Western Alliance Bancorporation — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Western Alliance is a bank holding company operating primarily in Arizona, Nevada and California. Financial amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q3 2012 / Sep. 30, 2012 | Comparable period / change |
|---|---|---|
| Net interest income | $71.9 | $64.6 in Q3 2011; up 11.4% |
| Net interest margin | 4.41% | 4.29% in Q3 2011 |
| Provision for credit losses | $8.9 | $11.2 in Q3 2011 |
| Non-interest income | $7.0 | $13.1 in Q3 2011 |
| Non-interest expense | $47.5 | $45.5 in Q3 2011 |
| Net income | $15.5 | $13.0 in Q3 2011 |
| Net income available to common shareholders | $15.1; diluted EPS $0.18 | $3.6 and $0.04 in Q3 2011 |
| Nine-month net income / common income | $40.7 / $37.3; diluted EPS $0.45 | $24.4 / $10.0; diluted EPS $0.12 in 2011 |
| Operating cash flow, nine months | $89.1 | $109.1 in 2011 |
| Assets / gross loans | $7,403.6 / $5,332.9 | Assets up $559.1 and gross loans up $552.9 from Dec. 31, 2011 |
| Deposits | $6,162.0 | Up $503.5, or 8.9%, from Dec. 31, 2011 |
| Stockholders’ equity | $698.0 | $636.7 at Dec. 31, 2011 |
Interest income rose 6.1% in Q3 to $78.7, while interest expense fell 29.6% to $6.7, largely reflecting lower deposit costs. Return on average assets was 0.85% and return on average equity was 8.95% in Q3, compared with 0.79% and 8.13%, respectively, a year earlier.
At September 30, cash and cash equivalents were $307.9. Management reported $632.8 of liquid assets and estimated liquidity sufficient for the next 90–120 days. Available borrowing capacity was approximately $1.05 billion at the FHLB and $658.9 million at the FRB; no FRB advances were outstanding. Total liabilities were $6,705.6. Borrowings included $150.0 of FHLB advances, $73.1 of customer repurchase agreements, $75.0 of senior notes (net carrying amount $73.6), and junior subordinated debt carried at $36.2.
Regulatory capital ratios at the holding company were 12.3% total risk-based capital, 11.0% Tier 1 risk-based capital and 9.7% leverage. The Company and its banks met applicable capital requirements and were classified as well-capitalized.
Material changes and notable items
- Loan growth was driven mainly by commercial and industrial lending and commercial leases. Gross loans increased 11.6% from year-end; deposits grew 8.9%.
- Credit indicators were mixed: annualized Q3 net charge-offs improved to 0.70% from 1.40% in Q3 2011, but nonaccrual loans increased to $121.2 from $90.4 at year-end 2011. Nonperforming assets were essentially unchanged at $294.5. The allowance was $97.4, or 1.83% of gross loans, versus $99.2 and 2.07% at year-end.
- Q3 non-interest income fell $6.1, primarily because fair-value gains were $6.0 lower than in Q3 2011. Nine-month non-interest income declined $9.2, also reflecting lower fair-value gains and securities-sale gains.
- Q3 non-interest expense included a $3.4 goodwill and intangible impairment charge related to Shine Investment Advisory Services. Nine-month expense decreased $4.8, chiefly due to lower losses and valuation adjustments on foreclosed assets and lower FDIC insurance expense, partly offset by higher compensation.
- Other assets acquired through foreclosure declined to $78.2 from $89.1 at year-end. Impaired loans rose to $224.1 from $209.5; troubled debt restructurings were $93.3, down from $112.5.
- Accumulated other comprehensive income improved, with nine-month other comprehensive income of $16.7, largely from unrealized gains on available-for-sale securities.
Outlook, risks and contingencies
- The filing provides no numerical earnings or growth guidance. Management said it was pursuing prudent loan and deposit growth and believed liquidity was adequate; these are expectations, not guarantees.
- Management identified material exposure to commercial real estate, construction and development, and commercial and industrial lending in its regional markets. Collateral values, credit losses, foreclosed-property valuations and regulatory reviews could affect results and reserves.
- Interest-rate risk was within board-approved limits. The filing’s simulation showed net interest income down 1.0% under a 100-basis-point decline and up 0.4%, 2.5% and 4.6% under increases of 100, 200 and 300 basis points, respectively. These estimates depend on assumptions and are not forecasts. A Treasury short position intended to mitigate modest liability sensitivity reduced quarterly margin by about five basis points.
- The Transaction Account Guarantee program was scheduled to expire December 31, 2012. The Company said it had taken steps to manage the potential liquidity effects. It also disclosed $146.6 of brokered deposits, $332.8 of CDARS deposits and $123.9 of ICS deposits.
- Bank of Nevada remained subject to a regulatory memorandum of understanding requiring enhanced oversight, prior approval for dividends to the parent, and elevated Tier 1 capital. The Company reported compliance with the MOU.
- Unfunded commitments and letters of credit totaled $1,352.1; the related loss-contingency liability was $1.6. Management said routine litigation was not expected to have a material effect.
- An IRS examination concerning a 2008 deduction and approximately $40.0 tax-refund claim was pending Joint Committee on Taxation approval after an IRS appeals conferee supported the deduction. No reserve was recorded. Management considered realization of the $36.6 net deferred tax asset more likely than not.
- Subsequent to quarter-end, the Company completed its October 17 acquisition of Western Liberty Bancorp for $27.5 cash and 2,966,236 shares; Service1st Bank was merged into Bank of Nevada. The acquired assets and liabilities were not included in September 30 balances. The Company also sold its Shine interest on October 31; management said the sale would not materially affect Q4 consolidated statements.
Most important facts for investors to verify
- Whether rising nonaccrual and impaired loans lead to further credit provisions or charge-offs, particularly in commercial real estate.
- Post-acquisition asset quality, capital, integration costs and realized benefits from Western Liberty, which were not reflected in quarter-end figures.
- Whether lower deposit funding costs and loan growth can sustain net interest income as yields, rates and funding mix change.
- The final outcome of the IRS review and the assumptions supporting deferred tax-asset recoverability.
- Liquidity and deposit-retention effects following expiration of the TAG program, and ongoing compliance with Bank of Nevada’s MOU.