3. Western Alliance Bancorporation
Western Alliance Bancorporation
(WAL - Get Report)
of Phoenix closed at $9.08 Tuesday, returning 46% year-to-date, after declining 15% last year.
The company on Aug. 17 announced an agreement to acquire
Western Liberty Bancorp
of Las Vegas, for roughly $55 million, or $4.02 a share, which was a premium of 49% over the target company's closing share price of $2.85 before the announcement, but only 75% of Western Liberty's total stockholder's equity of $73.7 million, as of June 30.
Western Alliance will take on $199 million in assets, along with three offices in the Las Vegas area. The deal is subject to the approval of Western Liberty's shareholders, and is expected to be completed during the fourth quarter.
Western Alliance reported second-quarter net income of $14.0 million, or 15 cents a share, increasing from $11.3 million, or 12 cents a share, during the first quarter, and $7.1 million, or seven cents a share, during the second quarter of 2011.
Net interest income increased to $70.8 million during the second quarter, from $70.1 million the previous quarter, and $68.7 million, a year earlier. The net interest margin was a strong 4.46% in the second quarter, declining from 4.53% tin the first quarter, but increasing from 4.34% in the second quarter of last year.
The main factor in the bottom line earnings improvement has been a decline in expenses on the sale and valuation of repossessed assets, to $901 thousand during the second quarter, from $2.7 million the previous quarter, and $7.7 million, a year earlier. Despite the declining expenses, Western Alliance's relatively high level of nonperforming assets continues to place a drag on earnings, with a second-quarter provision for loan losses of $13.3 million, which is slightly higher than in the previous quarter and a year earlier.
Nonperforming assets made up 2.5% of total assets as of June 30, improving from 2.7% in March, and 3.1% in June 2011.
Total loans increased 5% sequentially and 17% year-over-year, to $5.2 billion, as of June 30, with strong increases in commercial real estate and non-real estate lending.
Western Alliance Bancorporation's second-quarter ROA was 0.80%, improving from 0.67% the previous quarter, and 0.39% a year earlier. The return on average equity (ROE) was 8.48%, improving from 6.97% in the first quarter, and 3.98% in the second quarter of 2011.
With such a strong net interest margin, solid loan growth, and improving asset quality, Western Alliance looks like a golden late-cycle opportunity for investors.
Coffey says that growing loans is "what they do best," which "hurt them when they were growing loans in Nevada," after which Western Alliance "retooled and focused on Arizona and California."
"Loans have grown nine consecutive quarters and are on pace to grow 15% this year," he said.
The shares trade for 1.5 times their reported June 30 tangible book value of $6.01, and 12 times the consensus 2013 EPS estimate of 77 cents. The consensus 2012 EPS estimate is 59 cents.
Coffey rates Western Alliance "Outperform," with an $11 price target, and after raising his 2012 EPS estimate for the company by six cents to 75 cents on Aug. 20, the analyst on Wednesday raised the estimate by another two cents to 77 cents.
After lowering his 2013 EPS estimate by a nickel to 88 cents on Aug. 20, Coffee on Wednesday raised his 2013 EPS estimate to 92 cents, after Western Alliance late on Tuesday filed merger documents that included estimates of "nearly $16 million in credit marks (14.3% on loans and 16.7% on OREO), a net bargain purchase gain of $11.7 million and acquisition consideration of 50% cash/50% stock."
The analyst now estimates that Western Alliance will issue 2.9 million new shares to partially fund the Western Liberty deal, and since Western Liberty is so strongly capitalized, with a total ratio of Tier 1 capital to average assets of 34.77% as of June 30, and cash making up with cash making up 43% of total assets, "we are also estimating tangible book values of $6.18 for 3Q-12 and 2012 and $7.05 for 2013."
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