3 2011 Form 10-Q
Business context and reporting period
Quarter ended September 30, 2011; balance-sheet comparisons are primarily with December 31, 2010, and operating results with the three and nine months ended September 30, 2010. The company is a bank holding company operating Bank of Nevada, Western Alliance Bank and Torrey Pines Bank, with additional equipment-finance and investment-advisory businesses.
Financial performance and condition
- Q3 earnings: Net income was $13.0 million, versus $2.0 million a year earlier. Income available to common shareholders was $3.6 million, or $0.04 per diluted share, versus a $0.5 million loss, or $0.01 loss per share. The difference reflects $9.4 million of preferred dividends and accretion in Q3 2011.
- Nine-month earnings: Net income was $24.4 million, versus $3.6 million; income available to common shareholders was $10.0 million, versus a $3.8 million loss.
- Interest income and margin: Q3 interest income was $74.1 million and net interest income was $64.6 million, up 4.8% and 8.6%, respectively. Nine-month net interest income rose 10.1% to $189.0 million. Net interest margin was 4.29% for Q3 (4.32% in Q3 2010) and 4.32% for nine months (4.22% in 2010).
- Credit costs: Provision for credit losses was $11.2 million in Q3 and $33.1 million year to date, down from $23.0 million and $74.8 million. Q3 net charge-offs were $15.3 million versus $24.8 million; nine-month net charge-offs were $43.6 million versus $75.3 million.
- Other income and expenses: Non-interest income was $13.1 million in Q3, compared with $12.2 million, but fell to $29.5 million for nine months from $47.6 million, mainly due to lower securities-sale gains and the prior-year debt-extinguishment gain. Q3 non-interest expense was $45.5 million, down from $46.1 million; nine-month expense increased 3.1% to $144.6 million.
- Balance sheet growth: Total assets were $6.55 billion, up from $6.19 billion at year-end. Gross loans reached $4.53 billion, up 6.7%; deposits were $5.63 billion, up 5.5%. Stockholders’ equity was $632.3 million, versus $602.2 million.
- Credit quality: Nonperforming assets were $282.3 million, down from $342.8 million at year-end; nonaccrual loans were $113.7 million. Impaired loans declined to $201.0 million from $238.3 million, though impaired commercial and industrial loans increased. The allowance was $100.2 million, or 2.21% of gross loans.
- Cash flow and liquidity: Nine-month operating cash flow was $109.1 million, investing cash flow was negative $343.6 million, and financing cash flow was $323.7 million. Cash and cash equivalents ended at $306.0 million. Management reported $904.3 million of liquid assets and said liquidity was adequate for the next 90–120 days; available FHLB and FRB borrowing capacity was approximately $1.03 billion and $683.7 million, respectively.
- Debt and capital: The company had $75 million of 10% senior notes due 2015 and $36.3 million of junior subordinated debt carried at fair value (principal outstanding was $66.5 million). Consolidated total capital and Tier 1 risk-based ratios were 13.2% and 12.0%; the leverage ratio was 9.8%. The company and subsidiaries met well-capitalized thresholds.
Material changes, outlook, risks and unusual items
- Management attributed lower credit provisioning to improving asset quality and stabilizing collateral values, while acknowledging loan growth and continuing regional real-estate risk. Commercial real estate represented approximately 63% of loans; the portfolio is concentrated in Nevada, Arizona and California.
- Q3 earnings included a $6.4 million fair-value gain from marking down junior subordinated debt as credit spreads widened. Common equity also absorbed a one-time $6.9 million accelerated preferred-stock accretion charge upon redemption of the $140 million Series A Treasury preferred stock.
- The company issued $141 million of Series B preferred stock through the Treasury’s Small Business Lending Fund. Following a loan-reporting review, the applicable dividend rate was revised to 5% for the initial and current dividend periods. The first payment was due January 1, 2012. The Treasury warrant for 787,106 common shares remained outstanding.
- Management stated that it expected to realize its $62.5 million net deferred tax asset, forecasting use of net operating losses by the end of 2013. Realization depends on future taxable income and could be reduced if conditions deteriorate.
- The IRS had proposed a $136.7 million taxable-income adjustment related to 2008 CDO deductions and an approximately $40 million refund claim. The IRS Appeals Conferee accepted the deduction, but the matter remained subject to Joint Committee on Taxation approval; no reserve was recorded.
- Bank of Nevada remained under a memorandum of understanding requiring enhanced oversight, prior regulatory approval for dividends, and elevated Tier 1 capital. The company said it was in compliance; memoranda for Western Alliance Bank and Torrey Pines Bank had been terminated.
- No earnings or financial guidance was provided. Management described continued efforts to grow loans and deposits prudently. Risks include real-estate concentration and collateral values, credit losses, funding costs and deposit stability, deferred-tax-asset realization, interest-rate exposure, regulation and execution of growth plans.
Important facts for investors to verify
- Whether credit-quality improvement continues, particularly for commercial real estate and the rising impaired C&I exposure, and whether the allowance remains adequate.
- The terms and ongoing 5% dividend cost of the SBLF preferred stock, the redemption impact on common shareholders, and the remaining Treasury warrant dilution.
- Realization assumptions for the $62.5 million deferred tax asset and final resolution of the IRS refund review.
- Liquidity and deposit stability, including reliance on secured borrowing capacity and the Bank of Nevada’s regulatory restrictions.
- How much reported earnings depend on fair-value gains, securities transactions and other nonrecurring items versus recurring banking operations.