Western Alliance Bancorporation — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011; financial statements are unaudited. Western Alliance provides banking, lending, equipment-finance and investment-advisory services, principally in Arizona, Nevada and California.
Financial performance and position
Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise indicated.
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net interest income | $63.3 | $57.5 | $124.4 | $112.2 |
| Provision for credit losses | $11.9 | $23.1 | $21.9 | $51.9 |
| Non-interest income | $9.6 | $20.8 | $16.4 | $35.4 |
| Non-interest expense | $51.0 | $53.3 | $99.2 | $94.1 |
| Net income | $6.2 | $1.2 | $11.4 | $1.6 |
| Net income (loss) available to common shareholders | $3.7 | $(1.2) | $6.4 | $(3.3) |
| Diluted earnings (loss) per share | $0.05 | $(0.02) | $0.08 | $(0.05) |
- Margins and returns: Net interest margin was 4.34% versus 4.16% in the comparable 2010 periods. Q2 return on average assets was 0.39% versus 0.08%; return on average equity was 3.98% versus 0.84%.
- Balance sheet at June 30: Total assets were $6.51 billion, loans held for investment before allowance were $4.41 billion, deposits were $5.59 billion, and stockholders’ equity was $615.7 million. Compared with December 31, 2010, assets increased 5.1%, gross loans 4.0%, and deposits 4.7%.
- Credit quality: Allowance for credit losses was $104.4 million, or 2.37% of gross loans. Q2 net charge-offs were $13.6 million, down from $25.8 million; nonaccrual loans were $112.8 million, or 2.56% of gross loans. Nonperforming assets totaled $286.4 million, down from $342.8 million at year-end.
- Cash flow and liquidity: For the six months, operating cash flow was $81.7 million, investing cash outflow was $49.8 million, and financing cash inflow was $285.9 million. Cash and cash equivalents rose $317.8 million to $534.6 million. Management reported $1.08 billion in liquid assets and considered liquidity adequate for the next 90–120 days; parent-company liquidity was estimated to cover operations for over 12 months without new funding.
- Borrowings and capital: The company had $75 million principal of 10% senior notes due 2015; junior subordinated debt was carried at $42.7 million, versus $66.5 million unpaid principal. Consolidated regulatory capital ratios were 13.1% total risk-based capital, 11.8% Tier 1 risk-based capital and 9.5% leverage. The company and banks reported meeting applicable capital requirements and well-capitalized thresholds.
Changes versus comparable periods
- Common earnings moved from a Q2 loss to positive earnings and from a first-half loss to positive earnings. Management attributed the improvement principally to higher net interest income and lower credit-loss provisions as problem assets stabilized.
- Net interest income increased 10.1% in Q2 and 11.2% year to date. Lower deposit costs supported margin expansion; the average cost of interest-bearing deposits fell to 0.75% in Q2 from 1.13%.
- Non-interest income fell sharply: Q2 decreased $11.2 million and first-half decreased $19.0 million. Lower securities-sale and mark-to-market gains, the absence of a prior-year $3.0 million debt-extinguishment gain, and the sale of Premier Trust contributed to the decline.
- Non-interest expense decreased 4.2% in Q2 but increased 5.4% year to date. First-half expense included higher losses on repossessed-asset sales/valuations and higher salaries and benefits.
- Impaired loans declined to $204.0 million from $238.3 million at year-end; foreclosed and repossessed assets declined to $85.7 million from $107.7 million. Loan growth was concentrated partly in commercial real estate and commercial and industrial lending.
Outlook, risks and unusual items
- The filing provides no specific earnings or financial guidance. Management described plans to grow loans and deposits prudently and stated that interest-rate exposure was within board-approved limits.
- Credit and collateral values remain significant risks: approximately 65% of loans were commercial-real-estate-related, with substantial exposure in Nevada, Arizona and California. Management noted the sensitivity of collateral values to regional real estate conditions.
- Bank subsidiaries were subject to regulatory memoranda of understanding. These require enhanced oversight and plans, prior regulatory approval for bank dividends to the parent, and elevated capital requirements. Management stated the banks were in compliance.
- The $71.3 million net deferred tax asset depends on future taxable income; management forecast realization by the end of 2013 but warned deterioration in market conditions could reduce the realizable amount. Approximately $199 million of taxable income is needed during the carryforward periods to realize the deferred tax assets.
- The IRS proposed a $136.7 million taxable-income adjustment concerning 2008 CDO-related deductions that had contributed to an approximately $40 million refund for 2006–2007. The company protested and the matter was referred to Appeals; it had not accrued a reserve and said there was no assurance the deductions would be upheld.
- Additional securities impairment charges may occur if liquidity and credit spreads do not recover. The company recorded $0.2 million of securities impairment in the first half of 2011, attributed to its CDO portfolio.
- Unfunded credit commitments and letters of credit totaled $1.10 billion. Routine litigation was not expected by management to have a material effect; no material pending legal proceedings were reported.
Important facts for investors to verify
- Whether credit quality and collateral values continue to improve, particularly across commercial real estate and construction exposures.
- Whether the $104.4 million credit allowance remains adequate as loans grow and regulators review reserve assumptions.
- Whether the deferred tax asset remains realizable and the IRS accepts the disputed CDO deductions; no reserve was recorded for the proposed deficiency.
- Compliance with bank regulatory memoranda, elevated capital requirements, and restrictions on dividends to the parent.
- How recurring earnings develop without prior-period securities gains, mark-to-market gains, or the one-time debt-extinguishment gain.