WESTERN ALLIANCE BANCORPORATION
10-Qs and 10-Ks
PROXIES
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2010
Commission File Number: 001-32550
WESTERN ALLIANCE BANCORPORATION
(Exact Name of Registrant as Specified in Its Charter)
| Nevada | 88-0365922 | |
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer I.D. Number) |
| One E. Washington Street Suite 1400, Phoenix, AZ | 85004 | |
| (Address of Principal Executive Offices) | (Zip Code) |
(602)-389-3500
(Registrant’s telephone number, including area code)
(Registrant’s telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
| Title of Each Class | Name on Each Exchange in Which Registered | |
| Common Stock, $0.0001 Par Value | New York Stock Exchange |
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes
o No þ
o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act Yes
o No þ
o No þ
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
þ
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate website, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such files). Yes
o
No
o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in
Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer
o
Accelerated filer
þ
Non-accelerated filer
o
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes
o
No
þ
The aggregate market value of the registrant’s voting stock held by non-affiliates is
approximately $289.8 million based on the June 30, 2010 closing price of said stock on the New York
Stock Exchange ($7.17 per share).
As of February 28, 2011, 82,170,038 shares of the registrant’s common stock were outstanding.
Portions of the registrant’s definitive proxy statement for its 2011 Annual Meeting of Stockholders
are incorporated by reference into Part III of this report.
INDEX
| PART I | Page | |||||||
|
|
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| Forward-Looking Statements | 3 | |||||||
| Item 1. | 3 | |||||||
| Item 1A. | 13 | |||||||
| Item 1B. | 22 | |||||||
| Item 2. | 22 | |||||||
| Item 3. | 22 | |||||||
| Item 4. | 22 | |||||||
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|
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| PART II | ||||||||
| Item 5. | 23 | |||||||
| Item 6. | 24 | |||||||
| Item 7. | 26 | |||||||
| Item 7A. | 69 | |||||||
| Item 8. | 69 | |||||||
| Item 9. | 126 | |||||||
| Item 9A. | 126 | |||||||
| Item 9B. | 128 | |||||||
|
|
||||||||
| PART III | ||||||||
| Item 10. | 128 | |||||||
| Item 11. | 128 | |||||||
| Item 12. | 128 | |||||||
| Item 13. | 128 | |||||||
| Item 14. | 128 | |||||||
|
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||||||||
| PART IV | ||||||||
| Item 15. | 129 | |||||||
|
|
||||||||
| SIGNATURES | 133 | |||||||
| CERTIFICATIONS | ||||||||
| EX-10.19 | ||||||||
| EX-21.1 | ||||||||
| EX-23.1 | ||||||||
| EX-31.1 | ||||||||
| EX-31.2 | ||||||||
| EX-32.1 | ||||||||
| EX-99.1 | ||||||||
| EX-99.2 | ||||||||
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Table of Contents
PART I
Forward-Looking Statements
Certain statements contained in this Annual Report on Form 10-K (“Form 10K”) are “forward-looking
statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends such
forward-looking statements be covered by the safe harbor provisions for forward-looking statements.
All statements other than statements of historical fact are “forward-looking statements” for
purposes of Federal and State securities laws, including statements that related to or are
dependent on estimates or assumptions relating to expectations, beliefs, projections, future plans
and strategies, anticipated events or trends and similar expressions concerning matters that are
not historical facts.
The forward-looking statements contained in this Form 10K reflect our current views about future
events and financial performance and involve certain risks, uncertainties, assumptions and changes
in circumstances that may cause our actual results to differ significantly from historical results
and those expressed in any forward-looking statement, including those risks discussed under the
heading “Risk Factors” in this 2010 Form 10K. Factors that may cause actual results to differ
materially from those contemplated by such forward-looking statements include, among others, the
following possibilities: 1) dependency on real estate and events that negatively impact real
estate; 2) high concentration of commercial real estate, construction and development and
commercial and industrial loans; 3) actual credit losses may exceed expected losses in the loan
portfolio; 4) possible need for a valuation allowance against deferred tax assets; 5) stock
transactions could require revalue of deferred tax assets; 6) expose of financial instruments to
certain market risks may cause volatility in earnings, 7) dependence on low-cost deposits; 8)
ability to borrow from FHLB or FRB; 9) events that further impair goodwill; 10) increase in the
cost of funding as the result of changes to our credit rating; 11) expansion strategies may not be
successful, 12) our ability to control costs, 13) risk associated with changes in internal controls
and processes; 14) our ability to compete in a highly competitive market; 15) our ability to
recruit and retain qualified employees, especially seasoned relationship bankers; 16) the effects
of terrorist attacks or threats of war; 17) risk of audit of U.S. federal tax deductions; 18)
perpetration of internal fraud; 19) risk of operating in a highly regulated industry and our
ability to remain in compliance; 20) the effects of interest rates and interest rate policy; 21)
exposure to environmental liabilities related to the properties we acquire title; 22) recent
legislative and regulatory changes including Emergency Economic Stabilization Act of 2008, or EESA,
the American Recovery and Reinvestment Act of 2009, or ARRA, and the Dodd-Frank Wall Street Reform
and Consumer Protection Act of 2010 and the rules and regulations that might be promulgated
thereunder; and 22) risks related to ownership and price of our common stock.
For more information regarding risks that may cause our actual results to differ materially from
any forward-looking statements, see “Risk Factors” beginning on page 12. Forward-looking
statements speak only as of the date they are made, the Company does not undertake any obligations
to update forward-looking statements to reflect circumstances and or events that occur after the
date the forward-looking statements are made.
Purpose
The following discussion is designed to provide insight on the financial condition and results of
operations of Western Alliance Bancorporation and its subsidiaries. Unless otherwise stated, “the
Company” or “WAL” refers to this consolidated entity and “we” refers to the Company’s Management.
This discussion should be read in conjunction with the Company’s Consolidated Financial Statements
and notes to the Consolidated Financial Statement, herein referred to as “the Consolidated
Financial Statements”. These Consolidated Financial Statements are presented on pages 80 through
126 of this Form 10-K.
ITEM 1. BUSINESS
Organization Structure and Description of Services
Western Alliance Bancorporation (“WAL or “the Company”), incorporated in the state of Nevada, is a
bank holding company providing full service banking and related services to locally owned
businesses, professional firms, real estate developers and investors, local non-profit
organizations, high net worth individuals and other consumers through its three wholly owned
subsidiary banks (the “Banks”): Bank of Nevada (“BON”), operating in Southern Nevada, Western
Alliance Bank (“WAB”), operating in Arizona and Northern Nevada and Torrey Pines Bank (“TPB”),
operating in California. On December 31, 2010, the Company merged its former Alta Alliance Bank
(“AAB”) subsidiary into its Torrey Pines Bank subsidiary, and its former First Independent Bank of
Nevada subsidiary into its Alliance Bank of Arizona subsidiary. As part of the latter merger,
Alliance Bank of Arizona (“ABA”) was renamed Western Alliance Bank doing business as Alliance Bank
of Arizona (in Arizona) and First Independent Bank (“FIB”) (in Nevada). In addition, its non-bank
subsidiaries, Shine Investment Advisory Services, Inc (“Shine”). and Western Alliance Equipment
Finance (“WAEF”) offer an array of financial products and services aimed at satisfying the needs of
small to mid-sized businesses and their proprietors, including financial planning, custody and
investments, and equipment leasing nationwide. These entities are
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collectively referred to herein as the Company. The Company divested its wholly owned subsidiary
Premier Trust, Inc as of September 1, 2010.
WAL also has six unconsolidated subsidiaries used as business trusts in connection with issuance of
trust-preferred securities as described in Note 11, “Junior Subordinated and Subordinated Debt”
beginning on page 108 of this Form 10-K.
Bank Subsidiaries
| Year | Number of | ||||||||||||||||||||||||||||||||
| Bank | Founded/ | Branch | Total | Net | |||||||||||||||||||||||||||||
| Name | Headquarters | Acquired | Locations | Location Cities | Assets | Loans | Deposits | ||||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||||||
|
BON
(1)
|
Las Vegas Nevada | 1994 | 12 |
Las Vegas, North Las
Vegas, Henderson, and Mesquite |
$ | 2,771.4 | $ | 1,840.6 | $ | 2,388.3 | |||||||||||||||||||||||
|
WAB
(2)
|
Phoenix, Arizona | 2003 | 16 |
Phoenix, Tucson,
Scottsdale, Sedona, Mesa, Flagstaff, Reno, Sparks, Fallon, and Carson City |
$ | 1,927.5 | $ | 1,285.1 | $ | 1,671.1 | |||||||||||||||||||||||
|
TPB
(3)
|
San Diego, CA | 2003 | 11 |
San Diego, La Mesa,
Carlsbad, Los Angeles, Oakland, Piedmont and Los Altos |
$ | 1,452.2 | $ | 1,047.0 | $ | 1,281.6 | |||||||||||||||||||||||
(1)
BON commenced operations in 1994 as BankWest of Nevada (“BWN”). In 2006, BWN
merged with Nevada First Bank and Bank of Nevada. As part of the mergers, BWN changed its name to
BON. BON has two wholly-owned subsidiaries, BW Real Estate, Inc which operates as a real estate
investment trust and holds certain of BON’s real estate loans and related securities, and. BW
Nevada Holdings, LLC, which owns the Company’s 2700 West Sahara Avenue, Las Vegas, Nevada location.
(2)
WAB commenced operations in 2003 as Alliance Bank of Arizona, and subsequently
changed its name to WAB on December 31, 2010 as part of the merger between ABA and FIB.
(3)
TPB commenced operations in 2003. On December 31, 2010, AAB merged into TPB.
Non-Bank Subsidiaries and Affiliates
WAL acquired Miller/Russell & Associates, Inc. (“MRA”), an Arizona registered investment advisor,
in 2004. MRA provides investment advisory services to individuals, foundations, retirement plans
and corporations. On December 31, 2009, the Company completed the sale of a 75 percent interest in
MRA to certain members of the MRA management team in exchange for approximately $2.7 million. In
August 2010, WAL sold an additional 0.1%-interest in MRA to certain members of the MRA management
team in exchange for $3,600, for regulatory purposes.
In addition, in July 2007, WAL made an 80 percent interest investment in Shine, a registered
investment advisor.
The Company provides a full range of banking services, as well as investment advisory services,
through its consolidated subsidiaries. Applicable accounting guidance provides for the
identification of reportable segments on the basis of discreet business units and their financial
information to the extent such units are reviewed by an entity’s chief operating decision maker.
Market Segments
The Company had four reportable operating segments at December 31, 2010. The Company’s reporting
segments were modified in the fourth quarter of 2010 to reflect the way the Company manages and
assesses the performance of the business as a result of the strategic mergers and divestures of
subsidiaries. The Company previously reported the banking operations on a state-by-state basis but
due to the bank mergers now reports based on bank entity and other.
The Company adjusted segment reporting composition during 2010 to more accurately reflect the way
the Company manages and assesses the performance of the business. During 2010, the Company sold
its wholly-owned trust subsidiary, discontinued a portion of its credit card services and merged
from five bank subsidiaries to three.
The re-defined structure at December 31, 2010 consists of the following four reportable operating
segments: “Bank of Nevada”, “Western Alliance Bank”, “Torrey Pines Bank” and “Other” (Western
Alliance Bancorporation holding company,
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Western Alliance Equipment Finance, Shine Investment
Advisory Services, Inc, PTI until September 1, 2010 and the discontinued operations portion of the credit card services). All prior period balances were
reclassified to reflect the change in structure.
Management has determined the operating segments using a combination of factors primarily driven by
legal entity. Management determined that the legal entities that contributed less than the
quantitative thresholds for separate management reporting be combined into the Other segment.
The accounting policies of the reported segments are the same as those of the Company as described
in Note 1, “Nature of Operation and Summary of Significant Accounting Policies” beginning on page
79 transactions between segments consisted primarily of borrowings, loan participations and shared
services. All intercompany transactions are eliminated for reporting consolidated results of
operations. Loan participations are recorded at par value with no resulting gain or loss. The
Company allocated centrally-provided services to the operating segments based upon estimated usage
of those services. Please refer to Note 19, “Segments” in our Consolidated Financial Statements
for financial information regarding segment reporting beginning on
page 122.
The bank operating segments derive a majority of their revenues from net interest income generated
from quality loan growth offset by deposit costs. The Company’s chief executive officer relies
primarily on the success of loan and deposit growth while maintaining net interest margin and net
profits from these efforts to assess the performance of these segments. The other segment derives
a majority of its revenue from fees based on assets under management and interest income from
investments. The Company’s chief executive officer relies primarily on costs and strategic
initiative needs when assessing the performance of and allocating resources to this segment.
Lending Activities
Through its banking segments, the Company provides a variety of financial services to customers,
including commercial real estate loans, construction and land development loans, commercial loans,
and consumer loans. The Company’s lending has focused primarily on meeting the needs of business
customers. Loans to businesses comprised 85.9% and 84.1% of the total loan portfolio at December
31, 2010 and 2009, respectively.
Commercial Real Estate (“CRE”):
Loans to finance the purchase of CRE and loans to finance
inventory and working capital that are additionally secured by CRE make up the majority of our loan
portfolio. These CRE loans are secured by apartment buildings, professional offices, industrial
facilities, retail centers and other commercial properties. As of December 31, 2010 and 2009,
54.1% and 53.9% of our CRE loans were owner-occupied. Owner-occupied commercial real estate loans
are loans secured by owner-occupied nonfarm nonresidential properties for which the primary source
of repayment (more than 50%) is the cash flow from the ongoing operations and activities conducted
by the borrower who owns the property. Non-owner-occupied commercial real estate loans are
commercial real estate loans for which the primary source of repayment is nonaffiliated rental
income associated with the collateral property.
Construction and Land Development:
Construction and land development loans include
industrial/warehouse properties, office buildings, retail centers, medical facilities, restaurants
and single-family homes. These loans are primarily originated to experienced local developers with
whom the Company has a satisfactory lending history. An analysis of each construction project is
performed as part of the underwriting process to determine whether the type of property, location,
construction costs and contingency funds are appropriate and adequate. Loans to finance commercial
raw land are primarily to borrowers who plan to initiate active development of the property within
two years.
Commercial and Industrial:
Commercial and industrial loans include working capital lines of
credit, inventory and accounts receivable lines, mortgage warehouse lines, equipment loans and
leases, and other commercial loans. Commercial loans are primarily originated to small and
medium-sized businesses in a wide variety of industries. WAB is designated a “Preferred Lender” in
Arizona with the Small Business Association (“SBA”) under its “Preferred Lender Program.”
Residential real estate:
In 2010 the Company discontinued residential real estate loan origination
as a primary business line.
Consumer:
A variety of consumer loan types are offered to meet customer demand and to respond to
community needs. Consumer loans are generally offered at a higher rate and shorter term than
residential mortgages. Examples of our consumer loans include: home equity loans and lines of
credit; home improvement loans; credit card loans; new and used automobile loans; and personal
lines of credit.
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As of December 31, 2010, our loan portfolio totaled $4.2 billion, or approximately 68.5% of our
total assets. The following table sets forth the composition of our loan portfolio as of December
31, 2010 and 2009.
| December 31, | ||||||||||||||||
| 2010 | 2009 | |||||||||||||||
| Amount | Percent | Amount | Percent | |||||||||||||
| (dollars in thousands) | ||||||||||||||||
|
Commercial real estate-owner occupied
|
$ | 1,223,150 | 28.8 % | $ | 1,091,363 | 26.6% | ||||||||||
|
Commercial real estate-non-owner
|
1,038,488 | 24.5 % | 933,261 | 22.8% | ||||||||||||
|
Commercial and industrial
|
744,659 | 17.5 % | 685,089 | 16.7% | ||||||||||||
|
Residential real estate
|
527,302 | 12.4 % | 568,319 | 13.9% | ||||||||||||
|
Construction and land development
|
451,470 | 10.6 % | 623,198 | 15.2% | ||||||||||||
|
Commercial leases
|
189,968 | 4.5 % | 117,104 | 2.8% | ||||||||||||
|
Consumer
|
71,545 | 1.7 % | 80,300 | 2.0% | ||||||||||||
|
|
||||||||||||||||
|
Total loans
|
4,246,582 | 100.0 % | 4,098,634 | 100.0% | ||||||||||||
|
|
||||||||||||||||
|
Net deferred fees and unearned income
|
(6,040 | ) | (18,995 | ) | ||||||||||||
|
|
||||||||||||||||
|
Total loans, net of deferred loan fees
|
$ | 4,240,542 | $ | 4,079,639 | ||||||||||||
|
|
||||||||||||||||
For additional information concerning loans, refer to Note 4, “Loans, Leases and Allowance for
Credit Losses” of the Consolidated Financial Statements or see the “Management Discussion and
Analysis of Financial Condition and Results of Operations – Financial Condition – Loans”
discussions.
General
The Company adheres to a specific set of credit standards across our bank subsidiaries that ensure
the proper management of credit risk. Furthermore, our holding company’s management team plays an
active role in monitoring compliance with such standards by our banks.
Loan originations are subject to a process that includes the credit evaluation of borrowers,
utilizing established lending limits, analysis of collateral, and procedures for continual
monitoring and identification of credit deterioration. Loan officers actively monitor their
individual credit relationships in order to report suspected risks and potential downgrades as
early as possible. The respective boards of directors of each of our banking subsidiaries approve
their own loan policies, as well as loan limit authorizations. Except for variances to reflect
unique aspects of state law and local market conditions, our lending policies generally incorporate
consistent underwriting standards. The Company monitors all changes to each respective bank’s loan
policy to ensure this consistency. Our credit culture has helped us to identify troubled credits
early, allowing us to take corrective action when necessary.
Loan Approval Procedures and Authority
Our loan approval procedures are executed through a tiered loan limit authorization process, which
is structured as follows:
| • |
Individual Authorities.
The chief credit officer (“CCO”) of each subsidiary bank
sets the authorization levels for individual loan officers on a case-by-case basis.
Generally, the more experienced a loan officer, the higher the authorization level. The
maximum approval authority for a loan officer is $2.0 million for real estate secured
loans and $750,000 for other loans.
|
||
| • |
Management Loan Committees.
Credits in excess of individual loan limits are
submitted to the appropriate bank’s Management Loan Committee. The Management Loan
Committees consist of members of the senior management team of that bank and are chaired
by that bank’s chief credit officer. The Management Loan Committees have approval
authority up to $6.0 million at Bank of Nevada, $7.5 million at Western Alliance Bank,
and $7.0 million at Torrey Pines Bank. After December 31, 2010, each of the bank
affiliates changed their respective approval authority limits to $7.0 million.
|
||
| • |
Credit Administration.
Credits in excess of the Management Loan Committee
authority are submitted by the bank subsidiary to Western Alliance’s Credit
Administration (“WACA”). WACA has approval authority up to established house
concentration limits, which range from $15 million to $35 million, depending on quality
risk rating. Western Alliance Credit Administration Committee (“WACAC”) approval is
additionally required for new relationships of $15 million or greater to borrowers
within market footprint, and $5 million outside market footprint. The WACAC of members
of affiliate chief credit officers and senior management
|
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| team of Western Alliance Bancorporation, chaired by the Western Alliance Bancorporation Chief Credit Officer. | |||
| • |
Board of Directors Oversight.
The chief executive officer (“CEO”) of Western
Alliance Bancorporation acting with the Chairman of the Board of Directors of Bank of
Nevada has approval authority up to the bank’s legal lending limit. Which in the
aggregate was $153.2 million in certain circumstances at December 31, 2010.
|
Our credit administration department works independent of loan production.
Loans to One Borrower.
In addition to the limits set forth above, subject to certain exceptions,
state banking law generally limits the amount of funds that a bank may lend to a single borrower.
Under Nevada law, the combination of investments in private securities and total amount of
outstanding loans that a bank may make to a single borrower generally may not exceed 25% of
stockholders’ tangible equity. Under Arizona law, the obligations of one borrower to a bank
generally may not exceed 20% of the bank’s capital, plus an additional 10% of its capital if the
additional amounts are fully secured by readily marketable collateral. Under California law, the
unsecured obligations of any one borrower to a bank generally may not exceed 15% of the sum of the
bank’s shareholders’ equity, allowance for credit losses, capital notes and debentures; and the
secured and unsecured obligations of any one borrower to a bank generally may not exceed 25% of the
sum of the bank’s shareholders’ equity, allowance for credit losses, capital notes and debentures.
Concentrations of Credit Risk.
Our lending policies also establish customer and product
concentration limits to control single customer and product exposures. Our lending policies have
several different measures to limit concentration exposures. Set forth below are the primary
segmentation limits and actual measures as of December 31, 2010:
| Percent of Total Capital | Percent of Total Loans | |||||||||||||||
| Policy Limit | Actual | Policy Limit | Actual | |||||||||||||
|
Commercial Real Estate-Term
|
360 | % | 345 | % | 65 | % | 53 | % | ||||||||
|
Commercial and Industrial
|
165 | 143 | 30 | 22 | ||||||||||||
|
Construction
|
100 | 69 | 30 | 11 | ||||||||||||
|
Residential Real Estate
|
90 | 81 | 65 | 12 | ||||||||||||
|
Consumer
|
15 | 11 | 15 | 2 | ||||||||||||
Asset Quality
General
To measure asset quality, the Company has instituted a loan grading system consisting of nine
different categories. The first five are considered “satisfactory.” The other four grades range
from a “watch” category to a “loss” category and are consistent with the grading systems used by
Federal banking regulators. All loans are assigned a credit risk grade at the time they are made,
and each originating loan officer reviews the credit with his or her immediate supervisor on a
quarterly basis to determine whether a change in the credit risk grade is warranted. In addition,
the grading of our loan portfolio is reviewed, at minimum, annually by an external, independent
loan review firm.
Collection Procedure
If a borrower fails to make a scheduled payment on a loan, the bank attempts to remedy the
deficiency by contacting the borrower and seeking payment. Contacts generally are made within 15
business days after the payment becomes past due. Each of the bank affiliates maintain a Special
Assets Department, which generally services and collects loans rated substandard or worse. Each
bank’s CCO is responsible for monitoring activity that may indicate an increased risk rating, such
as past-dues, overdrafts, loan agreement covenant defaults, etc. All charge-offs in excess of
$25,000 require the review of each bank’s respective board of directors. Loans deemed
uncollectible are proposed for charge-off at each respective bank’s board meeting.
Nonperforming Assets
Nonperforming assets include loans past due 90 days or more and still accruing interest, nonaccrual
loans, trouble debt restructured loans, and repossessed assets including other real estate owned
(“OREO”). In general, loans are placed on nonaccrual status when we determine timely collection of
interest to be in doubt due to the borrower’s financial condition and collection efforts.
Restructured loans have modified terms to reduce either principal or interest due to deterioration
in the borrower’s financial condition. Other repossessed assets resulted from loans where we have
received title or physical possession of the borrower’s assets. Generally, the Company
re-appraises OREO and collateral dependent loans every
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six months. Net losses on sales/valuations of repossessed assets were $28.83 million and $21.3
million for the years ended December 31, 2010 and 2009, respectively. These losses may continue in
future periods.
Criticized Assets
Federal regulations require that each insured bank classify its assets on a regular basis. In
addition, in connection with examinations of insured institutions, examiners have authority to
identify problem assets, and, if appropriate, re-classify them. Loan grades six through nine of
our loan grading system are utilized to identify potential problem assets.
The following describes the potential problem assets in our loan grading system:
| • |
“Watch List/Special Mention.”
Generally these are assets that require more than normal
management attention. These loans may involve borrowers with adverse financial trends,
higher debt to equity ratios, or weaker liquidity positions, but not to the degree of being
considered a “problem loan” where risk of loss may be apparent. Loans in this category are
usually performing as agreed, although there may be some minor non-compliance with
financial covenants.
|
||
| • |
“Substandard.”
These assets contain well-defined credit weaknesses and are
characterized by the distinct possibility that the bank will sustain some loss if such
weakness or deficiency is not corrected. These loans generally are adequately secured and
in the event of a foreclosure action or liquidation, the bank should be protected from
loss. All loans 90 days or more past due and all loans on nonaccrual are considered at
least “substandard,” unless extraordinary circumstances would suggest otherwise.
|
||
| • |
“Doubtful.”
These assets have an extremely high probability of loss, but because of
certain known factors which may work to the advantage and strengthening of the asset (for
example, capital injection, perfecting liens on additional collateral and refinancing
plans), classification as an estimated loss is deferred until a more precise status may be
determined.
|
||
| • |
“Loss.”
These assets are considered uncollectible, and of such little value that their
continuance as assets is not warranted. This classification does not mean that the loan
has absolutely no recovery or salvage value, but rather that it is not practicable or
desirable to defer writing off the asset, even though partial recovery may be achieved in
the future.
|
Allowance for Credit Losses
Like other financial institutions, the Company must maintain an adequate allowance for credit
losses. The allowance for credit losses is established through a provision for credit losses
charged to expense. Loans are charged against the allowance for credit losses when Management
believes that collectability of the contractual principal or interest is unlikely. Subsequent
recoveries, if any, are credited to the allowance. The allowance is an amount believed adequate to
absorb probable losses on existing loans that may become uncollectable, based on evaluation of the
collectability of loans and prior credit loss experience, together with the other factors. For a
detailed discussion of the Company’s methodology see “Management’s Discussion and Analysis and
Financial Condition – Critical Accounting Policies – Allowance for Credit Losses” beginning on
page 47.
Investment Activities
Each of our banking subsidiaries and the holding company has its own investment policy, which is
approved by each respective bank’s board of directors. These policies dictate that investment
decisions will be made based on the safety of the investment, liquidity requirements, potential
returns, cash flow targets, and consistency with our interest rate risk management. Each bank’s
asset and liability committee is responsible for making securities portfolio decisions in
accordance with established policies. The Chief Financial Officer has the authority to purchase
and sell securities within specified guidelines established by the Company’s accounting and
investment policies. All transactions for a specific bank or for the holding company are reviewed
by the respective asset and liability management committee and/or board of directors.
Generally the bank’s investment policies limit securities investments to cash and cash equivalents,
which include short-term investments with a duration of less than 180 days issued by companies
rated “A” or better; securities backed by the full faith and credit of the U.S. government,
including U.S. treasury bills, notes, and bonds, and direct obligations of Ginnie Mae (and may in
the future encompass certain securities associated with the Troubled Asset Relief Program
(“TARP”)); mortgage-backed securities (“MBS”) or collateralized mortgage obligations (“CMO”) issued
by a government-sponsored enterprise (“GSE”) such as Fannie Mae or, Freddie Mac, debt securities
issued by a government-sponsored enterprise (“GSE”) such as Fannie Mae, Freddie Mac, and the FHLB;
municipal securities with a rating of “AAA;” adjustable-rate
8
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preferred stock (ARPS) where the issuing company is rated “BBB” or higher; corporate debt with a
rating of “Single-A” or better; and mandatory purchases of equity securities of the FRB and FHLB.
ARPS holdings are limited to no more than 10% of a bank’s tier 1 capital and corporate debt
holdings are limited to no more than 2.5% of a bank’s assets.
The Company no longer purchases (although we may continue to hold previously acquired)
collateralized debt obligations or private label collateralized mortgage obligations. Our
policies also govern the use of derivatives, and provide that the Company and its banking
subsidiaries are to prudently use derivatives as a risk management tool to reduce the Bank’s
overall exposure to interest rate risk, and not for speculative purposes.
All of our investment securities are classified as available-for-sale (“AFS”), held-to-maturity
(“HTM”) or measured at fair value (“trading”) pursuant to Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification (“ASC”) Topic 320,
“Investments”
and FASB ASC Topic 825,
“Financial Instruments
”. Available-for -sale securities are reported at fair value in accordance
with FASB Topic 820,
“Fair Value Measurements and Disclosures.
” For additional information
regarding the Company’s accounting policy for investment securities see, “Management’s Discussion
and Analysis of Financial Condition– Critical Accounting Policies – Investment Securities”
beginning on page 48.
As of December 31, 2010, the Company had an investment securities portfolio of $1.24 billion,
representing approximately 19.9% of our total assets, with the majority of the portfolio invested
in AAA-rated securities. The average duration of our investment securities is 2.97 years as of
December 31, 2010.
The following table summarizes the investment securities portfolio as of December 31, 2010 and
2009.
| December 31, | ||||||||||||||||
| 2010 | 2009 | |||||||||||||||
| Amount | Percent | Amount | Percent | |||||||||||||
| (dollars in millions) | ||||||||||||||||
|
Direct obligation and GSE residential mortgage-backed
|
$ | 781.2 | 63.2 | % | $ | 655.1 | 80.8 | % | ||||||||
|
Privale label residential mortgage-backed
|
8.1 | 0.7 | % | 18.2 | 2.2 | % | ||||||||||
|
U.S. Government sponsored agency securities
|
280.1 | 22.7 | % | 2.5 | 0.3 | % | ||||||||||
|
Adjustable rate preferred stock
|
67.2 | 5.4 | % | 18.3 | 2.3 | % | ||||||||||
|
Trust preferred securities
|
23.0 | 1.9 | % | 22.0 | 2.7 | % | ||||||||||
|
Municipal obligations
|
1.7 | 0.1 | % | 5.4 | 0.7 | % | ||||||||||
|
Collateralized debt obligations
|
0.3 | 0.0 | % | 0.9 | 0.1 | % | ||||||||||
|
Corporate bonds
|
49.9 | 4.0 | % | 71.2 | 8.8 | % | ||||||||||
|
Other
|
23.9 | 2.0 | % | 17.2 | 2.1 | % | ||||||||||
|
|
||||||||||||||||
|
Total
|
$ | 1,235.4 | 100.0 | % | $ | 810.8 | 100.0 | % | ||||||||
|
|
||||||||||||||||
As of December 31, 2010 and 2009, the Company had an investment in bank-owned life insurance
(“BOLI”) of $129.8 million and $92.5 million, respectively. The BOLI was purchased to help offset
employee benefit costs. For additional information concerning investments, see “Management’s
Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition –
Investments.”
Deposit Products
The Company offers a variety of deposit products including checking accounts, savings accounts,
money market accounts and other types of deposit accounts, including fixed-rate, fixed maturity
retail certificates of deposit. The Company has historically focused on growing its lower cost
core customer deposits. As of December 31, 2010, the deposit portfolio was comprised of 27.0%
non-interest bearing deposits and 73% interest-bearing deposits.
Noninterest bearing deposits consist of non-interest bearing checking account balances. The
Company considers these deposits to be core deposits.
The competition for deposits in our markets is strong. The Company has historically been
successful in attracting and retaining deposits due to several factors, including (1) focus on a
high quality of customer service; (2) our experienced relationship bankers who have strong
relationships within their communities; (3) the broad selection of cash management services we
offer; and (4) incentives to employees for business development. The Company intends to continue
its focus on attracting deposits from our business lending relationships in order to maintain low
cost of funds and improve net interest margin. The loss of low-cost deposits could negatively
impact future profitability.
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Deposit balances are generally influenced by national and local economic conditions, changes in
prevailing interest rates, internal pricing decisions, perceived stability of financial
institutions and competition. The Company’s deposits are primarily obtained from communities
surrounding our branch offices. In order to attract and retain quality deposits, we rely on
providing quality service and introducing new products and services that meet the needs of
customers.
The Company’s deposit rates are determined by each individual bank through an internal oversight
process under the direction of its asset and liability committee. The banks consider a number of
factors when determining deposit rates, including:
| • |
current and projected national and local economic conditions and the outlook for
interest rates;
|
||
| • |
local competition;
|
||
| • |
loan and deposit positions and forecasts, including any concentrations in either; and
|
||
| • |
FHLB advance rates and rates charged on other funding sources.
|
The following table shows our deposit composition:
| December 31, | ||||||||||||||||
| 2010 | 2009 | |||||||||||||||
| Amount | Percent | Amount | Percent | |||||||||||||
| (dollars in thousands) | ||||||||||||||||
|
Non-interest bearing demand
|
$ | 1,443,251 | 27.0 | % | $ | 1,157,013 | 24.5 | % | ||||||||
|
Interest-bearing demand
|
523,827 | 9.8 | % | 362,682 | 7.7 | % | ||||||||||
|
Savings and money market
|
1,926,060 | 36.1 | % | 1,752,450 | 37.1 | % | ||||||||||
|
Time certificates of $100,000 or more
|
1,276,369 | 23.9 | % | 1,205,162 | 25.5 | % | ||||||||||
|
Other time deposits
|
168,934 | 3.2 | % | 244,795 | 5.2 | % | ||||||||||
|
|
||||||||||||||||
|
Total deposits
|
$ | 5,338,441 | 100.0 | % | $ | 4,722,102 | 100.0 | % | ||||||||
|
|
||||||||||||||||
In addition to our deposit base, we have access to other sources of funding, including FHLB and FRB
advances, repurchase agreements and unsecured lines of credit with other financial institutions.
Additionally, in the past, we have accessed the capital markets through trust preferred offerings.
For additional information concerning our deposits see “Management’s Discussion and Analysis of
Financial Condition and Results of Operations – Balance Sheet Analysis – Deposits.”
Financial Products and Services
In addition to traditional commercial banking activities, the Company offers other financial
services to customers, including: internet banking, wire transfers, electronic bill payment, lock
box services, courier, and cash management services.
Through Shine Investment Advisory Services, a full service financial advisory firm, the Company
offers financial planning and investment management.
Customer, Product and Geographic Concentrations
Approximately 63.9% and 64.6% of the loan portfolio at December 31, 2010 and 2009, respectively
consisted of commercial real estate secured loans, including commercial real estate loans and
construction and land development loans. The Company’s business is concentrated in the Las Vegas,
Oakland, Phoenix, Reno, San Diego and Tucson metropolitan areas. Consequently, the Company is
dependent on the trends of these regional economies. The Company is not dependent upon any single
or limited number of customers, the loss of which would have a material adverse effect on the
Company. No material portion of the Company’s business is seasonal.
Foreign Operations
The Company has no foreign operations. The bank subsidiaries provide loans, letters of credit and
other trade-related services to commercial enterprises that conduct business outside the United
States.
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Competition
The banking and financial services industries in our market areas remain highly competitive despite
the recent economic downturn. Many of our competitors are much larger in total assets and
capitalization, have greater access to capital markets, and offer a broader range of financial
services than we can offer.
This increasingly competitive environment is primarily a result of long term changes in regulation
that made mergers and geographic expansion easier; changes in technology and product delivery
systems, such as automated teller machine (“ATM”) networks and web-based tools; the accelerating
pace of consolidation among financial services providers; and the flight of deposit customers to
perceived increased safety. We compete for loans, deposits and customers with other commercial
banks, local community banks, local credit unions, securities and brokerage companies, mortgage
companies, insurance companies, finance companies, money market funds, and other non-bank financial
services providers. This strong competition for deposit and loan products directly affects the
rates of those products and the terms on which they are offered to consumers.
Technological innovation continues to contribute to greater competition in domestic and
international financial services markets. Many customers now expect a choice of several delivery
systems and channels, including telephone, mail, internet and ATMs.
Mergers between financial institutions have placed additional pressure on banks to consolidate
their operations, reduce expenses and increase revenues to remain competitive. In addition,
competition has intensified due to federal and state interstate banking laws, which permit banking
organizations to expand geographically with fewer restrictions than in the past. These laws allow
banks to merge with other banks across state lines, thereby enabling banks to establish or expand
banking operations in our market. The competitive environment is also significantly impacted by
federal and state legislation that makes it easier for non-bank financial institutions to compete
with the Company.
Employees
As of December 31, 2010, the Company had 908 full-time equivalent employees. The Company’s
employees are not represented by a union or covered by a collective bargaining agreement.
Management believes that its employee relations are good.
Recent Developments and Company Response
The global and U.S. economies, and the economies of the local communities in which we operate,
experienced a rapid decline in 2008. The financial markets and the financial services industry in
particular suffered unprecedented disruption, causing many major institutions to fail or require
government intervention to avoid failure. These conditions were brought about largely by the
erosion of U.S. and global credit markets, including a significant and rapid deterioration of the
mortgage lending and related real estate markets. Despite these conditions, in 2010 we continued
to grow net interest income to $232.6 million, up 15% from $202.3 million in 2009. However, as
with many financial institutions in our markets, we continued to suffer losses resulting primarily
from provisions and charge-offs for credit losses, and net losses on sales/valuations of other
repossessed assets.
The United States, state and foreign governments have taken extraordinary actions in an attempt to
deal with the worldwide financial crisis and the severe decline in the economy. On July 21, 2010,
President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the
Dodd-Frank Act, into law. The Dodd-Frank Act has had, and will continue to have, a broad impact on
the financial services industry. The SEC and the Federal banking agencies, including the Board of
Governors of the Federal Reserve System (or the Federal Reserve) and the Federal Deposit Insurance
Corporation (or the FDIC), have issued a number of requests for public comment, proposed rules and
final regulations to implement the requirements of the Dodd-Frank Act. The following items provide
a brief description of the impact of the Dodd-Frank Act on the operations and activities, both
currently and prospectively, of the Company and its subsidiaries.
| • |
Deposit Insurance.
The Dodd-Frank Act and implementing final rules from the FDIC make
permanent the $250,000 deposit insurance limit for insured deposits. The assessment base
against which an insured depository institution’s deposit insurance premiums paid to the
FDIC’s Deposit Insurance Fund (or the DIF) has been revised to use the institution’s
average consolidated total assets less its average equity rather than its deposit base.
Although we do not expect these provisions to have a material effect on our deposit
insurance premium expense, in the future, they could increase the FDIC deposit insurance
premiums paid by our insured depository institution subsidiaries.
|
||
| • |
Increased Capital Standards and Enhanced Supervision.
The federal banking agencies are
required to establish minimum leverage and risk-based capital requirements for banks and
bank holding companies. These new standards will be no lower than existing regulatory
capital and leverage standards applicable to insured
|
11
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|
depository institutions and may, in fact, be higher when established by the agencies.
Compliance with heightened capital standards may reduce our ability to generate or originate
revenue-producing assets and thereby restrict revenue generation from banking and non-banking
operations. The Dodd-Frank Act also increases regulatory oversight, supervision and
examination of banks, bank holding companies and their respective subsidiaries by the
appropriate regulatory agency. Compliance with new regulatory requirements and expanded
examination processes could increase our cost of operations.
|
|||
| • |
Trust Preferred Securities.
Under the increased capital standards established by the
Dodd-Frank Act, bank holding companies are prohibited from including in their regulatory
Tier 1 capital hybrid debt and equity securities issued on or after May 19, 2010. Among
the hybrid debt and equity securities included in this prohibition are trust preferred
securities, which the Company has used in the past as a tool for raising additional Tier 1
capital and otherwise improving its regulatory capital ratios. Although the Company may
continue to include our existing trust preferred securities as Tier 1 capital, the
prohibition on the use of these securities as Tier 1 capital going forward may limit the
Company’s ability to raise capital in the future.
|
||
| • |
The Consumer Financial Protection Bureau.
The Dodd-Frank Act creates a new, independent
Consumer Financial Protection Bureau (or the Bureau) within the Federal Reserve that is
tasked with establishing and implementing rules and regulations under certain federal
consumer protection laws. These consumer protection laws govern the manner in which we
offer many of our financial products and services. Regulatory and rulemaking authority
over these laws is expected to be transferred to the Bureau in July 2011.
|
||
| • |
State Enforcement of Consumer Financial Protection Laws.
The Dodd-Frank Act permits
states to adopt consumer protection laws and regulations that are stricter than those
regulations promulgated by the Bureau. State attorneys general are permitted to enforce
consumer protection rules adopted by the Bureau against certain state-chartered
institutions. Although consumer products and services represent a relatively small part of
our business, compliance with any such new regulations would increase our cost of
operations and, as a result, could limit our ability to expand these products and services.
|
||
| • |
Transactions with Affiliates and Insiders.
The Dodd-Frank Act enhances the requirements
for certain transactions with affiliates under Section 23A and 23B of the Federal Reserve
Act, including an expansion of the definition of “covered transactions” and an increase in
the amount of time for which collateral requirements regarding covered transactions must be
maintained. Additionally, limitations on transactions with insiders are expanded through
the (i) strengthening on loan restrictions to insiders; and (ii) expansion of the types of
transactions subject to the various limits, including derivative transactions, repurchase
agreements, reverse repurchase agreements and securities lending or borrowing transactions.
Restrictions are also placed on certain asset sales to and from an insider to an
institution, including requirements that such sales be on market terms and, in certain
circumstances, approved by the institution’s board of directors.
|
||
| • |
Corporate Governance.
The Dodd-Frank Act addresses many corporate governance and
executive compensation matters that will affect most U.S. publicly traded companies,
including us. The Dodd-Frank Act (1) grants shareholders of U.S. publicly traded companies
an advisory vote on executive compensation; (2) enhances independence requirements for
compensation committee members; (3) requires companies listed on national securities
exchanges to adopt incentive-based compensation claw-back policies for executive officers;
and (4) provides the SEC with authority to adopt proxy access rules that would allow
shareholders of publicly traded-companies to nominate candidates for election as a director
and have those nominees included in a company’s proxy materials. The SEC recently adopted
final rules implementing rules for the shareholder advisory vote on executive compensation
and golden parachute payments.
|
Additional regulations called for in the Dodd-Frank Act, including regulations dealing with the
risk retention requirements for, and disclosures required from, residential mortgage originators
will be implemented over time. Although the Dodd-Frank Act contains some specific timelines for
the Federal regulatory agencies to follow, it remains unclear whether the agencies will be able to
meet these deadlines and when rules will be proposed and finalized. We continue to monitor the
rulemaking process and, while our current assessment is that the Dodd-Frank Act and the
implementing regulations will not have a material effect on the Company, given the uncertainty
associated with the manner in which the provisions of the Dodd-Frank Act will be implemented, the
full extent of the impact such requirements will have on our operations is unclear. The changes
resulting from the Dodd-Frank Act may impact the profitability of our business activities, require
changes to certain of our business practices, impose upon us more stringent capital, liquidity and
leverage requirements or otherwise adversely affect our business. These changes may also require
us to invest significant management attention and resources to evaluate and make any changes
necessary to comply with new statutory and regulatory requirements. Failure to comply with the new
requirements would negatively impact our results of operations and
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financial condition. While we cannot predict what effect any presently contemplated or future
changes in the laws or regulations or their interpretations would have on us, these changes could
be materially adverse to our investors.
The Company was, and continues to be, a participant in programs established by the U.S. Treasury
Department under the authority contained in the Emergency Economic Stabilization Act of 2008
(enacted on October 3, 2008) and the American Recovery and Reinvestment Act of 2009 (enacted on
February 17, 2009). Among other matters, these laws:
| • |
provide for the government to invest additional capital into banks and otherwise
facilitate bank capital formation (commonly referred to as the Troubled Asset Relief
Program or TARP);
|
||
| • |
increase the limits on federal deposit insurance; and
|
||
| • |
provide for various forms of economic stimulus, including to assist homeowners in
restructuring and lowering mortgage payments on qualifying loans.
|
Other laws, regulations, and programs at the federal, state and even local levels are under
consideration that seek to address the economic climate and/or the financial institutions industry.
The effect of these initiatives cannot be predicted.
During 2008, in addition to two private offerings raising a total of approximately $80 million in
capital, the Company also took advantage of TARP to raise $140 million of new capital and
strengthen its balance sheet. In 2009, we raised an additional $191 million (net proceeds) from a
public offering of our common stock. In August of 2010, we raised approximately $48 million (net
proceeds) of new capital through another public offering of our stock, and issued $75 million of
senior notes.
On October 21, 2010, the Company received notification from the FDIC that the previously disclosed
Consent Order with respect to Torrey Pines Bank, dated November 16, 2009, was terminated as of
October 20, 2010.
The Company’s banking subsidiaries, including Bank of Nevada, have been placed under informal
supervisory oversight by banking regulators in the form of memoranda of understanding. The
oversight requires enhanced supervision by the Board of Directors of each bank, and the adoption or
revision of written plans and/or policies addressing such matters as asset quality, credit
underwriting and administration, the allowance for loan and lease losses, loan and investment
portfolio risks, asset-liability management and loan concentrations, as well as the formulation and
adoption of comprehensive strategic plans. The banks also are prohibited from paying dividends or
making other distributions to the Company without prior regulatory approval and are required to
maintain higher levels of Tier 1 capital than otherwise would be required to be considered
well-capitalized under federal capital guidelines. In addition, the banks are required to provide
regulators with prior notice of certain management and director changes and, in certain cases, to
obtain their non-objection before engaging in a transaction that would materially change its
balance sheet composition. The Company believes each bank is in full compliance with the
requirements of the applicable memorandum of understanding.
Supervision and Regulation
The Company and its subsidiaries are extensively regulated and supervised under both Federal and
State laws. A summary description of the laws and regulations which relate to the Company’s
operations are discussed beginning on page 57.
Additional Available Information
The
Company maintains an Internet website at
http://www.westernalliancebancorp.com
. The Company
makes available its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and amendments to such reports filed or furnished pursuant to Sections 13(a) and 15(d) of
the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and other information related
to the Company free of charge, through this site as soon as reasonably practicable after it
electronically files those documents with, or otherwise furnishes them to the Securities Exchange
Commission (“SEC”). The SEC maintains an internet site,
http://www.sec.gov
, in which all
forms filed electronically may be accessed. The Company’s internet website and the information
contained therein are not intended to be incorporated in this Form 10-K.
ITEM IA. RISK FACTORS
Investing in our common stock involves various risks which are specific to the Company. Several of
these risks and uncertainties, are discussed below and elsewhere in this report. This listing
should not be considered as all-inclusive. These factors represent risks and uncertainties that
could have a material adverse effect on our business, results of operations and financial
condition. Other risks that we do not know about now, or that we do not believe are significant,
could negatively impact our business or the trading price of our securities. In addition to common
business risks such as theft, loss of market share and disasters, the Company is subject to special
types of risk due to the nature of its business.
13
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See additional discussions about credit, interest rate, market and litigation risks in
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of
this report beginning on page 26 and additional information regarding legislative and regulatory
risks in the “Supervision and Regulation” section beginning on page 54.
Risks Relating to Our Business
The Company is highly dependent on real estate and events that negatively impact the real
estate market will hurt our business and earnings
The Company is located in areas in which economic growth is largely dependent on the real
estate market, and a significant portion of our loan portfolio is dependent on real estate. As of
December 31, 2010, real estate related loans accounted for a significant percentage of total loans.
Real estate values have been declining in our markets, in some cases in a material and even
dramatic fashion, which affects collateral values and has resulted in increased provisions for loan
losses. We expect the weakness in these portions of our loan portfolio to continue through 2011.
Accordingly, it is anticipated that our nonperforming asset and charge-off levels will remain
elevated.
Further, the effects of recent mortgage market challenges, combined with the ongoing decrease
in residential real estate market prices and demand, could result in further price reductions in
home values, adversely affecting the value of collateral securing the residential real estate and
construction loans that we hold, as well as loan originations and gains on sale of real estate and
construction loans. A further decline in real estate activity would likely cause a further decline
in asset and deposit growth and further negatively impact our earnings and financial condition.
The Company’s high concentration of commercial real estate, construction and land development
and commercial, industrial loans expose us to increased lending risks
Commercial real estate, construction and land development and commercial and industrial loans,
comprised approximately 82% of our total loan portfolio as of December 31, 2010, and expose the
Company to a greater risk of loss than residential real estate and consumer loans, which comprised
a smaller percentage of the total loan portfolio at December 31, 2010. Commercial real estate and
land development loans typically involve larger loan balances to single borrowers or groups of
related borrowers compared to residential loans. Consequently, an adverse development with respect
to one commercial loan or one credit relationship exposes us to a significantly greater risk of
loss compared to an adverse development with respect to one residential mortgage loan.
Actual credit losses may exceed the losses that we expect in our loan portfolio, which could
require us to raise additional capital. If we are not able to raise additional capital, our
financial condition, results of operations and capital would be materially and adversely affected
Credit losses are inherent in the business of making loans. We make various assumptions and
judgments about the collectability of our consolidated loan portfolio and maintain an allowance for
estimated credit losses based on a number of factors, including the size of the portfolio, asset
classifications, economic trends, industry experience and trends, industry and geographic
concentrations, estimated collateral values, management’s assessment of the credit risk inherent in
the portfolio, historical loan loss experience and loan underwriting policies. In addition, the
Company evaluates all loans identified as problem loans and augments the allowance based upon our
estimation of the potential loss associated with those problem loans. Additions to the allowance
for credit losses recorded through our provision for credit losses decrease net income. If such
assumptions and judgments are incorrect, our actual credit losses may exceed our allowance for
credit losses.
At December 31, 2010, our allowance for credit losses was $111 million. In recent periods, we
have added to our allowance for credit losses due to the deteriorating real estate markets in
Nevada, Arizona and California. Continuing deterioration in the real estate market, and in
particular the commercial real estate market, could affect the ability of our loan customers to
service their debt, which could result in additional loan provisions and subsequent increases in
our allowance for credit losses in the future. Moreover, because future events are uncertain and
because we may not successfully identify all deteriorating loans in a timely manner, there may be
loans that deteriorate in an accelerated time frame. If actual credit losses materially exceed our
allowance for credit losses, we may be required to raise additional capital, which may not be
available to us on acceptable terms or at all. Our inability to raise additional capital on
acceptable terms when needed could materially and adversely affect our financial condition, results
of operations and capital.
In addition, we may be required to increase our allowance for credit losses based on changes
in economic and real estate market conditions, new information regarding existing loans, input from
regulators in connection with their review of our allowance, as a result of changes in regulatory
guidance regulations or accounting standards, identification of additional problem loans and other
factors, both within and outside of our management’s control. Increases to our allowance for credit
losses would negatively affect our financial condition and earnings.
14
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If actual credit losses exceed our provision for credit losses, we may also be required to
record a valuation allowance against our deferred tax assets
Deferred tax assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some or all deferred tax assets will not be realized. This
determination is based upon an evaluation of all available positive or negative evidence. As a
result of losses incurred in 2008, 2009, and 2010, the Company is in a three-year cumulative pretax
loss position at December 31, 2010. A cumulative loss position is considered significant negative
evidence in assessing the realizability of a deferred tax asset. The Company has assessed its
ability to utilize deferred tax assets, and although the Company has a 20-year carryforward period,
we have concluded that there is sufficient positive evidence to overcome this negative evidence.
This positive evidence includes Company forecasts, exclusive of tax planning strategies, that show
realization of deferred tax assets by the end of 2013 based on current projections. In addition,
management has identified tax planning strategies that would also be available to utilize deferred
tax assets. The Company has concluded that there is sufficient positive evidence to overcome
negative evidence, and that it is not more likely than not that deferred tax assets will not be
realized. However, if future results underperform management’s forecasts, the Company may be
required to record a valuation allowance against some or all of its deferred tax assets.
We could be required to revalue our deferred tax assets if stock transactions result in
limitations on the deductibility of our net operating losses or loan losses
Our deferred tax assets relate primarily to net operating losses and loan loss allowances and the
net operating loss carryforwards. The availability of net operating losses and loan losses to
offset future taxable income would be limited if we were to undergo an “ownership change” pursuant
to Section 382 of the Internal Revenue Code of 1986, as amended. On September 14, 2010, our Board
of Directors approved an amendment to WAL’s Amendment and Restated By-laws (the “By-laws
Amendment”) and an amendment to WAL’s Second Amended and Restated Articles of Incorporation, as
amended (the “Articles Amendment”), to prohibit certain acquisitions of the Company’s common stock.
The By-Laws Amendment and Articles Amendment are intended to protect the Company’s ability to use
certain tax assets, such as net operating loss carryforwards, capital loss carryforwards and
certain built-in losses, by preventing stock transactions that would result in an ownership change
(any such restrictions would most likely affect 5% stockholders or those persons who would seek to
acquire 5% of our stock). The Articles Amendment was approved by WAL’s stockholders on November
30, 2010.
Notwithstanding the restrictions implemented through the By-Laws Amendment and Articles Amendment,
there can be no assurance that such restrictions will prevent all acquisitions that could result in
an “ownership change” or will be upheld if challenged, or that the restrictions and any remedies or
cures for violations would be respected by taxing or other authorities. Further, because such
restrictions restrict a stockholder’s ability to acquire, directly or indirectly, additional shares
of common stock in excess of the specified limitations, and may limit a stockholder’s ability to
dispose of common stock by reducing the universe of potential acquirors for such common stock, and
because a stockholder’s ownership of common stock may become subject to the Articles Amendment upon
actions taken by persons related to, or affiliated with, such stockholder, the restrictions could
adversely affect the marketability and market price for our stock.
The Company’s financial instruments expose it to certain market risks and may increase the
volatility of reported earnings
The Company holds certain financial instruments measured at fair value. For those financial
instruments measured at fair value, the Company is required to recognize the changes in the fair
value of such instruments in earnings. Therefore, any increases or decreases in the fair value of
these financial instruments have a corresponding impact on reported earnings. Fair value can be
affected by a variety of factors, many of which are beyond our control, including our credit
position, interest rate volatility, volatility in capital markets and other economic factors.
Accordingly, our earnings are subject to mark-to-market risk and the application of fair value
accounting may cause our earnings to be more volatile than would be suggested by our underlying
performance.
If the Company lost a significant portion of its low-cost deposits, it could negatively impact
our liquidity and profitability
The Company’s profitability depends in part on successfully attracting and retaining a stable
base of low-cost deposits. While we generally do not believe these core deposits are sensitive to
interest rate fluctuations, the competition for these deposits in our markets is strong and
customers are increasingly seeking investments that are safe, including the purchase of U.S.
Treasury securities and other government-guaranteed obligations, as well as the establishment of
accounts at the largest, most-well capitalized banks. If the Company were to lose a significant
portion of its low-cost deposits, it would negatively impact its liquidity and profitability.
From time to time, the Company has been dependent on borrowings from the FHLB and the FRB, and
there can be no assurance these programs will be available as needed
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While it currently has no outstanding borrowings from the FHLB of San Francisco and the FRB,
the Company in the recent past has been reliant on such borrowings to satisfy its liquidity needs.
The Company’s borrowing capacity is generally dependent on the value of the Company’s collateral
pledged to these entities. These lenders could reduce the borrowing capacity of the Company or
eliminate certain types of collateral and could otherwise modify or even terminate its loan
programs. Any change or termination would have an adverse affect on the Company’s liquidity and
profitability.
A decline in the Company’s stock price or expected future cash flows, or a material adverse
change in our results of operations or prospects, could result in further impairment of our
goodwill
Since January 1, 2008, we have written off $188.5 million in goodwill. A further significant
and sustained decline in our stock price and market capitalization, a significant decline in our
expected future cash flows, a significant adverse change in the business climate or slower growth
rates could result in additional impairment of our goodwill. If we were to conclude that a future
write-down of our goodwill is necessary, then we would record the appropriate charge, which could
be materially adverse to our operating results and financial position. For further discussion, see
Note 7, “Goodwill and Other Intangible Assets” in the notes to the Consolidated Financial
Statements included in this Annual Report on Form 10-K.
Any reduction in the Company’s credit rating could increase the cost of funding from the
capital markets
Moody’s Investors Service regularly evaluates its ratings of us and our long-term debt based
on a number of factors, including our financial strength as well as factors not entirely within our
control, including conditions affecting the financial services industry generally. In light of the
difficulties in the financial services industry and the housing and financial markets, there can be
no assurance that we will not be subject to credit downgrades. Credit ratings measure a company’s
ability to repay its obligations and directly affect the cost and availability to that company of
unsecured financing. Downgrades could adversely affect the cost and other terms upon which we are
able to obtain funding and increase our cost of capital.
The Company’s expansion strategy may not prove to be successful and our market value and
profitability may suffer
The Company continually evaluates expansion through acquisitions of banks, the organization of
new banks and the expansion of our existing banks through establishment of new branches. Any
future acquisitions will be accompanied by the risks commonly encountered in acquisitions. These
risks include, among other things: 1) difficulty of integrating the operations and personnel; 2)
potential disruption of our ongoing business; and 3) inability of our management to maximize our
financial and strategic position by the successful implementation of uniform product offerings and
the incorporation of uniform technology into our product offerings and control systems.
The recent crisis also revealed and caused risks that are unique to acquisitions of financial
institutions and banks, and that are difficult to assess, including the risk that the acquired
institution has troubled, illiquid, or bad assets or an unstable base of deposits or assets under
management. The Company expects that competition for suitable acquisition candidates may be
significant. We may compete with other banks or financial service companies with similar
acquisition strategies, many of which are larger and have greater financial and other resources.
The Company cannot assure you that we will be able to successfully identify and acquire suitable
acquisition targets on acceptable terms and conditions.
In addition to the acquisition of existing financial institutions, the Company may consider
the organization of new banks in new market areas. We do not have any current plans to organize a
new bank. Any acquisition or organization of a new bank carries with it numerous risks, including
the following:
| • |
the inability to obtain all the regulatory approvals;
|
||
| • |
significant costs and anticipated operating losses during the application and
organizational phases, and the first years of operation of the new bank;
|
||
| • |
the inability to secure the services of qualified senior management;
|
||
| • |
the local market may not accept the services of a new bank owned and managed by a bank
holding company headquartered outside of the market area of the new bank;
|
||
| • |
the inability to obtain attractive locations within a new market at a reasonable cost
and
|
||
| • |
the additional strain on management resources and internal systems and controls.
|
The Company cannot provide any assurance that it will be successful in overcoming these risks
or any other problems encountered in connection with acquisitions and the organization of new
banks. Further, as described below, certain of the Company’s bank subsidiaries, including the Bank
of Nevada, are currently subject to a memorandum of understanding, which, among other things,
imposes limitations on the Company’s ability to grow its business. Regulatory enforcement actions,
like a memorandum of understanding, also may adversely affect our ability to engage in certain
expansionary activities. The Company’s inability to provide resources necessary for the subsidiary
banks to meet the
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requirements of any regulatory action or otherwise to overcome these risks could have an adverse
effect on the achievement of our business strategy and maintenance of our market value.
The Company may not be able to control costs and its business, financial condition, results of
operations and prospects could suffer
Our ability to manage our business successfully will depend in part on our ability to maintain
low-cost deposits and to control operating costs. If the Company is not able to efficiently manage
our costs, results of operations could suffer.
The Company may not be able to implement and improve its controls and processes, or its
reporting systems and procedures, which could cause it to experience compliance and operational
problems or incur additional expenditures beyond current projections, any one of which could
adversely affect our financial results
The Company’s future success will depend on the ability of officers and other key employees to
continue to implement and improve operational, credit, financial, management and other internal
risk controls and processes, and improve reporting systems and procedures, while at the same time
maintaining and growing existing businesses and client relationships. We may not successfully
implement such improvements in an efficient or timely manner and may discover deficiencies in
existing systems and controls. Such activities would divert management from maintaining and
growing our existing businesses and client relationships and could require us to incur additional
expenditures to expand our administrative and operational infrastructure. If we are unable to
improve our controls and processes, or our reporting systems and procedures, we may experience
compliance and operational problems or incur additional expenditures beyond current projections,
any one of which could adversely affect our financial results.
The Company’s future success will depend on our ability to compete effectively in a highly
competitive market
The Company faces substantial competition in all phases of our operations from a variety of
different competitors. Our competitors, including commercial banks, community banks, savings and
loan associations, mutual savings banks, credit unions, consumer finance companies, insurance
companies, securities dealers, brokers, mortgage bankers, investment advisors, money market mutual
funds and other financial institutions, compete with lending and deposit-gathering services offered
by us. Increased competition in our markets may result in reduced loans and deposits.
There is very strong competition for financial services in the market areas in which we
conduct our businesses from many local commercial banks as well as numerous national and commercial
banks and regionally based commercial banks. Many of these competing institutions have much
greater financial and marketing resources than we have. Due to their size, many competitors can
achieve larger economies of scale and may offer a broader range of products and services than us.
If we are unable to offer competitive products and services, our business may be negatively
affected.
Some of the financial services organizations with which we compete are not subject to the same
degree of regulation as is imposed on bank holding companies and federally insured depository
institutions. As a result, these non-bank competitors have certain advantages over us in accessing
funding and in providing various services. The banking business in our primary market areas is
very competitive, and the level of competition facing us may increase further, which may limit our
asset growth and financial results.
The success of the Company is dependent upon its ability to recruit and retain qualified
employees especially seasoned relationship bankers
The Company’s business plan includes and is dependent upon hiring and retaining highly
qualified and motivated executives and employees at every level. In particular, our relative
success to date has been partly the result of our management’s ability to seek and retain highly
qualified relationship bankers that have long-standing relationships in their communities. These
professionals bring with them valuable customer relationships and have been an integral part of our
ability to attract deposits and to expand our market areas. Our declining stock price and new
government limits on employee compensation for TARP recipients could make it more difficult to
recruit and retain people. From time to time, the Company recruits or utilizes the services of
employees who are subject to the limitations on their ability to use confidential information of a
prior employer, to freely compete with that employer, or to solicit customers of that employer. If
the Company is unable to hire or retain qualified employees it may not be able to successfully
execute its business strategy. If the Company is found to have violated any nonsolicitation or
other restrictions applicable to it or its employees, the Company or its employee could become
subject to litigation or other proceedings.
The limitations on bonuses, retention awards and incentive compensation contained in ARRA may
adversely affect the Company’s ability to retain its highest performing employees
Competition for qualified personnel in the banking industry is intense and there are a limited
number of persons both knowledgeable and experienced in our industry. The process of recruiting
personnel with the combination of skills and attributes required to carry out the Company’s
strategic initiatives is often lengthy. In addition, for so long as any equity or debt securities
that were issued to the Treasury under TARP remain outstanding, ARRA restricts bonuses, retention
awards and other compensation payable to an institution’s senior executive officers and certain
other highly paid
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employees. It is possible that the Company may be unable to create a compensation structure that
permits us to retain our highest performing employees or recruit additional employees, especially
if we are competing against institutions that are not subject to the same restrictions. If this
were to occur, our business and results of operations could be materially adversely affected.
The Company would be harmed if it lost the services of any of its senior management team or
senior relationship bankers
We believe that our success to date has been substantially dependent on our senior management
team, which includes Robert Sarver, Chairman and Chief Executive Officer, Kenneth Vecchione,
President and Chief Operating Officer, Dale Gibbons, Chief Financial Officer, Robert R. McAuslan,
Chief Credit Officer, Bruce Hendricks, Chief Executive Officer of Bank of Nevada, James Lundy,
Chief Executive Officer of Western Alliance Bank, James DeVolld, President of Western Alliance
Bank, Gerald Cady, Chief Executive Officer of Torrey Pines Bank, and certain of our senior
relationship bankers. We also believe that our prospects for success in the future are dependent
on retaining our senior management team and senior relationship bankers. In addition to their
skills and experience as bankers, these persons provide us with extensive community ties upon which
our competitive strategy is based. Our ability to retain these persons may be hindered by the fact
that we have not entered into employment agreements with any of them. The loss of the services of
any of these persons, particularly Mr. Sarver, could have an adverse effect on our business if we
cannot replace them with equally qualified persons who are also familiar with our market areas.
See also “The limitations on bonuses, retention awards and incentive compensation contained in ARRA
may adversely affect our ability to retain our highest performing employees”.
Mr. Sarver’s involvement in outside business interests requires substantial time and attention
and may adversely affect the Company’s ability to achieve its strategic plan
Mr. Sarver joined the Company in December 2002 and is an integral part of our business. He
has substantial business interests that are unrelated to us, including his position as managing
partner of the Phoenix Suns National Basketball Association franchise. Mr. Sarver’s other business
interests demand significant time commitments, the intensity of which may vary throughout the year.
Mr. Sarver’s other commitments may reduce the amount of time he has available to devote to our
business. We believe that Mr. Sarver spends the substantial majority of his business time on
matters related to our company. However, a significant reduction in the amount of time Mr. Sarver
devotes to our business may adversely affect our ability to achieve our strategic plan.
Terrorist attacks and threats of war or actual war may impact all aspects of our operations,
revenues, costs and stock price in unpredictable ways
Terrorist attacks in the United States, as well as future events occurring in response or in
connection to them including, without limitation, future terrorist attacks against United States
targets, rumors or threats of war, actual conflicts involving the United States or its allies or
military or trade disruptions, may impact our operations. Any of these events could cause consumer
confidence and savings to decrease or result in increased volatility in the United States and
worldwide financial markets and economy. Any of these occurrences could have an adverse impact on
the Company’s operating results, revenues and costs and may result in the volatility of the market
price for our securities, including our common stock, and impair their future price.
The Company has received an IRS notice of proposed deficiency related to the Company’s claim of
certain deductions on its 2008 tax return, in connection with the partial worthlessness of
collateralized debt obligations, which deductions resulted in an approximately $37-million tax
refund for the 2006 and 2007 taxable periods
The Internal Revenue Service’s Examination Division issued a notice of proposed deficiency, on
January 10, 2011, proposing a taxable income adjustment of $136.7 million related to deductions
taken on our 2008 tax return in connection with the partial worthlessness of collateralized debt
obligations, or CDOs. The use of these deductions on our 2008 tax return resulted in an
approximately $40-million tax refund for the 2006 and 2007 taxable periods. The Company filed a
protest of the proposed deficiency, which is expected to cause the matter to be referred to the
Internal Revenue Service’s Appeals Division. The Company will continue to vigorously challenge
these proposed adjustments because the Company believes the proposed IRS adjustments and resulting
proposed deficiency are inconsistent with applicable tax laws, and that the Company has meritorious
defenses to these proposed IRS adjustments. Although the Company believes that the CDO-related
deductions will be respected for U.S. federal income tax purposes, there can be no assurance that
the Internal Revenue Service will not successfully challenge some or all of such deductions. If
the Internal Revenue Service were to successfully challenge some or all of such deductions, the
Company may be subject to a tax liability in the amount of the $40-million refund, or portion
thereof (excluding penalties or interest). The Company has not accrued a reserve for this
potential exposure.
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The business may be adversely affected by internet fraud
The Company is inherently exposed to many types of operational risk, including those caused by
the use of computer, internet and telecommunications systems. These risks may manifest themselves
in the form of fraud by employees, by customers, other outside entities targeting us and/or our
customers that use our internet banking, electronic banking or some other form of our
telecommunications systems. Given the growing level of use of electronic, internet-based, and
networked systems to conduct business directly or indirectly with our clients, certain fraud losses
may not be avoidable regardless of the preventative and detection systems in place.
Risks Related to the Banking Industry
We operate in a highly regulated environment and the laws and regulations that govern our
operations, corporate governance, executive compensation and accounting principles, or changes in
them, or our failure to comply with them, may adversely affect us
The Company is subject to extensive regulation, supervision, and legislation that governs
almost all aspects of our operations. See “Management’s
Discussion and Analysis — Supervision and
Regulation” included in this Annual Report on Form 10-K. Intended to protect customers, depositors
and the FDIC’s Deposit Insurance Fund, these laws and regulations, among other matters, prescribe
minimum capital requirements, impose limitations on the business activities in which we can engage,
limit the dividends or distributions that our banking institutions can pay to our holding company,
restrict the ability of institutions to guarantee our parent company’s debt, impose certain
specific accounting requirements on us that may be more restrictive and may result in greater or
earlier charges to earnings or reductions in our capital than generally accepted accounting
principles, among other things. Compliance with laws and regulations can be difficult and costly,
and changes to laws and regulations often impose additional compliance costs. Further, our failure
to comply with these laws and regulations, even if the failure follows good faith effort or
reflects a difference in interpretation, could subject the Company to additional restrictions on
its business activities, fines and other penalties, any of which could adversely affect our results
of operations, capital base and the price of our securities.
On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer
Protection Act, or the Dodd-Frank Act, into law. The Dodd-Frank Act has had, and will continue to
have, a broad impact on the financial services industry, including significant regulatory and
compliance changes. Many of the requirements called for in the Dodd-Frank Act are in the process
of being implemented by regulations issued by the SEC and Federal banking agencies, such as the
FDIC and Federal Reserve, and will continue to be implemented over the course of several years.
Given the uncertainty associated with the manner in which the provisions of the Dodd-Frank Act will
be implemented by the various regulatory agencies and through regulations, the full extent of the
impact such requirements will have on our operations is unclear. The changes resulting from the
Dodd-Frank Act may impact the profitability of our business activities, require changes to certain
of our business practices, impose upon us more stringent capital, liquidity and leverage
requirements or otherwise adversely affect our business. In particular, the potential impact of the
Dodd-Frank Act on our operations and activities, both currently and prospectively, include, among
others:
| • |
a reduction in our ability to generate or originate revenue-producing assets as a result
of compliance with heightened capital standards;
|
||
| • |
increased cost operations due to greater regulatory oversight, supervision and
examination of banks and bank holding companies, and higher deposit insurance premiums;
|
||
| • |
the limitation on our ability to raise capital through the use of trust preferred
securities as these securities may no longer be included in Tier 1 capital going forward;
and
|
||
| • |
the limitations on our ability to expand consumer product and service offerings due to
anticipated stricter consumer protection laws and regulations.
|
Further, we may be required to invest significant management attention and resources to
evaluate and make any changes necessary to comply with new statutory and regulatory requirements
under the Dodd-Frank Act. Failure to comply with the new requirements may negatively impact our
results of operations and financial condition. While we cannot predict what effect any presently
contemplated or future changes in the laws or regulations or their interpretations would have on
us, these changes could be materially adverse to our investors.
State and federal banking agencies periodically conduct examinations of our business,
including for compliance with laws and regulations, and our failure to comply with any supervisory
actions to which we are or become subject as a result of such examinations may adversely affect us
State and federal banking agencies periodically conduct examinations of our business,
including for compliance with laws and regulations. If, as a result of an examination, the FDIC or
Federal Reserve were to determine that the financial condition, capital resources, asset quality,
earnings prospects, management, liquidity or other aspects of any of the banks’ operations had
become unsatisfactory, or that any of the banks or their management was in violation of any law or
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regulation, the FDIC or Federal Reserve may take a number of different remedial actions as it deems
appropriate. These actions include the power to enjoin “unsafe or unsound” practices, to require
affirmative actions to correct any conditions resulting from any violation or practice, to issue an
administrative order that can be judicially enforced, to direct an increase in the bank’s capital,
to restrict the bank’s growth, to assess civil monetary penalties against the bank’s officers or
directors, to remove officers and directors and, if the FDIC concludes that such conditions cannot
be corrected or there is an imminent risk of loss to depositors, to terminate the bank’s deposit
insurance. Under Nevada, Arizona and California law, the respective state banking supervisory
authority has many of the same remedial powers with respect to its state-chartered banks.
The Company’s banking subsidiaries, including Bank of Nevada, have been placed under informal
supervisory oversight by banking regulators in the form of memoranda of understanding. The
oversight requires enhanced supervision by the Board of Directors of each bank, and the adoption or
revision of written plans and/or policies addressing such matters as asset quality, credit
underwriting and administration, the allowance for loan and lease losses, loan and investment
portfolio risks, asset-liability management and loan concentrations, as well as the formulation and
adoption of comprehensive strategic plans. The banks also are prohibited from paying dividends or
making other distributions to the Company without prior regulatory approval and are required to
maintain higher levels of Tier 1 capital than otherwise would be required to be considered
well-capitalized under federal capital guidelines. In addition, the banks are required to provide
regulators with prior notice of certain management and director changes and, in certain cases, to
obtain their non-objection before engaging in a transaction that would materially change its
balance sheet composition.
If we were unable to comply with regulatory directives in the future, or if we were unable to
comply with the terms of any future supervisory requirements to which we may become subject, then
we could become subject to additional supervisory actions and orders, including cease and desist
orders, prompt corrective action and/or other regulatory enforcement actions. If our regulators
were to take such additional supervisory actions, then we could, among other things, become subject
to greater restrictions on our ability to develop any new business, as well as restrictions on our
existing business, and we could be required to raise additional capital, dispose of certain assets
and liabilities within a prescribed period of time, or both. Failure to implement the measures in
the time frames provided, or at all, could result in additional orders or penalties from federal
and state regulators, which could result in one or more of the remedial actions described above.
In the event that one or more of the banks was ultimately unable to comply with the terms of a
regulatory enforcement action, such a bank could ultimately fail and be placed into receivership by
the chartering agency. Under applicable federal law and FDIC regulations, the failure of one of
the subsidiary banks could impose liability for any loss to the FDIC or the DIF on the remaining
subsidiary banks, further straining the financial resources available to the surviving charters.
The terms of any such supervisory action and the consequences associated with any failure to comply
therewith could have a material negative effect on our business, operating flexibility and
financial condition.
Changes in interest rates could adversely affect our profitability, business and prospects
Most of the Company’s assets and liabilities are monetary in nature, which subjects us to
significant risks from changes in interest rates and can impact our net income and the valuation of
our assets and liabilities. Increases or decreases in prevailing interest rates could have an
adverse effect on our business, asset quality and prospects. The Company’s operating income and
net income depend to a great extent on our net interest margin. Net interest margin is the
difference between the interest yields we receive on loans, securities and other interest earning
assets and the interest rates we pay on interest bearing deposits, borrowings and other
liabilities. These rates are highly sensitive to many factors beyond our control, including
competition, general economic conditions and monetary and fiscal policies of various governmental
and regulatory authorities, including the Federal Reserve. If the rate of interest we pay on our
interest bearing deposits, borrowings and other liabilities increases more than the rate of
interest we receive on loans, securities and other interest earning assets, our net interest
income, and therefore our earnings, would be adversely affected. The Company’s earnings also could
be adversely affected if the rates on our loans and other investments fall more quickly than those
on our deposits and other liabilities.
In addition, loan volumes are affected by market interest rates on loans. Rising interest
rates generally are associated with a lower volume of loan originations while lower interest rates
are usually associated with higher loan originations. Conversely, in rising interest rate
environments, loan repayment rates will decline and in falling interest rate environments, loan
repayment rates will increase. The Company cannot guarantee that it will be able to minimize
interest rate risk. In addition, an increase in the general level of interest rates may adversely
affect the ability of certain borrowers to pay the interest on and principal of their obligations.
Interest rates also affect how much money the Company can lend. When interest rates rise, the
cost of borrowing increases. Accordingly, changes in market interest rates could materially and
adversely affect our net interest spread, asset quality, loan origination volume, business,
financial condition, results of operations and cash flows.
The Company is exposed to risk of environmental liabilities with respect to properties to
which we obtain title
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Approximately 76% of the Company’s loan portfolio at December 31, 2010 was secured by real
estate. In the course of our business, the Company may foreclose and take title to real estate,
and could be subject to environmental liabilities with respect to these properties. We may be held
liable to a governmental entity or to third parties for property damage, personal injury,
investigation and clean-up costs incurred by these parties in connection with environmental
contamination, or may be required to investigate or clean up hazardous or toxic substances, or
chemical releases at a property. The costs associated with investigation or remediation activities
could be substantial. In addition, if we are the owner or former owner of a contaminated site, we
may be subject to common law claims by third parties based on damages and costs resulting from
environmental contamination emanating from the property. These costs and claims could adversely
affect our business and prospects.
Risks Related to our Common Stock
The price of our common stock may fluctuate significantly, and this may make it difficult for
you to resell shares of common stock owned by you at times or at prices you find attractive
The price of our common stock on NYSE constantly changes. We expect that the market price of
our common stock will continue to fluctuate and there can be no assurances about the market prices
for our common stock.
Our stock price may fluctuate as a result of a variety of factors, many of which are beyond
our control. These factors include:
| • |
sales of our equity securities;
|
||
| • |
our financial condition, performance, creditworthiness and prospects;
|
||
| • |
quarterly variations in our operating results or the quality of our assets;
|
||
| • |
operating results that vary from the expectations of management, securities analysts and
investors;
|
||
| • |
changes in expectations as to our future financial performance;
|
||
| • |
announcements of strategic developments, acquisitions and other material events by us or
our competitors;
|
||
| • |
the operating and securities price performance of other companies that investors believe
are comparable to us;
|
||
| • |
the credit, mortgage and housing markets, the markets for securities relating to
mortgages or housing, and developments with respect to financial institutions generally;
|
||
| • |
changes in global financial markets and global economies and general market conditions,
such as interest or foreign exchange rates, stock, commodity or real estate valuations or
volatility and other geopolitical, regulatory or judicial events; and
|
||
| • |
our past and future dividend practice.
|
There may be future sales or other dilution of our equity, which may adversely affect the
market price of our common stock.
Except as may be described under “Underwriting,” we are not restricted from issuing additional
common stock, including any securities that are convertible into or exchangeable for, or that
represent the right to receive, common stock. The issuance of any additional shares of common
stock or preferred stock or securities convertible into, exchangeable for or that represent the
right to receive common stock or the exercise of such securities could be substantially dilutive to
shareholders of our common stock. Holders of our shares of common stock have no preemptive rights
that entitle holders to purchase their pro rata share of any offering of shares of any class or
series. The market price of our common stock could decline as a result of this offering as well as
sales of shares of our common stock made after this offering or the perception that such sales
could occur. Because our decision to issue securities in any future offering will depend on market
conditions and other factors beyond our control, we cannot predict or estimate the amount, timing
or nature of our future offerings. Thus, our stockholders bear the risk of our future offerings
reducing the market price of our common stock and diluting their stock holdings in us. In addition,
giving effect to the issuance of common stock in this offering, the receipt of the expected net
proceeds and the use of those proceeds, we expect that this offering will have a dilutive effect on
our expected earnings per share.
Offerings of debt, which would be senior to our common stock upon liquidation, and/or
preferred equity securities which may be senior to our common stock for purposes of dividend
distributions or upon liquidation, may adversely affect the market price of our common stock.
We may from time to time issue debt securities, borrow money through other means, or issue
preferred stock. On August 25, 2010, the Company completed a public offering of $75 million in
principal Senior Notes due in 2015. In 2008, we issued preferred stock to the federal government
under the TARP program, and from time to time we have borrowed money from the Federal Reserve,
other financial institutions and other lenders. All of these securities or borrowings have
priority over the common stock on a liquidation, which could affect the market price of our stock.
Our Board of Directors is authorized to issue one or more classes or series of preferred stock
from time to time without any action on the part of the stockholders. Our Board of Directors also
has the power, without stockholder approval, to
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set the terms of any such classes or series of preferred stock that may be issued, including voting
rights, dividend rights, and preferences over our common stock with respect to dividends or upon
our dissolution, winding-up and liquidation and other terms. If we issue preferred stock in the
future that has a preference over our common stock with respect to the payment of dividends or upon
our liquidation, dissolution, or winding up, or if we issue preferred stock with voting rights that
dilute the voting power of our common stock, the rights of holders of our common stock or the
market price of our common stock could be adversely affected.
Anti-takeover provisions could negatively impact our stockholders.
Provisions of Nevada law and provisions of our amended and restated articles of incorporation
and amended and restated by-laws could make it more difficult for a third party to acquire control
of us or have the effect of discouraging a third party from attempting to acquire control of us.
Additionally, our amended and restated articles of incorporation authorize our Board of Directors
to issue additional series of preferred stock and such preferred stock could be issued as a
defensive measure in response to a takeover proposal. These provisions could make it more
difficult for a third party to acquire us even if an acquisition might be in the best interest of
our stockholders.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
ITEM 2. PROPERTIES
At December 31, 2010, the Company operated 39 domestic branch locations, of which 18 are owned and
21 are on leased premises. In addition, the Company leases a 7,000 square foot service center in
San Diego, California, owns a 36,000 square foot operations facility in Las Vegas, Nevada, and
leases spaces in Denver, Colorado and Wilmington, Delaware. The Company has one owned branch not
in use, and two leased branches that are subleased. The Company also owns three hotel condominium
units for employee travel to the Company’s Las Vegas, Nevada location. For information regarding
rental payments, see Note 5,
“Premises and Equipment”
of the Consolidated Financial Statements.
The Company continually evaluates the suitability and adequacy of its offices. Management believes
that the existing facilities are adequate for present and anticipated future use.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is a party or to which any of
our properties are subject. There are no material proceedings known to us to be contemplated by
any governmental authority. See “Supervision and Regulation” for additional information. From
time to time, we are involved in a variety of litigation matters in the ordinary course of our
business and anticipate that we will become involved in new litigation matters in the future.
As previously disclosed in our Annual Report on Form 10-K, the Company’s banking subsidiaries,
including Bank of Nevada, have been placed under informal supervisory oversight by banking
regulators in the form of memoranda of understanding. The oversight requires enhanced supervision
by the Board of Directors of each bank, and the adoption or revision of written plans and/or
policies addressing such matters as asset quality, credit underwriting and administration, the
allowance for loan and lease losses, loan and investment portfolio risks, asset-liability
management and loan concentrations, as well as the formulation and adoption of comprehensive
strategic plans. The banks also are prohibited from paying dividends or making other distributions
to the Company without prior regulatory approval and are required to maintain higher levels of Tier
1 capital than otherwise would be required to be considered well-capitalized under federal capital
guidelines. In addition, the banks are required to provide regulators with prior notice of certain
management and director changes and, in certain cases, to obtain their non-objection before
engaging in a transaction that would materially change its balance sheet composition. The Company
believes each bank is in full compliance with the requirements of the applicable memorandum of
understanding.
On October 21, 2010, the Company received notification from the FDIC that the previously disclosed
Consent Order with respect to Torrey Pines Bank, dated November 16, 2009, was terminated as of
October 20, 2010.
ITEM 4. RESERVED
22
Table of Contents
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
Market Information
The Company’s common stock began trading on the New York Stock Exchange under the symbol “WAL” on
June 30, 2005. The Company has filed, without qualifications, its 2010 Domestic Company section
303A CEO certification regarding its compliance with the NYSE’s corporate governance listing
standards. The following table presents the high and low sales prices of the Company’s common
stock for each quarterly period for the last two years as reported by The NASDAQ Global Select
Market:
| 2010 Quarters | 2009 Quarters | |||||||||||||||||||||||||||||||
| Fourth | Third | Second | First | Fourth | Third | Second | First | |||||||||||||||||||||||||
|
Range of stock prices:
|
||||||||||||||||||||||||||||||||
|
High
|
$ | 7.46 | $ | 8.10 | $ | 9.64 | $ | 6.04 | $ | 6.33 | $ | 7.84 | $ | 9.22 | $ | 10.54 | ||||||||||||||||
|
Low
|
5.69 | 5.98 | 5.59 | 3.75 | 2.99 | 5.86 | 4.00 | 3.72 | ||||||||||||||||||||||||
Holders
At December 31, 2010, there were approximately 1,418 stockholders of record. At such date, our
directors and executive officers owned approximately 14.7% of our outstanding shares. This number
excludes an estimate for the number of stockholders whose shares are held in the name of brokerage
firms or other financial institutions. The Company is not provided the exact number of or
identities of these stockholders. There are no other classes of common equity outstanding.
Dividends
Western Alliance Bancorporation (“Western Alliance”) is a legal entity separate and distinct from
the banks and our other non-bank subsidiaries. As a holding company with limited significant
assets other than the capital stock of our subsidiaries, Western Alliance’s ability to pay
dividends depends primarily upon the receipt of dividends or other capital distributions from our
subsidiaries. Our subsidiaries’ ability to pay dividends to Western Alliance is subject to, among
other things, their individual earnings, financial condition and need for funds, as well as federal
and state governmental policies and regulations applicable to Western Alliance and each of those
subsidiaries, which limit the amount that may be paid as dividends without prior approval. See the
additional discussion in the “Supervision and Regulation” section of this report for information
regarding restrictions on the ability to pay cash dividends. Our subsidiaries also are presently
subject to Memoranda of Understanding that require prior regulatory approval of any dividends paid
to Western Alliance Bancorporation. In addition, if any required payments on outstanding trust
preferred securities or preferred stock, including the preferred stock that we issued to the
Treasury in November 2008 pursuant to the Capital Purchase Program, are not made, Western Alliance
would be prohibited from paying cash dividends on our common stock. Western Alliance has never
paid a cash dividend on its common stock and does not anticipate paying any cash dividends in the
foreseeable future.
Sale of Unregistered Securities
There were no unregistered sales of securities during 2010.
Share Repurchases
There were no shares repurchased during 2010 or 2009. While the Series A Preferred Stock that we
issued to the Treasury are outstanding, the Company is prohibited from repurchasing shares of our
common stock.
Performance Graph
The following graph summarizes a five year comparison of the cumulative total returns for the
Company’s common stock, the Standard & Poor’s 500 stock index and the KBW Regional Banking Index,
each of which assumes an initial value of $100.00 on December 31, 2005 and reinvestment of
dividends.
23
Table of Contents
The information under the caption “Equity Compensation Plans” in our definitive proxy statement to
be filed with the SEC is incorporated by reference into this Item 5.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data have been derived from the Company’s consolidated financial
condition and results of operations, as of and for the years ended December 31, 2010, 2009, 2008,
2007 and 2006, and should be read in conjunction with the consolidated financial statements and the
related notes included elsewhere in this report:
| Year Ended December 31, | ||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||
| (in thousands, except per share data) | ||||||||||||||||
|
Results of Operations:
|
||||||||||||||||
|
Interest income
|
$ | 281,813 | $ | 276,023 | $ | 295,591 | $ | 305,822 | $ | 233,085 | ||||||
|
Interest expense
|
49,260 | 73,734 | 100,683 | 125,933 | 84,297 | |||||||||||
|
|
||||||||||||||||
|
Net interest income
|
232,553 | 202,289 | 194,908 | 179,889 | 148,788 | |||||||||||
|
Provision for credit losses
|
93,211 | 149,099 | 68,189 | 20,259 | 4,660 | |||||||||||
|
|
||||||||||||||||
|
Net interest income after provision for credit losses
|
139,342 | 53,190 | 126,719 | 159,630 | 144,128 | |||||||||||
|
Non-interest income
|
46,836 | 4,435 | (117,258 | ) | 22,533 | 13,434 | ||||||||||
|
Non-interest expense
|
196,758 | 242,977 | 288,967 | 131,011 | 96,086 | |||||||||||
|
|
||||||||||||||||
|
(Loss)/income from continuing operations before taxes
|
(10,580 | ) | (185,352 | ) | (279,506 | ) | 51,152 | 61,476 | ||||||||
|
Income tax (benefit)/provision
|
(6,410 | ) | (38,453 | ) | (49,496 | ) | 16,674 | 21,587 | ||||||||
|
|
||||||||||||||||
|
(Loss)/income from continuing operations
|
(4,170 | ) | (146,899 | ) | (230,010 | ) | 34,478 | 39,889 | ||||||||
|
Loss from discontinued operations, net of tax benefit
|
(3,025 | ) | (4,507 | ) | (6,450 | ) | (1,603 | ) | - | |||||||
|
|
||||||||||||||||
|
Net (loss)/income
|
$ | (7,195 | ) | $ | (151,406 | ) | $ | (236,460 | ) | $ | 32,875 | $ | 39,889 | |||
|
|
||||||||||||||||
24
Table of Contents
| Year Ended December 31, | ||||||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
| (in thousands, except per share data) | ||||||||||||||||||||
|
Per Share Data:
|
||||||||||||||||||||
|
(Loss)/income per share–basic
|
$ | (0.23 | ) | $ | (2.74 | ) | $ | (7.27 | ) | $ | 1.14 | $ | 1.56 | |||||||
|
(Loss)/income per share–diluted
|
$ | (0.23 | ) | $ | (2.74 | ) | $ | (7.27 | ) | $ | 1.06 | $ | 1.41 | |||||||
|
Book value per common share
|
$ | 5.77 | $ | 6.18 | $ | 9.59 | $ | 16.63 | $ | 15.09 | ||||||||||
|
Shares outstanding at period end
|
81,669 | 72,504 | 38,601 | 30,157 | 27,085 | |||||||||||||||
|
Weighted average shares outstanding–basic
|
75,083 | 58,836 | 32,652 | 28,918 | 25,623 | |||||||||||||||
|
Weighted average shares outstanding–diluted
|
75,083 | 58,836 | 32,652 | 31,019 | 28,218 | |||||||||||||||
|
Selected Balance Sheet Data:
|
||||||||||||||||||||
|
Cash and cash equivalents
|
$ | 216,746 | $ | 396,830 | $ | 139,954 | $ | 115,629 | $ | 264,880 | ||||||||||
|
Investments and other securities
|
$ | 1,273,098 | $ | 864,779 | $ | 565,377 | $ | 736,200 | $ | 542,321 | ||||||||||
|
Gross loans, including net deferred loan fees
|
$ | 4,240,542 | $ | 4,079,638 | $ | 4,095,711 | $ | 3,633,009 | $ | 3,003,222 | ||||||||||
|
Allowance for loan losses
|
$ | 110,699 | $ | 108,623 | $ | 74,827 | $ | 49,305 | $ | 33,551 | ||||||||||
|
Assets
|
$ | 6,193,883 | $ | 5,753,279 | $ | 5,242,761 | $ | 5,016,096 | $ | 4,169,604 | ||||||||||
|
Deposits
|
$ | 5,338,441 | $ | 4,722,102 | $ | 3,652,266 | $ | 3,546,922 | $ | 3,400,423 | ||||||||||
|
Senior debt
|
$ | 75,000 | $ | - | $ | - | $ | - | $ | - | ||||||||||
|
Junior subordinated and subordinated debt
|
$ | 43,034 | $ | 102,438 | $ | 103,038 | $ | 122,240 | $ | 101,857 | ||||||||||
|
Stockholders’ equity
|
$ | 602,174 | $ | 575,725 | $ | 495,497 | $ | 501,518 | $ | 408,579 | ||||||||||
|
Selected Other Balance Sheet Data:
|
||||||||||||||||||||
|
Average assets
|
$ | 6,030,609 | $ | 5,575,025 | $ | 5,198,237 | $ | 4,667,243 | $ | 3,668,405 | ||||||||||
|
Average earning assets
|
$ | 5,526,521 | $ | 5,125,574 | $ | 4,600,466 | $ | 4,123,956 | $ | 3,304,325 | ||||||||||
|
Average stockholders’ equity
|
$ | 601,412 | $ | 586,171 | $ | 512,872 | $ | 493,365 | $ | 348,294 | ||||||||||
|
Selected Financial and Liqudity Ratios:
|
||||||||||||||||||||
|
Return on average assets
|
(0.12% | ) | (2.72% | ) | (4.55% | ) | 0.70% | 1.09% | ||||||||||||
|
Return on average stockholders’ equity
|
(1.20% | ) | (25.83% | ) | (46.11% | ) | 6.66% | 11.45% | ||||||||||||
|
Net interest margin (2)
|
4.23% | 3.97% | 4.28% | 4.40% | 4.52% | |||||||||||||||
|
Loan to deposit ratio
|
79.43% | 86.39% | 112.14% | 102.43% | 88.32% | |||||||||||||||
|
Capital Ratios:
|
||||||||||||||||||||
|
Leverage ratio
|
9.5% | 9.5% | 8.9% | 7.4% | 8.2% | |||||||||||||||
|
Tier 1 risk-based capital ratio
|
12.0% | 11.8% | 9.8% | 7.9% | 9.4% | |||||||||||||||
|
Total risk-based capital ratio
|
13.2% | 14.4% | 12.3% | 10.3% | 11.5% | |||||||||||||||
|
Average equity to average assets
|
10.0% | 10.5% | 9.9% | 10.6% | 9.5% | |||||||||||||||
|
Selected Asset Quality Ratios:
|
||||||||||||||||||||
|
Nonaccrual loans to gross loans
|
2.76% | 3.77% | 1.44% | 0.49% | 0.05% | |||||||||||||||
|
Nonaccrual loans and repossessed
assets to total assets
|
3.63% | 4.12% | 1.40% | 0.42% | 0.03% | |||||||||||||||
|
Loans past due 90 days or more and still
accruing to total loans
|
0.03% | 0.14% | 0.30% | 0.02% | 0.03% | |||||||||||||||
|
Allowance for credit losses to total loans
|
2.61% | 2.66% | 1.83% | 1.36% | 1.12% | |||||||||||||||
|
Allowance for credit losses to nonaccrual loans
|
94.62% | 70.67% | 128.34% | 275.86% | 2367.75% | |||||||||||||||
|
Net charge-offs to average loans
|
2.22% | 2.86% | 1.10% | 0.23% | 0.04% | |||||||||||||||
25
Table of Contents
| ITEM 7. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The
following discussion and analysis should be read in conjunction with “Item 8 – Consolidated
Financial Statements and Supplementary Data.” This discussion and analysis contains
forward-looking statements that involve risk, uncertainties and assumptions. Certain risks,
uncertainties and other factors, including but not limited to those set forth under “Cautionary
Note Regarding Forward-Looking Statements” may cause actual results to differ materially from those
projected in the forward-looking statements.
Financial Overview and Highlights
Western Alliance Bancorporation is a multi-bank holding company headquartered in Phoenix, Arizona
that provides full service banking, investment advisory services and lending through its
subsidiaries.
Financial Result Highlights of 2010
Net loss available to common stockholders for the Company of $17.1 million, or ($0.23) loss per
diluted share for 2010 compared to net loss of $161.1 million or ($2.74) loss per diluted share for
2009.
The significant factors impacting earnings of the Company during 2010 were:
| • |
During 2010, the Company improved its net interest margin to 4.23% from 3.97% and its
net interest spread to 3.92% from 3.52%. The increase is attributed to the reduction in
the cost of interest bearing liabilities to 1.20% from 1.89%. The increased margin of 26
basis points was primarily a result of downward repricing of deposits to 1.07% from 1.90%.
The Company has reported five consecutive quarters of increases in net interest income.
|
||
| • |
During 2010, the Company increased deposits by $616.3 million to $5.34 billion at
December 31, 2010 from $4.72 billion at December 31, 2009.
|
||
| • |
The Company experienced loan growth of $160.9 million to $4.24 billion at December 31,
2010 from $4.08 billion at December 31, 2009.
|
||
| • |
Provision expense for 2010 declined $55.9 million to $93.2 million compared to $149.1
million for 2009.
|
||
| • |
Key asset quality ratios improved for 2010 compared to 2009. Nonaccrual loans and
repossessed assets to total assets improved to 3.63% from 4.12% in 2009 and nonaccrual
loans to gross loans improved to 2.76% at the end of 2010 compared to 3.77% at the end of
2009.
|
||
| • |
On August 24, 2010, the Company completed a public offering of 8,050,000 shares of
common stock, including 1,050,000 shares pursuant to the underwriter’s over-allotment
option, at a public offering price of $6.25 per share, for an aggregate offering price of
$50.3 million. The net proceeds of the offering were approximately $47.6 million.
|
||
| • |
On August 25, 2010, the Company completed a public offering of $75 million in principal
Senior Notes due in 2015 bearing interest of 10%. The net proceeds of the offering were
$72.8 million.
|
||
| • |
The Company divested its wholly owned subsidiary Premier Trust, Inc as of September 1,
2010 and recorded a $0.6 million gain on sale.
|
||
| • |
On October 21, 2010, the Company received notification from the FDIC that the previously
disclosed Consent Order with respect to Torrey Pines Bank, dated November 16, 2009, was
terminated as of October 20, 2010.
|
||
| • |
In October of 2010, the Company relocated its corporate headquarters and the
headquarters of its Arizona affiliate to the newly constructed CityScape complex, a
mixed-use development in the heart of downtown Phoenix. In addition during 2010, the
Company’s bank affiliates opened branch offices in the following locations:
|
| – |
Western Alliance Bank opened an office in Carson City, Nevada
|
||
| – |
Torrey Pines Bank opened a full-service branch office in Los Altos, California
and a full-service banking office in downtown Los Angeles, California |
| • |
As of December 31, 2010, the Company consolidated from five bank subsidiaries to three.
The Alta Alliance Bank subsidiary merged into its Torrey Pines Bank subsidiary, and its
First Independent Bank of Nevada subsidiary merged into its Alliance Bank of Arizona
subsidiary. As part of the latter merger, Alliance Bank of Arizona was renamed Western
Alliance Bank doing business as Alliance Bank of Arizona (in Arizona) and First Independent
Bank (in Nevada). Merger expenses for the period ending December 31, 2010 were $1.7
million.
|
26
Table of Contents
The impact to the Company from these items, and others of both a positive and negative nature, will
be discussed in more detail as they pertain to the Company’s overall comparative performance for
the year ended December 31, 2010 throughout the analysis sections of this report.
A summary of our results of operations and financial condition and select metrics is included in
the following table:
| Year Ended December 31, | ||||||||||||||||||||||||
| 2010 | 2009 | 2008 | ||||||||||||||||||||||
| (in thousands, except per share amounts) | ||||||||||||||||||||||||
|
Net (loss)/income available to common stockholders
|
$ | (17,077 | ) | $ | (161,148 | ) | $ | (237,541 | ) | |||||||||||||||
|
Basic earnings (loss) per share
|
(0.23 | ) | (2.74 | ) | (7.27 | ) | ||||||||||||||||||
|
Diluted earnings (loss) per share
|
(0.23 | ) | (2.74 | ) | (7.27 | ) | ||||||||||||||||||
|
Total assets
|
$ | 6,193,883 | $ | 5,753,279 | $ | 5,242,761 | ||||||||||||||||||
|
Gross loans
|
$ | 4,240,542 | $ | 4,079,639 | $ | 4,095,711 | ||||||||||||||||||
|
Total deposits
|
$ | 5,338,441 | $ | 4,722,102 | $ | 3,652,266 | ||||||||||||||||||
|
Net interest margin
|
4.23 | % | 3.97 | % | 4.28 | % | ||||||||||||||||||
|
Return on average assets
|
(0.12 | ) | % | (2.72 | ) | % | (4.55 | ) | % | |||||||||||||||
|
Return on average stockholders’ equity
|
(1.20 | ) | % | (25.84 | ) | % | (46.11 | ) | % | |||||||||||||||
As a bank holding company, management focuses on key ratios in evaluating the Company’s financial
condition and results of operations. In the current economic environment, key ratios regarding
asset credit quality and efficiency are more informative as to the financial condition of the
Company than those utilized in a more normal economic period such as return on equity and return on
assets.
Asset Quality
For all banks and bank holding companies, asset quality plays a significant role in the overall
financial condition of the institution and results of operations. The Company measures asset
quality in terms of nonaccrual loans as a percentage of gross loans, and net charge-offs as a
percentage of average loans. Net charge-offs are calculated as the difference between charged-off
loans and recovery payments received on previously charged-off loans. The following table
summarizes asset quality metrics as of December 31, 2010:
| Year Ended December 31, | ||||||||
| 2010 | 2009 | |||||||
| (in thousands) | ||||||||
|
Non-accrual loans
|
$ | 116,999 | $ | 153,702 | ||||
|
Non-performing assets
|
342,808 | 289,066 | ||||||
|
Non-accrual loans to gross loans
|
2.76% | 3.77% | ||||||
|
Net charge-offs to averge loans
|
2.22% | 2.86% | ||||||
Asset and Deposit Growth
The ability to originate new loans and attract new deposits is fundamental to the Company’s asset
growth. The Company’s assets and liabilities are comprised primarily of loans and deposits. Total
assets increased during 2010 to $6.19 billion from $5.75 billion at December 31, 2009. Total gross
loans excluding net deferred fees and unearned income increased by $147.9 million, or 3.6% as of
December 31, 2010 compared to December 31, 2009. Total deposits increased $616.3 million, or 13.1%
to $5.34 billion as of December 31, 2010 from $4.72 billion as of December 31, 2009.
RESULTS OF OPERATONS
The following table sets forth a summary financial overview for the comparable years:
27
Table of Contents
| Year Ended | ||||||||||||
| December 31, | Increase | |||||||||||
| 2010 | 2009 | (Decrease) | ||||||||||
| (in thousands, except per share amounts) | ||||||||||||
|
Consolidated Statement of Operations Data:
|
||||||||||||
|
Interest income
|
$ | 281,813 | $ | 276,023 | $ | 5,790 | ||||||
|
Interest expense
|
49,260 | 73,734 | (24,474 | ) | ||||||||
|
|
||||||||||||
|
Net interest income
|
232,553 | 202,289 | 30,264 | |||||||||
|
Provision for credit losses
|
93,211 | 149,099 | (55,888 | ) | ||||||||
|
|
||||||||||||
|
Net interest income after provision for credit losses
|
139,342 | 53,190 | 86,152 | |||||||||
|
Other non-interest income
|
46,836 | 4,435 | 42,401 | |||||||||
|
Non-interest expense
|
196,758 | 242,977 | (46,219 | ) | ||||||||
|
|
||||||||||||
|
Net (loss) from continuing operations before income taxes
|
(10,580 | ) | (185,352 | ) | 174,772 | |||||||
|
Income tax benefit
|
(6,410 | ) | (38,453 | ) | 32,043 | |||||||
|
|
||||||||||||
|
Loss from continuing operations
|
(4,170 | ) | (146,899 | ) | 142,729 | |||||||
|
Loss from discontinued operations, net of tax benefit
|
(3,025 | ) | (4,507 | ) | 1,482 | |||||||
|
|
||||||||||||
|
Net loss
|
$ | (7,195 | ) | $ | (151,406 | ) | $ | 144,211 | ||||
|
|
||||||||||||
|
Net loss available to common stockholders
|
$ | (17,077 | ) | $ | (161,148 | ) | $ | 144,071 | ||||
|
|
||||||||||||
|
Loss per
share - basic
|
$ | (0.23 | ) | $ | (2.74 | ) | $ | 2.51 | ||||
|
|
||||||||||||
|
Loss per
share - diluted
|
$ | (0.23 | ) | $ | (2.74 | ) | $ | 2.51 | ||||
|
|
||||||||||||
The Company’s primary source of income is interest income. Interest income for the year ended
December 31, 2010 was $281.8 million, an increase of 2.1% when comparing interest income for 2010
to 2009. This increase was primarily from interest income from loans. Average yield on loans
increased 9 basis points to 6.23% for the year ended December 31, 2010 compared to 2009.
Interest expense for the year ended 2010 compared to 2009 decreased by 33.2% to $49.3 million from
$73.7 million. This decline was primarily due to decreased average interest paid on deposits which
declined 83 basis points to 1.07% for the year ended December 31, 2010 compared to the same period
in 2009.
Net interest income was $232.6 million for the year ended December 31, 2010, compared to 2009, an
increase of $30.3 million, or 15.0%. The increase in net interest income reflects a $400.9 million
increase in average earning assets, offset by a $209.2 million increase in average interest bearing
liabilities. The increased margin of 26 basis points was due to a decrease in our average cost of
funds primarily as a result of downward repricing of deposits.
28
Table of Contents
Net
Interest Margin
The net interest margin is reported on a fully tax equivalent (“FTE”) basis. A tax equivalent
adjustment is added to reflect interest earned on certain municipal securities and loans that are
exempt from Federal income tax. The following table sets forth the average balances and interest
income on a fully tax equivalent basis and interest expense for the years indicated:
| Year Ended December 31, | ||||||||||||||||||||||||
| 2010 | 2009 | |||||||||||||||||||||||
|
(dollars in thousands)
|
||||||||||||||||||||||||
| Average | Average | Average | Average | |||||||||||||||||||||
| Balance | Interest | Yield/Cost | Balance | Interest | Yield/Cost | |||||||||||||||||||
|
Interest-Earning Assets
|
||||||||||||||||||||||||
|
Securities:
|
||||||||||||||||||||||||
|
Taxable
|
$ | 869,027 | $ | 23,272 | 2.68% | $ | 634,916 | $ | 24,124 | 3.80% | ||||||||||||||
|
Tax-exempt (1)
|
46,171 | 1,481 | 5.73% | 55,515 | 1,691 | 5.23% | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total securities
|
915,198 | 24,753 | 2.83% | 690,431 | 25,815 | 3.91% | ||||||||||||||||||
|
Federal funds sold and other
|
17,328 | 141 | 0.81% | 33,479 | 1,103 | 3.29% | ||||||||||||||||||
|
Loans (1) (2) (3)
|
4,105,022 | 255,626 | 6.23% | 4,037,659 | 248,098 | 6.14% | ||||||||||||||||||
|
Short term investments
|
448,815 | 1,130 | 0.25% | 322,883 | 874 | 0.27% | ||||||||||||||||||
|
Restricted stock
|
40,158 | 163 | 0.41% | 41,122 | 133 | 0.32% | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total earnings assets
|
5,526,521 | 281,813 | 5.12% | 5,125,574 | 276,023 | 5.41% | ||||||||||||||||||
|
Nonearning Assets
|
||||||||||||||||||||||||
|
Cash and due from banks
|
116,588 | 174,112 | ||||||||||||||||||||||
|
Allowance for credit losses
|
(114,074 | ) | (88,243 | ) | ||||||||||||||||||||
|
Bank-owned life insurance
|
99,435 | 91,321 | ||||||||||||||||||||||
|
Other assets
|
402,139 | 272,261 | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total assets
|
$ | 6,030,609 | $ | 5,575,025 | ||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Interest-Bearing Liabilities
|
||||||||||||||||||||||||
|
Sources of Funds
|
||||||||||||||||||||||||
|
Interest-bearing deposits:
|
||||||||||||||||||||||||
|
Interest checking
|
$ | 581,063 | $ | 2,898 | 0.50% | $ | 303,388 | $ | 3,216 | 1.06% | ||||||||||||||
|
Savings and money market
|
1,861,668 | 16,724 | 0.90% | 1,666,728 | 26,903 | 1.61% | ||||||||||||||||||
|
Time deposits
|
1,437,234 | 21,707 | 1.51% | 1,280,381 | 31,786 | 2.48% | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total interest-bearing deposits
|
3,879,965 | 41,329 | 1.07% | 3,250,497 | 61,905 | 1.90% | ||||||||||||||||||
|
Short-term borrowings
|
131,878 | 1,506 | 1.14% | 512,265 | 5,286 | 1.03% | ||||||||||||||||||
|
Long-term debt
|
26,558 | 2,777 | 10.46% | 25,727 | 1,577 | 6.13% | ||||||||||||||||||
|
Junior subordinated and
subordinated debt
|
62,342 | 3,648 | 5.85% | 103,034 | 4,966 | 4.82% | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total interest-bearing liabilities
|
4,100,743 | 49,260 | 1.20% | 3,891,523 | 73,734 | 1.89% | ||||||||||||||||||
|
Noninterest-Bearing Liabilities
|
||||||||||||||||||||||||
|
Noninterest-bearing
demand deposits
|
1,296,634 | 1,070,011 | ||||||||||||||||||||||
|
Other liabilities
|
31,820 | 27,320 | ||||||||||||||||||||||
|
Stockholders’ equity
|
601,412 | 586,171 | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total Liabilities and Stockholders’
Equity |
$ | 6,030,609 | $ | 5,575,025 | ||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net interest income and margin (4)
|
$ | 232,553 | 4.23% | $ | 202,289 | 3.97% | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net interest spread (5)
|
3.92% | 3.52% | ||||||||||||||||||||||
| (1) |
Yields on loans and securities have been adjusted to a tax equivalent basis. Interest income
has not been adjusted to a tax equivalent basis. The tax-equivalent adjustments for 2010 and
2009 were $1,164 and $1,210, respectively.
|
|
| (2) |
Net loan fees of $4.2 million and $4.0 million are included in the yield computation for 2010
and 2009, respectively.
|
|
| (3) |
Includes nonaccrual loans.
|
|
| (4) |
Net interest margin is computed by dividing net interest income by total average earning
assets.
|
|
| (5) |
Net interest spread represents average yield earned on interest-earning assets less the
average rate paid on interest bearing liabilities.
|
29
Table of Contents
The table below sets forth the relative impact on net interest income of changes in the volume of
earning assets and interest-bearing liabilities and changes in rates earned and paid by us on such
assets and liabilities. For purposes of this table, nonaccrual loans have been included in the
average loan balances.
| Year Ended December 31, | ||||||||||||
| 2010 versus 2009 | ||||||||||||
| Increase (Decrease) | ||||||||||||
| Due to Changes in (1)(2) | ||||||||||||
| Volume | Rate | Total | ||||||||||
| (in thousands) | ||||||||||||
|
Interest on investment securities:
|
||||||||||||
|
Taxable
|
$ | 6,269 | $ | (7,121 | ) | $ | (852 | ) | ||||
|
Tax-exempt
|
(300 | ) | 90 | (210 | ) | |||||||
|
Federal funds sold and other
|
(131 | ) | (831 | ) | (962 | ) | ||||||
|
Loans
|
4,195 | 3,333 | 7,528 | |||||||||
|
Short term investments
|
317 | (61 | ) | 256 | ||||||||
|
Restricted stock
|
(4 | ) | 34 | 30 | ||||||||
|
|
||||||||||||
|
Total interest income
|
10,346 | (4,556 | ) | 5,790 | ||||||||
|
Interest expense:
|
||||||||||||
|
Interest checking
|
1,385 | (1,703 | ) | (318 | ) | |||||||
|
Savings and money market
|
1,751 | (11,930 | ) | (10,179 | ) | |||||||
|
Time deposits
|
2,369 | (12,448 | ) | (10,079 | ) | |||||||
|
Short-term borrowings
|
(4,344 | ) | 564 | (3,780 | ) | |||||||
|
Long-term debt
|
87 | 1,113 | 1,200 | |||||||||
|
Junior subordinated debt
|
(2,381 | ) | 1,063 | (1,318 | ) | |||||||
|
|
||||||||||||
|
Total interest expense
|
(1,133 | ) | (23,341 | ) | (24,474 | ) | ||||||
|
|
||||||||||||
|
Net increase (decrease)
|
$ | 11,479 | $ | 18,785 | $ | 30,264 | ||||||
|
|
||||||||||||
| (1) |
Changes due to both volume and rate have been allocated to volume changes.
|
|
| (2) |
Changes due to mark-to-market gains/losses under ASC 825 have been allocated to volume
changes.
|
Comparison of net interest margin for 2009 to 2008
The following table sets forth a summary financial overview for the years ended December 31, 2009
and 2008:
| Year Ended | ||||||||||||
| December 31, | Increase | |||||||||||
| 2009 | 2008 | (Decrease) | ||||||||||
| (in thousands, except per share amounts) | ||||||||||||
|
Consolidated Statement of Operations Data:
|
||||||||||||
|
Interest income
|
$ | 276,023 | $ | 295,591 | $ | (19,568 | ) | |||||
|
Interest expense
|
73,734 | 100,683 | (26,949 | ) | ||||||||
|
|
||||||||||||
|
Net interest income
|
202,289 | 194,908 | 7,381 | |||||||||
|
Provision for credit losses
|
149,099 | 68,189 | 80,910 | |||||||||
|
|
||||||||||||
|
Net interest income after provision for credit losses
|
53,190 | 126,719 | (73,529 | ) | ||||||||
|
Non-interest income
|
4,435 | (117,258 | ) | 121,693 | ||||||||
|
Non-interest expense
|
242,977 | 288,967 | (45,990 | ) | ||||||||
|
|
||||||||||||
|
Net loss from continuing operations before income taxes
|
(185,352 | ) | (279,506 | ) | 94,154 | |||||||
|
Income tax benefit
|
(38,453 | ) | (49,496 | ) | 11,043 | |||||||
|
|
||||||||||||
|
Loss from continuing operations
|
(146,899 | ) | (230,010 | ) | 83,111 | |||||||
|
Loss from discontinued operations, net of tax benefit
|
(4,507 | ) | (6,450 | ) | 1,943 | |||||||
|
|
||||||||||||
|
Net loss
|
$ | (151,406 | ) | $ | (236,460 | ) | $ | 85,054 | ||||
|
|
||||||||||||
|
Net loss available to common stockholders
|
$ | (161,148 | ) | $ | (237,541 | ) | $ | 76,393 | ||||
|
|
||||||||||||
|
Loss per
share - basic
|
$ | (2.74 | ) | $ | (7.27 | ) | $ | 4.53 | ||||
|
|
||||||||||||
|
Loss per
share - diluted
|
$ | (2.74 | ) | $ | (7.27 | ) | $ | 4.53 | ||||
|
|
||||||||||||
30
Table of Contents
Interest income for the year ended December 31, 2009 was $276.0 million, a decrease of 6.6% when
comparing interest income for 2009 to 2008. This decrease was primarily from interest income from
investment securities and dividends due to decreased rates received on these investments. Interest
income from loans also declined primarily due to rates. Average yield on loans decreased 51 basis
points to 6.14% for the year ended December 31, 2009 compared to 2008. The Company’s increased
nonaccrual loans also contributed to this decline.
Interest expense for the year ended 2009 compared to 2008 decreased by 26.8% to $73.7 million from
$100.7 million. This decline was primarily due to decreased average interest paid on deposits
which declined 81 basis points to 1.90% for the year ended December 31, 2009 compared to the same
period in 2008. Total average cost of interest paid on interest-bearing liabilities declined 83
basis points for the comparable years 2009 to 2008.
Net interest income for the year ended December 31, 2009 compared to the year ended December 31,
2008 increased $7.4 million, or 3.8%, as the decrease in interest expense more than offset the
decrease in interest income. Net interest margin declined by 31 basis points to 3.97% for the year
ended December 31, 2009 compared to 2008 while net interest spread declined by 23 basis points to
3.52% from 3.75% for 2009 compared to 2008.
The net interest margin is reported on a fully tax equivalent (“FTE”) basis. A tax equivalent
adjustment is added to reflect interest earned on certain municipal securities and loans that are
exempt from Federal income tax. The following table sets forth the average balances and interest
income on a fully tax equivalent basis and interest expense for the years indicated:
31
Table of Contents
| Year Ended December 31, | ||||||||||||||||||||||||
| 2009 | 2008 | |||||||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||
| Average | Average | Average | Average | |||||||||||||||||||||
| Balance | Interest | Yield/Cost | Balance | Interest | Yield/Cost | |||||||||||||||||||
|
Interest-Earning Assets
|
||||||||||||||||||||||||
|
Investment Securities:
|
||||||||||||||||||||||||
|
Taxable
|
$ | 634,916 | $ | 24,124 | 3.80 | % | $ | 589,416 | $ | 32,938 | 5.59 | % | ||||||||||||
|
Tax-exempt (1)
|
55,515 | 1,691 | 5.23 | % | 78,096 | 2,896 | 6.07 | % | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total securities
|
690,431 | 25,815 | 3.91 | % | 667,512 | 35,834 | 5.64 | % | ||||||||||||||||
|
Federal funds sold and other
|
33,479 | 1,103 | 3.29 | % | 18,574 | 322 | 1.73 | % | ||||||||||||||||
|
Loans (1) (2) (3)
|
4,037,659 | 248,098 | 6.14 | % | 3,872,918 | 257,528 | 6.65 | % | ||||||||||||||||
|
Short term investments
|
322,883 | 874 | 0.27 | % | - | - | 0.00 | % | ||||||||||||||||
|
Restricted stock
|
41,122 | 133 | 0.32 | % | 41,462 | 1,907 | 4.60 | % | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total earnings assets
|
5,125,574 | 276,023 | 5.41 | % | 4,600,466 | 295,591 | 6.47 | % | ||||||||||||||||
|
Nonearning Assets
|
||||||||||||||||||||||||
|
Cash and due from banks
|
174,112 | 113,423 | ||||||||||||||||||||||
|
Allowance for credit losses
|
(88,243 | ) | (56,124 | ) | ||||||||||||||||||||
|
Bank-owned life insurance
|
91,321 | 89,343 | ||||||||||||||||||||||
|
Other assets
|
272,261 | 451,129 | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total assets
|
$ | 5,575,025 | $ | 5,198,237 | ||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Interest-Bearing Liabilities
|
||||||||||||||||||||||||
|
Sources of Funds
|
||||||||||||||||||||||||
|
Interest-bearing deposits:
|
||||||||||||||||||||||||
|
Interest checking
|
$ | 303,388 | $ | 3,216 | 1.06 | % | $ | 253,783 | $ | 3,965 | 1.56 | % | ||||||||||||
|
Savings and money market
|
1,666,728 | 26,903 | 1.61 | % | 1,517,189 | 35,475 | 2.34 | % | ||||||||||||||||
|
Time deposits
|
1,280,381 | 31,786 | 2.48 | % | 781,828 | 29,696 | 3.80 | % | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total interest-bearing deposits
|
3,250,497 | 61,905 | 1.90 | % | 2,552,800 | 69,136 | 2.71 | % | ||||||||||||||||
|
Short-term borrowings
|
512,265 | 5,286 | 1.03 | % | 896,309 | 19,721 | 2.20 | % | ||||||||||||||||
|
Long-term debt
|
25,727 | 1,577 | 6.13 | % | 141,954 | 4,569 | 3.22 | % | ||||||||||||||||
|
Junior subordinated and subordinated
|
103,034 | 4,966 | 4.82 | % | 114,741 | 7,257 | 6.32 | % | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total interest-bearing liabilities
|
3,891,523 | 73,734 | 1.89 | % | 3,705,804 | 100,683 | 2.72 | % | ||||||||||||||||
|
Noninterest-Bearing Liabilities
|
||||||||||||||||||||||||
|
Noninterest-bearing demand deposits
|
1,070,011 | 961,703 | ||||||||||||||||||||||
|
Other liabilities
|
27,320 | 17,858 | ||||||||||||||||||||||
|
Stockholders’ equity
|
586,171 | 512,872 | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total Liabilities and Stockholders’
Equity
|
$ | 5,575,025 | $ | 5,198,237 | ||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net interest income and margin (4)
|
$ | 202,289 | 3.97 | % | $ | 194,908 | 4.28 | % | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net interest spread (5)
|
3.52 | % | 3.75 | % | ||||||||||||||||||||
| (1) |
Yields on loans and securities have been adjusted to a tax equivalent basis. Interest income
has not been adjusted to a tax equivalent basis. The tax-equivalent adjustments for 2009 and
2008 were $1,210 and $1,843, respectively.
|
|
| (2) |
Net loan fees of $4.0 million and $5.5 million are included in the yield computation for 2009
and 2008, respectively.
|
|
| (3) |
Includes nonaccrual loans.
|
|
| (4) |
Net interest margin is computed by dividing net interest income by total average earning
assets.
|
|
| (5) |
Net interest spread represents average yield earned on interest-earning assets less the
average rate paid on interest bearing liabilities.
|
32
Table of Contents
The table below sets forth the relative impact on net interest income of changes in the volume
of earning assets and interest-bearing liabilities and changes in rates earned and paid by us on
such assets and liabilities. For purposes of this table, nonaccrual loans have been included in
the average loan balances.
| Year Ended December 31, | ||||||||||||
| 2009 versus 2008 | ||||||||||||
| Increase (Decrease) | ||||||||||||
| Due to Changes in (1)(2) | ||||||||||||
| Volume | Rate | Total | ||||||||||
| (in thousands) | ||||||||||||
|
Interest on investment securities:
|
||||||||||||
|
Taxable
|
$ | 1,729 | $ | (10,543 | ) | $ | (8,814 | ) | ||||
|
Tax-exempt
|
(688 | ) | (517 | ) | (1,205 | ) | ||||||
|
Federal funds sold and other
|
491 | 290 | 781 | |||||||||
|
Loans
|
10,123 | (19,553 | ) | (9,430 | ) | |||||||
|
Short term investments
|
874 | - | 874 | |||||||||
|
Restricted stock
|
(1 | ) | (1,773 | ) | (1,774 | ) | ||||||
|
|
||||||||||||
|
Total interest income
|
12,528 | (32,096 | ) | (19,568 | ) | |||||||
|
Interest expense:
|
||||||||||||
|
Interest checking
|
526 | (1,275 | ) | (749 | ) | |||||||
|
Savings and money market
|
2,414 | (10,986 | ) | (8,572 | ) | |||||||
|
Time deposits
|
12,377 | (10,287 | ) | 2,090 | ||||||||
|
Short-term borrowings
|
(3,963 | ) | (10,472 | ) | (14,435 | ) | ||||||
|
Long-term debt
|
(7,124 | ) | 4,132 | (2,992 | ) | |||||||
|
Junior subordinated debt
|
(564 | ) | (1,727 | ) | (2,291 | ) | ||||||
|
|
||||||||||||
|
Total interest expense
|
3,666 | (30,615 | ) | (26,949 | ) | |||||||
|
|
||||||||||||
|
Net increase (decrease)
|
$ | 8,862 | $ | (1,481 | ) | $ | 7,381 | |||||
|
|
||||||||||||
| (1) |
Changes due to both volume and rate have been allocated to volume changes.
|
|
| (2) |
Changes due to mark-to-market gains/losses under ASC 825 have been allocated to volume
changes.
|
Provision for Credit Losses
The provision for credit losses in each period is reflected as a charge against earnings in that
period. The provision is equal to the amount required to maintain the allowance for credit losses
at a level that is adequate to absorb probable credit losses inherent in the loan portfolio. The
provision for credit losses decreased by 37.5% to $93.2 million for the year ended December 31,
2010, compared with $149.1 million for the year ended December 31, 2009. The provision decreased
primarily due to increased asset credit quality.
The provision for credit losses was $149.1 million for the year ended December 31, 2009, an
increase of $80.9 million compared with $68.2 million for the year ended December 31, 2008. The
provision increased in 2009 compared to 2008 mostly due to decreased asset credit quality as a
result of the decline in the economy.
Noninterest Income (Loss)
The Company earned noninterest income (loss) primarily through fees related to trust and investment
advisory services, services provided to loan and deposit customers, bank owned life insurance,
securities gains and impairment charges, losses on repossessed assets, mark to market gains and
other.
The following tables present a summary of non-interest income for the periods presented:
33
Table of Contents
| Year Ended December 31, | ||||||||||||
| Increase | ||||||||||||
| 2010 | 2009 | (Decrease) | ||||||||||
| (in thousands) | ||||||||||||
|
Net securities impairment charges
|
$ | (1,186 | ) | $ | (43,784 | ) | $ | 42,598 | ||||
|
Gain on sales of investment securities, net
|
19,757 | 16,100 | 3,657 | |||||||||
|
Service charges
|
8,969 | 8,172 | 797 | |||||||||
|
Trust and investment advisory services
|
4,003 | 9,287 | (5,284 | ) | ||||||||
|
Operating lease income
|
3,793 | 4,066 | (273 | ) | ||||||||
|
Other fee revenue
|
3,324 | 2,754 | 570 | |||||||||
|
Income from bank owned life insurance
|
3,299 | 2,193 | 1,106 | |||||||||
|
Gain on extinguishment of debt
|
3,000 | - | 3,000 | |||||||||
|
Mark to market (loss) gain, net
|
(369 | ) | 3,631 | (4,000 | ) | |||||||
|
Derivative losses, net
|
(269 | ) | (263 | ) | (6 | ) | ||||||
|
Other
|
2,515 | 2,279 | 236 | |||||||||
|
|
||||||||||||
|
Total noninterest income
|
$ | 46,836 | $ | 4,435 | $ | 42,401 | ||||||
|
|
||||||||||||
Total noninterest income increased for the year ended December 31, 2010 compared to 2009
mostly due to the $42.6 million decrease in security impairment charges. In 2010, the Company
recorded $1.2 million of other then temporary impairment charges (“OTTI”) related to its
collateralized mortgage debt securities. In 2009 the Company recorded $43.8 million OTTI on its
investment securities. These impairment charges included $36.4 million related to impairment
losses in the Company’s adjustable rate preferred stock (“ARPS”), $3.4 million related to
impairment losses to the Company’s collateralized debt obligations (“CDO”) portfolio and $4.0
million related to the Company’s collateralized mortgage obligation (“CMO”) portfolio. Net gains
from investment securities sales increased by $3.7 million for the comparable periods. The
increase in gains on sales of securities for 2010 compared to 2009, was mostly due to previously
impaired securities which had improvements in price and were sold to reduce the percentage of
classified securities in the Company’s portfolio. The Company also recognized a $3.0 million gain
on the repayment of its subordinated debt during 2010. Partially offsetting this increased income
was a decrease of $5.3 million in trust and advisory service fees as a result of the divestitures
of MRA at the end of 2009 and PTI in September of 2010.
Comparison of non-interest income for 2009 to 2008
The following table presents non-interest income for the periods presented:
| Year Ended December 31, | ||||||||||||
| Increase | ||||||||||||
| 2009 | 2008 | (Decrease) | ||||||||||
| (in thousands) | ||||||||||||
|
Securities impairment charges
|
$ | (43,784 | ) | $ | (156,832 | ) | $ | 113,048 | ||||
|
Net gain on sale of investment securities
|
16,100 | 138 | 15,962 | |||||||||
|
Service charges
|
8,172 | 6,135 | 2,037 | |||||||||
|
Trust and investment advisory services
|
9,287 | 10,489 | (1,202 | ) | ||||||||
|
Operating lease income
|
4,066 | 3,659 | 407 | |||||||||
|
Other fee revenue
|
2,754 | 3,918 | (1,164 | ) | ||||||||
|
Income from bank owned life insurance
|
2,193 | 2,639 | (446 | ) | ||||||||
|
Mark to market gains, net
|
3,631 | 9,033 | (5,402 | ) | ||||||||
|
Derivative (losses) gains, net
|
(263 | ) | 1,607 | (1,870 | ) | |||||||
|
Other
|
2,279 | 1,956 | 323 | |||||||||
|
|
||||||||||||
|
Total noninterest income (loss)
|
$ | 4,435 | $ | (117,258 | ) | $ | 121,693 | |||||
|
|
||||||||||||
The $121.6 million positive change in noninterest income was mostly the result of decreased
securities impairment charges and increased gains on the sales of investment securities in 2009
compared to 2008. In 2009 the Company recorded OTTI on its investment securities of $43.8 million
related to ARPS, CDOs and CMOs as discussed above compared to $156.8 million of OTTI charges in
2008 related to $127.2 million in CDOs, $22.1 million in ARPs, $5.3 million
34
Table of Contents
related to two
auction-rate leveraged securities and $2.2 million in CMOs. These positive changes were partially
offset by decreased trust and advisory fees and mark to market gains.
Noninterest Expense
The following table presents, a summary of non-interest expenses for the periods presented:
| Year Ended December 31, | ||||||||||||
| Increase | ||||||||||||
| 2010 | 2009 | (Decrease) | ||||||||||
| (in thousands) | ||||||||||||
|
Non-interest expense:
|
||||||||||||
|
Salaries and employee benefits
|
$ | 86,586 | $ | 91,504 | $ | (4,918 | ) | |||||
|
Occupancy
|
19,580 | 20,802 | (1,222 | ) | ||||||||
|
Net loss on sales/valuations of repossessed assets and bank
premises, net
|
28,826 | 21,274 | 7,552 | |||||||||
|
Insurance
|
15,475 | 12,525 | 2,950 | |||||||||
|
Loan and repossessed asset expense
|
8,076 | 6,363 | 1,713 | |||||||||
|
Legal, professional and director fees
|
7,591 | 8,973 | (1,382 | ) | ||||||||
|
Customer service
|
4,256 | 4,290 | (34 | ) | ||||||||
|
Marketing
|
4,061 | 4,915 | (854 | ) | ||||||||
|
Data processing
|
3,374 | 4,274 | (900 | ) | ||||||||
|
Intangible amortization
|
3,604 | 3,781 | (177 | ) | ||||||||
|
Operating lease depreciation
|
2,506 | 3,229 | (723 | ) | ||||||||
|
Goodwill impairment charges
|
- | 49,671 | (49,671 | ) | ||||||||
|
Other
|
12,823 | 11,376 | 1,447 | |||||||||
|
|
||||||||||||
|
Total non-interest expense
|
$ | 196,758 | $ | 242,977 | $ | (46,219 | ) | |||||
|
|
||||||||||||
Total non-interest expense declined $46.2 million, or 19.0% for the year ended 2010 compared
to 2009. This decrease is primarily the result of the $49.7 million decrease in goodwill
impairment charges as there was no goodwill impairment recognized in 2010. In 2009 the Company
recorded $45 million in goodwill impairment at its BON subsidiary, $4.1 million at its Shine
subsidiary and $0.6 million at its former MRA subsidiary. Net of increased costs related to asset
quality issues and insurance of $12.2 million due to an increase in other real estate owned and
problem loan workout activity during 2010, the Company’s other non-interest expense categories
decreased by $8.8 million. The Company was diligent with cost saving strategies in 2010 and also
reduced headcount from 930 full time equivalent employees to 908 contributing to the $4.9 million
decline in salary and employee benefit costs. The increase in insurance of $3.0 million in 2010
compared to 2009 is due to increase in loan volumes.
| Year Ended December 31, | ||||||||||||
| Increase | ||||||||||||
| 2009 | 2008 | (Decrease) | ||||||||||
| (in thousands) | ||||||||||||
|
Non-interest expense:
|
||||||||||||
|
Salaries and employee benefits
|
$ | 91,504 | $ | 84,347 | $ | 7,157 | ||||||
|
Occupancy
|
20,802 | 20,727 | 75 | |||||||||
|
Net loss on sales/valuations of repossessed assets and bank
premises, net
|
21,274 | 679 | 20,595 | |||||||||
|
Goodwill impairment charges
|
49,671 | 138,844 | (89,173 | ) | ||||||||
|
Insurance
|
12,525 | 4,089 | 8,436 | |||||||||
|
Loan and respossessed asset expense
|
6,363 | 2,601 | 3,762 | |||||||||
|
Customer service
|
4,290 | 2,620 | 1,670 | |||||||||
|
Legal, professional and director fees
|
8,973 | 5,221 | 3,752 | |||||||||
|
Marketing
|
4,915 | 5,409 | (494 | ) | ||||||||
|
Data processing
|
4,274 | 5,755 | (1,481 | ) | ||||||||
|
Intangible amortization
|
3,781 | 3,631 | 150 | |||||||||
|
Operating lease depreciation
|
3,229 | 2,886 | 343 | |||||||||
|
Other
|
11,376 | 12,158 | (782 | ) | ||||||||
|
|
||||||||||||
|
Total non-interest expense
|
$ | 242,977 | $ | 288,967 | $ | (45,990 | ) | |||||
|
|
||||||||||||
35
Table of Contents
Comparison of non-interest expense for 2009 to 2008
Total non-interest expense declined $46.0 million, or 15.9% for the year ended 2009 compared to
2008. This decrease is primarily the result of the $89.2 million decrease in goodwill impairment
charges which were $49.7 million for 2009 compared to $138.8 million in 2008. Partially offsetting
this decline were increased salaries and benefits expense, FDIC insurance costs and customer
service expenses. Insurance expenses increased by $8.4 million for the year ended December 31,
2009 compared to 2008. This increase is mostly the result of increased FDIC insurance assessments
including one-time charges of $8.0 million for the comparable years.
Income
Taxes
The effective tax rate of the tax benefit on the net operating loss for the year ended December 31,
2010 was 54.4% compared to 21.6% for the year ended December 31, 2009. This increase in the
effective tax rate on the tax benefit from the prior year was primarily due to the favorable tax
impact of securities yielding dividends received deductions, tax exempt income, bank owned life
insurance and a decrease in the deferred tax valuation allowance.
Business Segment Results
Bank of Nevada reported a net loss of $26.4 million and $97.7 million for the years ended December
31, 2010 and 2009, respectively. The decrease in the net loss for the year ended December 31, 2010
compared to 2009 was primarily due to decreased provision for credit losses of $28.2 million and a
decline in goodwill impairment charges of $45.0 million for 2010 compared to 2009. Total deposits
at Bank of Nevada grew by $184.5 million to $2.39 billion at December 31, 2010 compared to $2.20
billion at December 31, 2009. Total loans decreased $158.3 million to $1.91 billion at December
31, 2010 compared to 2009.
Western Alliance Bank, which consists of Alliance Bank of Arizona operating in Arizona and First
Independent Bank operating in Northern Nevada, reported a net income of $12.8 million and a net
loss of $15.6 million for the years ended December 31, 2010 and 2009, respectively. The increase
in net income for the year ended December 31, 2010 from the year ended December 31, 2009 was
primarily due to an increase in interest income of $16.7 million, decreased provision
for credit losses of $24.1 million and increased non-interest income of $3.8 million, partially
offset by increased income tax expense of $16.7 million. During 2010 total loans at Western
Alliance Bank grew $180.0 million to $1.31 billion from $1.13 billion at December 31, 2009. In
addition, total deposits grew by $231.3 million to $1.67 billion at December 31, 2010.
Torrey Pines Bank reported net income of $10.3 million and a net loss of $3.3 million for the years
ended December 31, 2010 and 2009, respectively. The increase in net income for the year ended
December 31, 2010 from the year ended December 31, 2009 was the result of increased interest income
of $17.5 million, decreased provision for credit losses of $3.6 million, and $1.5 million decrease
in non-interest expense partially offset by increased income tax expense of $9.2 million. Total
loans at Torrey Pines Bank increased by $139.0 million to $1.06 billion at December 31, 2010 from
$924.8 million at December 31, 2009. Total deposits increased by 199.7 million during 2010 to
$1.28 billion at December 31, 2010.
The other segment, which includes the holding company, Shine, Western Alliance Equipment Finance,
the discontinued operations related to the affinity credit card platform, PTI (through September 1,
2010) and MRA (in 2009), reported a net loss of $3.9 million and $34.9 million for the years ended
December 31, 2010 and 2009, respectively.
BALANCE SHEET ANALYSIS
Total assets increased $440.6 million or 7.7% to $6.19 billion at December 31, 2010 compared to
$5.75 billion at December 31, 2009. The majority of the increase was in investment securities of
$424.6 million as the Company invested excess liquidity and repositioned the overall duration of
the portfolio. Net loans increased by $158.8 million to $4.13 billion primarily the result of
commercial real estate and commercial loan portfolio growth offset by principal reductions and net
charge-offs.
Total liabilities increased $414.2 million or 8% to $5.59 billion at December 31, 2010 from $5.18
billion at December 31, 2009. Total deposits increased by $616.3 million or 13.1% to $5.34 billion
at December 31, 2010 from $4.72 billion at December 31, 2009. Non-interest bearing demand deposits
increased by $286.2 million or 24.7% to 1.44 billion at December 31, 2010 from $1.16 billion at
December 31, 2009. In the third quarter of 2010, the Company completed a debt offering of $75
million.
36
Table of Contents
Total stockholders’ equity increased by $26.4 million to $602.2 million at December 31, 2010 from
$575.7 million at December 31, 2009. In the third quarter of 2010, the Company completed a public
offering of 8,050,000 shares with net proceeds of $47.6 million.
The following table shows the amounts of loans outstanding by type of loan at the end of each of
the periods indicated.
| December 31, | ||||||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
| (in thousands) | ||||||||||||||||||||
|
Commercial real estate
|
$ | 2,261,638 | $ | 2,024,624 | $ | 1,763,392 | $ | 1,514,533 | $ | 1,232,260 | ||||||||||
|
Construction and land development
|
451,470 | 623,198 | 820,874 | 806,110 | 715,546 | |||||||||||||||
|
Commercial and industrial
|
934,627 | 802,193 | 860,280 | 784,378 | 645,469 | |||||||||||||||
|
Residential real estate
|
527,302 | 568,319 | 589,196 | 492,551 | 384,082 | |||||||||||||||
|
Consumer
|
71,545 | 80,300 | 71,148 | 43,517 | 29,561 | |||||||||||||||
|
Net deferred loan fees
|
(6,040 | ) | (18,995 | ) | (9,179 | ) | (8,080 | ) | (3,696 | ) | ||||||||||
|
|
||||||||||||||||||||
|
Gross loans, net of deferred fees
|
4,240,542 | 4,079,639 | 4,095,711 | 3,633,009 | 3,003,222 | |||||||||||||||
|
Less: allowance for credit losses
|
(110,699 | ) | (108,623 | ) | (74,827 | ) | (49,305 | ) | (33,551 | ) | ||||||||||
|
|
||||||||||||||||||||
|
Total loans, net
|
$ | 4,129,843 | $ | 3,971,016 | $ | 4,020,884 | $ | 3,583,704 | $ | 2,969,671 | ||||||||||
|
|
||||||||||||||||||||
The following table sets forth the amount of loans outstanding by type of loan as of December
31, 2010 that were contractually due in one year or less, more than one year and less than five
years, and more than five years based on remaining scheduled repayments of principal. Lines of
credit or other loans having no stated final maturity and no stated schedule of repayments are
reported as due in one year or less. The tables also present an analysis of the rate structure for
loans within the same maturity time periods.
37
Table of Contents
| December 31, 2010 | ||||||||||||||||
| Due after one | ||||||||||||||||
| Due in one | year to five | Due after | ||||||||||||||
| year or less | years | five years | Total | |||||||||||||
| (in thousands) | ||||||||||||||||
|
Commercial
real estate -- owner occupied
|
||||||||||||||||
|
Floating rate
|
$ | 23,551 | $ | 117,672 | $ | 641,983 | $ | 783,206 | ||||||||
|
Fixed rate
|
54,301 | 171,855 | 213,788 | 439,944 | ||||||||||||
|
|
||||||||||||||||
|
Commercial
real estate -- non-owner occupied
|
||||||||||||||||
|
Floating rate
|
67,245 | 180,093 | 331,375 | 578,713 | ||||||||||||
|
Fixed rate
|
41,011 | 291,115 | 121,846 | 453,972 | ||||||||||||
|
|
||||||||||||||||
|
Commercial and industrial
|
||||||||||||||||
|
Floating rate
|
342,688 | 142,672 | 24,100 | 509,460 | ||||||||||||
|
Fixed rate
|
49,328 | 163,361 | 22,510 | 235,199 | ||||||||||||
|
|
||||||||||||||||
|
Leases
|
||||||||||||||||
|
Floating rate
|
- | - | - | - | ||||||||||||
|
Fixed rate
|
1,693 | 159,529 | 28,746 | 189,968 | ||||||||||||
|
|
||||||||||||||||
|
Construction and land development
|
||||||||||||||||
|
Floating rate
|
263,208 | 65,981 | 16,595 | 345,784 | ||||||||||||
|
Fixed rate
|
47,572 | 56,164 | 1,950 | 105,686 | ||||||||||||
|
|
||||||||||||||||
|
Residential real estate
|
||||||||||||||||
|
Floating rate
|
38,487 | 25,775 | 378,680 | 442,942 | ||||||||||||
|
Fixed rate
|
11,335 | 18,822 | 53,966 | 84,123 | ||||||||||||
|
|
||||||||||||||||
|
Consumer
|
||||||||||||||||
|
Floating rate
|
58,108 | 729 | 197 | 59,034 | ||||||||||||
|
Fixed rate
|
6,125 | 6,235 | 151 | 12,511 | ||||||||||||
|
|
||||||||||||||||
|
Total
|
$ | 1,004,652 | $ | 1,400,003 | $ | 1,835,887 | $ | 4,240,542 | ||||||||
|
|
||||||||||||||||
As of December 31, 2010, approximately $2.0 billion or 47.3% of total variable rate loans were
subject to rate floors with a weighted average interest rate of 6.33% At December 31, 2010, total
loans consisted of 64.1% with floating rates and 35.9% with fixed rates.
Concentrations of Lending Activities
The Company’s lending activities are primarily driven by the customers served in the market areas
where the Company has branch offices in the States of Nevada, California and Arizona. The Company
monitors concentrations within five broad categories: geography, industry, product, call code, and
collateral. The Company grants commercial, construction, real estate and consumer loans to
customers through branch offices located in the Company’s primary markets. The Company’s business
is concentrated in these areas and the loan portfolio includes significant credit exposure to the
commercial real estate market of these areas. As of December 31, 2010 and 2009, commercial real
estate related loans accounted for approximately 64% and 65% of total loans, respectively, and
approximately 2% and 5% of commercial real estate loans, respectively, are secured by undeveloped
land. Substantially all of these loans are secured by first liens with an initial loan to value
ratio of generally not more than 75%. Approximately 54% of these commercial real estate loans were
owner occupied at December 31, 2010 and 2009, respectively. In addition, approximately 3% and 4%
of total loans were unsecured as of December 31, 2010 and 2009, respectively.
Interest Reserves.
Interest reserves are generally established at the time of the loan origination
as an expense item in the budget for a construction and land development loan. The Company’s
practice is to monitor the construction, sales and/or leasing progress to determine the feasibility
of ongoing construction and development projects. If, at any time during the life of the loan, the
project is determined not to be viable, the Company has the ability to discontinue the use of the
interest reserve and take appropriate action to protect its collateral position via negotiation
and/or legal action as deemed appropriate. At December 31, 2010, WAL had 26 loans with an
outstanding balance of $46.7 million with available interest reserves of $1.2 million. In
instances where projects have been determined unviable, the interest reserves have
38
Table of Contents
been frozen.
This is a decrease from 97 loans at December 31, 2009 with an outstanding principal balance of
$164.4 million and available interest reserve amounts of $11.1 million.
Non-performing loans
: Nonperforming loans decreased by $40.8 million, or 25.6% at December 31,
2010 to $118.5 million from $159.2 million at December 31, 2009. During 2010, total impaired loans
increased 2.1%, from $233.5 million at December 31, 2009 to $238.3 million at December 31, 2010.
| December 31, | |||||||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||
|
Total nonaccrual loans
|
$ | 116,999 | $ | 153,702 | $ | 58,302 | $ | 17,873 | $ | 1,417 | |||||||||||
|
Loans past due 90 days or more and
still accruing
|
1,458 | 5,538 | 11,515 | 779 | 794 | ||||||||||||||||
|
|
|||||||||||||||||||||
|
Total nonperforming loans
|
118,457 | 159,240 | 69,817 | 18,652 | 2,211 | ||||||||||||||||
|
Restructured loans
|
116,696 | 46,480 | 15,605 | 3,782 | - | ||||||||||||||||
|
Other impaired loans
|
3,182 | 27,752 | 92,981 | 12,680 | 839 | ||||||||||||||||
|
|
|||||||||||||||||||||
|
Total impaired loans
|
$ | 238,335 | $ | 233,472 | $ | 178,403 | $ | 35,114 | $ | 3,050 | |||||||||||
|
|
|||||||||||||||||||||
|
Other real estate owned (OREO)
|
$ | 107,655 | $ | 83,347 | $ | 14,545 | $ | 3,412 | $ | - | |||||||||||
|
Nonaccrual loans to gross loans
|
2.76 | % | 3.77 | % | 1.42 | % | 0.49 | % | 0.05 | % | |||||||||||
|
Loans past due 90 days or more
and still accruing to total loans
|
0.03 | 0.14 | 0.28 | 0.02 | 0.03 | ||||||||||||||||
|
Interest income received on nonaccrual loans
|
$ | 2,501 | $ | 624 | $ | 488 | $ | 30 | $ | 120 | |||||||||||
|
Interest income that would have been recorded
under the original terms of nonaccrual loans
|
$ | 6,016 | $ | 8,713 | $ | 1,827 | $ | 765 | $ | 147 | |||||||||||
The composite of nonaccrual loans were as follows:
| At December 31, 2010 | At December 31, 2009 | |||||||||||||||||||||||
| Nonaccrual | Percent of | Nonaccrual | Percent of | |||||||||||||||||||||
| Balance | % | Total Loans | Balance | % | Total Loans | |||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||
|
Construction and land
|
$ | 36,523 | 31.22 | % | 0.86 | % | $ | 64,079 | 41.69 | % | 1.57 | % | ||||||||||||
|
Residential real estate
|
32,638 | 27.90 | % | 0.76 | % | 30,000 | 19.52 | % | 0.73 | % | ||||||||||||||
|
Commercial real estate
|
40,257 | 34.40 | % | 0.95 | % | 42,253 | 27.49 | % | 1.04 | % | ||||||||||||||
|
Commercial and industrial
|
7,349 | 6.28 | % | 0.17 | % | 17,134 | 11.15 | % | 0.42 | % | ||||||||||||||
|
Consumer
|
232 | 0.20 | % | 0.01 | % | 236 | 0.15 | % | 0.01 | % | ||||||||||||||
|
|
||||||||||||||||||||||||
|
Total nonaccrual loans
|
$ | 116,999 | 100.00 | % | 2.76 | % | $ | 153,702 | 100.00 | % | 3.77 | % | ||||||||||||
|
|
||||||||||||||||||||||||
As of December 31, 2010 and December 31, 2009, nonaccrual loans totaled $117.0 million and
$153.7 million, respectively. Nonaccrual loans at December 31, 2010 consisted of multiple customer
relationships with no single customer relationship having a principal balance greater than $10.0
million. Nonaccrual loans by bank at December 31, 2010 were $81.8 million at Bank of Nevada, $22.9
million at Western Alliance Bank and $12.3 million at Torrey Pines Bank. Nonaccrual loans as a
percentage of total gross loans were 2.76% and 3.77% at December 31, 2010 and 2009, respectively.
Nonaccrual loans as a percentage of each bank’s total gross loans were 4.27% at Bank of Nevada,
1.75% at Western Alliance Bank and 1.16% at Torrey Pines Bank. Total lost interest on nonaccrual
loans for year ended December 31, 2010 and 2009 was $6.0 million and $8.7 million, respectively.
Impaired loans:
A loan is identified as impaired when it is probable that interest and principal
will not be collected according to the contractual terms of the original loan agreement. These
loans generally have balances greater than $250,000 and are rated substandard or worse. An
exception to this would be any known impaired loans regardless of balance. Most impaired loans
are classified as nonaccrual. However, there are some loans that are termed impaired due to doubt
regarding collectability according to contractual terms, but are both fully secured by collateral
and are current in their interest and principal payments. These impaired loans are not classified
as nonaccrual. Impaired loans are measured for reserve requirements in accordance with ASC Topic
310,
Receivables,
based on the present value of expected future cash flows discounted at the loan’s
effective interest rate or, as a practical expedient, at the loan’s observable market price or the
fair value of the collateral less applicable disposition costs if the loan is collateral
39
Table of Contents
dependent.
The amount of an impairment reserve, if any, and any subsequent changes are charged against the
allowance for loan losses.
Troubled Debt Restructured Loans
: A troubled debt restructured loan is a loan on which the Bank,
for reasons related to a borrower’s financial difficulties, grants a concession to the borrower
that the Bank would not otherwise consider. The loan terms that have been modified or restructured
due to a borrower’s financial situation include, but are not limited to, a reduction in the stated
interest rate, an extension of the maturity at an interest rate below current market, a reduction
in the face amount of the debt, a reduction in the accrued interest, or re-aging, extensions,
deferrals, renewals and rewrites. A troubled debt restructured loan is also considered impaired.
Generally, a loan that is modified at an effective market rate of interest may no longer be
classified as troubled debt restructuring in the calendar year subsequent to the restructuring if
it is in compliance with the modified terms and the expectation exists for continued performance
going forward.
As of December 31, 2010 and, December 31, 2009, the aggregate total amount of loans classified as
impaired, was $238.3 million and $233.4 million, respectively. The total specific allowance for
loan losses related to these loans was $13.4 million and $13.4 million for December 31, 2010 and
2009, respectively. As of December 31, 2010 and December 31, 2009, we had $116.7 million and $46.5
million, respectively, in loans classified as accruing restructured loans. The increases in total
impaired loans and restructured loans were primarily due to the continued impact from the decline
in economic conditions. The increase in impaired loans at December 31, 2010, of $4.9 million from
December 31, 2009 is mostly attributed to the increase in commercial real estate impaired loans which were $85.4 million
at December 31, 2009 compared to $123.9 million at December 31, 2010, an increase of $38.6 million.
This increase was mostly offset by a decrease in impaired construction and land development loans
of $30.9 million to $58.4 million at December 31, 2010 compared to 2009.
The following tables present a breakdown of total impaired loans and the related specific reserves
for the periods indicated:
| At December 31, 2010 | ||||||||||||||||||||||||
| Impaired | Percent of | Reserve | Percent of | |||||||||||||||||||||
| Balance | Percent | Total Loans | Balance | Percent | Total Allowance | |||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||
|
Construction and land development
|
$ | 58,415 | 24.51 | % | 1.38 | % | $ | 2,846 | 21.18 | % | 2.57 | % | ||||||||||||
|
Residential real estate
|
42,423 | 17.80 | % | 1.00 | % | 2,716 | 20.21 | % | 2.45 | % | ||||||||||||||
|
Commercial real estate
|
123,939 | 52.00 | % | 2.92 | % | 4,582 | 34.08 | % | 4.14 | % | ||||||||||||||
|
Commercial and industrial
|
12,803 | 5.37 | % | 0.30 | % | 3,170 | 23.59 | % | 2.86 | % | ||||||||||||||
|
Consumer
|
755 | 0.32 | % | 0.02 | % | 126 | 0.94 | % | 0.11 | % | ||||||||||||||
|
|
||||||||||||||||||||||||
|
Total impaired loans
|
$ | 238,335 | 100.00 | % | 5.62 | % | $ | 13,440 | 100.00 | % | 12.14 | % | ||||||||||||
|
|
||||||||||||||||||||||||
| At December 31, 2009 | ||||||||||||||||||||||||
| Impaired | Percent of | Reserve | Percent of | |||||||||||||||||||||
| Balance | Percent | Total Loans | Balance | Percent | Total Allowance | |||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||
|
Construction and land development
|
$ | 89,314 | 38.26 | % | 2.19 | % | $ | 5,314 | 39.71 | % | 4.89 | % | ||||||||||||
|
Residential real estate
|
39,619 | 16.97 | % | 0.97 | % | 4,443 | 33.20 | % | 4.09 | % | ||||||||||||||
|
Commercial real estate
|
85,377 | 36.57 | % | 2.09 | % | 2,377 | 17.76 | % | 2.19 | % | ||||||||||||||
|
Commercial and industrial
|
18,926 | 8.10 | % | 0.46 | % | 1,167 | 8.72 | % | 1.07 | % | ||||||||||||||
|
Consumer
|
236 | 0.10 | % | 0.01 | % | 82 | 0.61 | % | 0.08 | % | ||||||||||||||
|
|
||||||||||||||||||||||||
|
Total impaired loans
|
$ | 233,472 | 100.00 | % | 5.72 | % | $ | 13,383 | 100.00 | % | 12.32 | % | ||||||||||||
|
|
||||||||||||||||||||||||
The amount of interest income recognized on impaired loans for the years ended December 31,
2010, 2009 and 2008 was approximately $7.6 million, $10.5 million and $10.5 million, respectively.
Allowance for Credit Losses
The following table summarizes the activity in our allowance for credit losses for the period
indicated.
40
Table of Contents
| Year Ended December 31, | ||||||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||
|
Allowance for credit losses:
|
||||||||||||||||||||
|
Balance at beginning of period
|
$ | 108,623 | $ | 74,827 | $ | 49,305 | $ | 33,551 | $ | 21,192 | ||||||||||
|
Provisions charged to operating expenses
|
93,211 | 149,099 | 68,189 | 20,259 | 4,660 | |||||||||||||||
|
Acquisitions
|
- | - | - | 3,419 | 8,768 | |||||||||||||||
|
Recoveries of loans previously charged-off:
|
||||||||||||||||||||
|
Construction and land development
|
3,197 | 1,708 | 32 | - | - | |||||||||||||||
|
Commercial real estate
|
1,003 | 230 | 3 | - | - | |||||||||||||||
|
Residential real estate
|
2,039 | 545 | 43 | - | 5 | |||||||||||||||
|
Commercial and industrial
|
3,000 | 1,529 | 533 | 213 | 324 | |||||||||||||||
|
Consumer
|
164 | 173 | 37 | 49 | 107 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total recoveries
|
9,403 | 4,185 | 648 | 262 | 436 | |||||||||||||||
|
Loans charged-off:
|
||||||||||||||||||||
|
Construction and land development
|
23,623 | 35,807 | 16,715 | 2,361 | 64 | |||||||||||||||
|
Commercial real estate
|
33,821 | 16,756 | 2,912 | - | - | |||||||||||||||
|
Residential real estate
|
20,663 | 24,082 | 6,643 | 49 | - | |||||||||||||||
|
Commercial and industrial
|
17,218 | 38,573 | 15,937 | 5,304 | 1,273 | |||||||||||||||
|
Consumer
|
5,213 | 4,270 | 1,108 | 472 | 168 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total charged-off
|
100,538 | 119,488 | 43,315 | 8,186 | 1,505 | |||||||||||||||
|
Net charge-offs
|
91,135 | 115,303 | 42,667 | 7,924 | 1,069 | |||||||||||||||
|
|
||||||||||||||||||||
|
Balance at end of period
|
$ | 110,699 | $ | 108,623 | $ | 74,827 | $ | 49,305 | $ | 33,551 | ||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Net charge-offs to average loans outstanding
|
2.22% | 2.86% | 1.10% | 0.23% | 0.04% | |||||||||||||||
|
Allowance for credit losses to gross loans
|
2.61 | 2.66 | 1.83 | 1.36 | 1.12 | |||||||||||||||
The following table summarizes the allocation of the allowance for credit losses by loan type.
However, allocation of a portion of the allowance to one category of loans does not preclude its
availability to absorb losses in other categories:
| December 31, | |||||||||||||||||||||||||||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||
| % of | % of | % of | % of | % of | |||||||||||||||||||||||||||||||||||||
| Loans in | Loans in | Loans in | Loans in | Loans in | |||||||||||||||||||||||||||||||||||||
| Each | Each | Each | Each | Each | |||||||||||||||||||||||||||||||||||||
| Category | Category | Category | Category | Category | |||||||||||||||||||||||||||||||||||||
| to Gross | to Gross | to Gross | to Gross | to Gross | |||||||||||||||||||||||||||||||||||||
| Amount | Loans | Amount | Loans | Amount | Loans | Amount | Loans | Amount | Loans | ||||||||||||||||||||||||||||||||
|
Construction and
land development
|
$ | 20,587 | 10.6 | % | $ | 29,608 | 15.2 | % | $ | 28,010 | 20.0 | % | $ | 18,979 | 22.1 | % | $ | 13,456 | 23.8 | % | |||||||||||||||||||||
|
Real estate:
|
|||||||||||||||||||||||||||||||||||||||||
|
Commercial
|
33,043 | 53.3 | 16,279 | 49.4 | 11,870 | 42.9 | 10,929 | 41.6 | 6,483 | 41.0 | |||||||||||||||||||||||||||||||
|
Residential
|
20,889 | 12.4 | 24,397 | 13.9 | 11,735 | 14.4 | 3,184 | 13.5 | 1,729 | 12.8 | |||||||||||||||||||||||||||||||
|
Commercial and
industrial
|
30,782 | 22.0 | 31,883 | 19.6 | 19,867 | 21.0 | 15,442 | 21.5 | 11,312 | 21.5 | |||||||||||||||||||||||||||||||
|
Consumer
|
5,398 | 1.7 | 6,456 | 2.0 | 3,345 | 1.7 | 771 | 1.3 | 571 | 0.9 | |||||||||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||||||||||||||
|
Total
|
$ | 110,699 | 100.0 | % | $ | 108,623 | 100.0 | % | $ | 74,827 | 100.0 | % | $ | 49,305 | 100.0 | % | $ | 33,551 | 100.0 | % | |||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||||||||||||||
The allowance for credit losses as a percentage of total loans decreased slightly to 2.61% at
December 31, 2010 from 2.66% at December 31, 2009 and increased from 1.83% at December 31, 2008.
The Company’s credit loss reserve at December 31, 2010 increased to $110.7 million from $108.6
million at December 31, 2009 mostly due to the increase in portfolio balance and change in the
portfolio mix. Loan portfolio growth and the change in the portfolio mix were the primary causes
of the increased allowance for credit losses.
Potential Problem Loans
41
Table of Contents
The Company classifies loans consistent with federal banking regulations using a nine category
grading system. These loan grades are described in further detail in the Item 1, Business of this
Form 10-K. The following table presents information regarding potential problem loans, consisting
of loans graded watch, substandard, doubtful, and loss, but still performing:
| December 31, 2010 | ||||||||||||||||
|
# of |
Loan |
Percent of | ||||||||||||||
| Loans | Balance | Percent | Total Loans | |||||||||||||
| (dollars in thousands) | ||||||||||||||||
|
Construction and Land Development
|
57 | $ | 50,764 | 21.4 | % | 1.20 | % | |||||||||
|
Commercial Real Estate
|
110 | 123,691 | 52.1 | % | 2.92 | % | ||||||||||
|
Residential Real Estate
|
64 | 24,052 | 10.1 | % | 0.57 | % | ||||||||||
|
Commercial & Industrial
|
199 | 37,536 | 15.8 | % | 0.89 | % | ||||||||||
|
Consumer
|
21 | 1,451 | 0.6 | % | 0.03 | % | ||||||||||
|
|
||||||||||||||||
|
Total Loans
|
451 | $ | 237,494 | 100.0 | % | 5.61 | % | |||||||||
|
|
||||||||||||||||
Total potential problem loans consisted of 451 loans and totaled approximately $237.5 million
at December 31, 2010. These loans are primarily secured by real estate.
Investment securities
The investment securities portfolio of the Company is utilized as collateral for borrowings,
required collateral for public deposits and customer repurchase agreements, and to manage
liquidity, capital and interest rate risk.
The following table summarizes the carrying value of the investment securities portfolio:
| At December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (in thousands) | ||||||||||||
|
U.S. Treasury securities
|
$ | - | $ | - | $ | 8,170 | ||||||
|
U.S. Government sponsored agency securities
|
280,103 | 2,479 | 2,511 | |||||||||
|
Direct obligation and GSE residential mortgage-backed securities
|
781,179 | 655,073 | 436,804 | |||||||||
|
Private label residential mortgage-backed
|
8,111 | 18,175 | 38,428 | |||||||||
|
Municipal obligations
|
1,677 | 5,380 | 18,956 | |||||||||
|
Adjustable rate preferred stock
|
67,243 | 18,296 | 27,722 | |||||||||
|
Trust preferred securities
|
23,126 | 22,050 | 16,301 | |||||||||
|
Collateralized debt obligations
|
276 | 918 | 1,219 | |||||||||
|
Corporate bonds
|
49,907 | 71,190 | - | |||||||||
|
Other
|
23,743 | 17,189 | 15,266 | |||||||||
|
|
||||||||||||
|
Total investment securities
|
$ | 1,235,365 | $ | 810,750 | $ | 565,377 | ||||||
|
|
||||||||||||
Weighted average yield is calculated by dividing income within each maturity range by the
outstanding amount of the related investment and has not been tax affected on tax-exempt
obligations. Securities available for sale are carried at amortized cost in the table below for
purposes of calculating the weighted average yield received on such securities. The maturity
distribution and weighted average yield of our investment security portfolios at December 31, 2010
are summarized in the table below:
42
Table of Contents
| December 31, 2010 | ||||||||||||||||||||||||||||||||||||||||
| Due Under 1 | Due Over 10 | |||||||||||||||||||||||||||||||||||||||
| Year | Due 1-5 Years | Due 5-10 Years | Years | Total | ||||||||||||||||||||||||||||||||||||
| Amount/Yield | Amount/Yield | Amount/Yield | Amount/Yield |
Amount/Yield
|
||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||
|
Available-for-Sale
|
||||||||||||||||||||||||||||||||||||||||
|
Municipal obligations
|
$ | 5 | 6.43 | % | $ | - | 0.00 | % | $ | 56 | 6.23 | % | $ | 241 | 5.82 | % | $ | 302 | 5.91 | % | ||||||||||||||||||||
|
US Government Agencies
|
- | 0.00 | - | 0.00 | 277,592 | 2.45 | - | 0.00 | 277,592 | 2.45 | ||||||||||||||||||||||||||||||
|
Adjustable-rate preferred stock
|
13,627 | 5.57 | 8,663 | 5.53 | 13,595 | 8.73 | 31,358 | 5.95 | 67,243 | 6.38 | ||||||||||||||||||||||||||||||
|
Direct obligation & GSE residential
mortgage-backed securities
|
- | 0.00 | - | 0.00 | 30,064 | 1.58 | 739,325 | 2.06 | 769,389 | 2.04 | ||||||||||||||||||||||||||||||
|
Private label residential mortgage-
|
- | 0.00 | - | 0.00 | - | 0.00 | 8,111 | 4.58 | 8,111 | 4.58 | ||||||||||||||||||||||||||||||
|
backed securities
|
||||||||||||||||||||||||||||||||||||||||
|
Trust Preferred
|
- | 0.00 | - | 0.00 | - | 0.00 | 23,126 | 1.17 | 23,126 | 1.17 | ||||||||||||||||||||||||||||||
|
Corporate bonds
|
- | 0.00 | - | 0.00 | - | 0.00 | 4,907 | 5.00 | 4,907 | 5.00 | ||||||||||||||||||||||||||||||
|
Other
|
22,243 | 2.95 | - | 0.00 | - | 0.00 | - | 0.00 | 22,243 | 2.95 | ||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Total available-for-sale
|
$ | 35,875 | 3.94 | % | $ | 8,663 | 5.53 | % | $ | 321,307 | 2.64 | % | $ | 807,068 | 2.23 | % | $ | 1,172,913 | 2.42 | % | ||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Held-to-Maturity
|
||||||||||||||||||||||||||||||||||||||||
|
Municipal obligations
|
$ | - | 0.00 | % | $ | 999 | 6.93 | % | $ | 376 | 6.89 | % | $ | - | 0.00 | % | $ | 1,375 | 6.92 | % | ||||||||||||||||||||
|
Corporate securities
|
- | 0.00 | - | 0.00 | 40,000 | 5.34 | 5,000 | 5.00 | 45,000 | 5.31 | ||||||||||||||||||||||||||||||
|
Debt obligations and structured
securities
|
- | 0.00 | - | 0.00 | - | 0.00 | 276 | 0.00 | 276 | 0.00 | ||||||||||||||||||||||||||||||
|
Other
|
1,500 | 0.00 | - | 0.00 | - | 0.00 | - | 0.00 | 1,500 | 0.00 | ||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Total held-to-maturity
|
$ | 1,500 | 0.00 | % | $ | 999 | 6.93 | $ | 40,376 | 5.36 | % | $ | 5,276 | 4.74 | % | $ | 48,151 | 5.16 | % | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Measured at fair value
|
||||||||||||||||||||||||||||||||||||||||
|
U.S. Governmentagency securities
|
$ | - | 0.00 | % | $ | - | 0.00 | % | $ | - | 0.00 | % | $ | 2,511 | 5.00 | % | $ | 2,511 | 5.00 | % | ||||||||||||||||||||
|
Direct obligation & GSE residential
mortgage-backed securities
|
- | 0.00 | 9 | 1.48 | 1,760 | 6.53 | 10,021 | 4.61 | 11,790 | 4.90 | ||||||||||||||||||||||||||||||
|
Private label residential mortgage-backed securities
|
- | 0.00 | - | 0.00 | - | 0.00 | - | 0.00 | - | 0.00 | ||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Total measured at fair value
|
$ | - | 0.00 | % | $ | 9 | 1.48 | % | $ | 1,760 | 6.53 | % | $ | 12,532 | 4.69 | % | $ | 14,301 | 4.92 | % | ||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
The Company does not own any subprime mortgage-backed securities in its investment portfolio.
All but $2.3 million of our remaining mortgage-backed securities are rated AAA and backed by prime
mortgage collateral.
Gross unrealized losses at December 31, 2010 are primarily caused by interest rate fluctuations,
credit spread widening and reduced liquidity in applicable markets. The Company has reviewed
securities on which there is an unrealized loss in accordance with its accounting policy for other
then temporary impaired (“OTTI”) described in Note 3,
Investment Securities
, and recorded
impairment charges totaling $1.2 million and $43.8 million for the twelve months ended December 31,
2010 and 2009, respectively. For 2010, the impairment charges related to unrealized losses in the
Company’s CDO portfolio. For 2009, this includes $36.4 million related to impairment losses in the
Company’s ARPS, $3.4 million related to impairment losses to the Company’s CDO portfolio and $4.0
million related to the Company’s collateralized mortgage obligation (“CMO”) portfolio.
The Company does not consider any other securities to be other-than-temporarily impaired as of
December 31, 2010 and 2009. However, without recovery in the near term such that liquidity returns
to the applicable markets and spreads return to levels that reflect underlying credit
characteristics, additional OTTI may occur in future periods. At December 31, 2010,
the Company had the intent and ability to retain its investments for a period of time sufficient to
allow for any anticipated recovery in fair value.
Premises and Equipment
On December 30, 2005, the Company purchased the corporate headquarters of Bank of Nevada for
a
total acquisition price of approximately $16.3 million. The location was previously leased by the
Company. In connection with this purchase, the Company assumed a note on the building. The note
amount at December 31, 2009 and 2008 was $9.4 million and $9.5 million, respectively. The note,
which had a fixed interest rate of 8.79%, matured and was paid in full in February 2010. The note
was collateralized by the purchased building.
Goodwill and Other Intangible Assets
43
Table of Contents
The Company had no goodwill impairment in 2010. Total goodwill impairment for the years ended
December 31, 2009 and 2008 was $49.7 million and $138.8 million, respectively. The Company utilizes
three general approaches to the valuation testing: the asset-based approach, the market approach
and the income approach. Specifically, the Company used the capitalized earnings, capitalized
tangible book value, core deposit premium plus tangible book value, and discounted cash flow
calculations in the valuation analysis based on available market and Company information. In
addition, the Company included a market capitalization analysis in the calculation of goodwill
impairment.
The Company tests for impairment of goodwill as of October 1 of each year, and again at a
quarter-end if any triggering events occur during a quarter that may affect goodwill. For this
testing, the Company typically works together with a third-party valuation firm to perform a “Step
1” test for potential goodwill impairment of the Company’s bank subsidiaries. At October 1, 2010,
it was determined that the Bank of Nevada failed Step 1 of the testing.
In performing the Step 2 analysis, the Company determines the fair value of its assets and
liabilities and deducts this amount from the fair value of the respective reporting unit as
determined in Step 1 to imply a fair value of its goodwill in an acquisition. For the Bank of
Nevada reporting unit, the Company worked with an outside third party valuation specialist to
estimate the fair value of the loan and deposit portfolios using a discounted cash flow approach.
Significant assumptions used in the loan portfolio valuation involved (1) the stratification of the
loan portfolio into pools based on their respective credit risk characteristics, (2) the individual
pool yields were compared to market yields in conjunction with their remaining months to maturity
and prepayments speeds, and (3) a credit loss factor was incorporated into the cash flows. The key
assumptions used in the Company’s analysis involved the level of credit quality and thus the credit
risk existing within each pool of the loan portfolio.
The Company determined at the conclusion of its Step 2 analysis that the fair value of the goodwill
in the Bank of Nevada reporting unit exceeded its carrying value of $23.2 million and that no
impairment of goodwill existed at the testing date.
During the first quarter of 2009, the Company determined that it was necessary to perform an
interim test for goodwill impairment on the Bank of Nevada reporting unit. As a result of this
goodwill impairment test, the Company determined that the Bank of Nevada reporting unit was
impaired by $45.0 million. During the third quarter of 2009, the Company performed an interim test
of goodwill on its former subsidiary Miller/Russell and Associates, Inc. As a result of this
goodwill impairment test, the Company determined that the Miller/Russell and Associates, Inc.
reporting unit was impaired by $0.6 million. At the end of 2009, the Company recorded a $4.1
million impairment charge for Shine.
The goodwill impairment charges had no effect on the Company’s cash balances or liquidity. In
addition, because goodwill is not included in the calculation of regulatory capital, the Company’s
regulatory ratios were not affected by these non-cash expenses. No assurance can be given that
goodwill will not be further impaired in future periods.
The goodwill impairment charges recorded in 2008 were $79.2 million related to First Independent
Bank of Nevada and $59.6 million related to Bank of Nevada.
Deposits
The average balances and weighted average rates paid on deposits for the years ended
December 31,
2010, 2009 and
2008 are presented below.
| Year Ended December 31, | ||||||||||||||||||||||||
| 2010 Average | 2009 Average | 2008 Average | ||||||||||||||||||||||
| Balance/Rate | Balance/Rate |
Balance/Rate
|
||||||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Interest checking (NOW)
|
$ | 581,063 | 0.50 | % | $ | 303,388 | 1.06 | % | $ | 253,783 | 1.56 | % | ||||||||||||
|
Savings and money market
|
1,861,668 | 0.90 | 1,666,728 | 1.61 | 1,517,189 | 2.34 | ||||||||||||||||||
|
Time
|
1,437,235 | 1.51 | 1,280,381 | 2.48 | 781,828 | 3.80 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total interest-bearing deposits
|
3,879,966 | 1.07 | 3,250,497 | 1.90 | 2,552,800 | 2.71 | ||||||||||||||||||
|
Noninterest bearing demand deposits
|
1,296,634 | - | 1,070,011 | - | 961,703 | - | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total deposits
|
$ | 5,176,600 | 0.80 | % | $ | 4,320,508 | 1.43 | % | $ | 3,514,503 | 1.97 | % | ||||||||||||
|
|
||||||||||||||||||||||||
44
Table of Contents
Total deposits increased to $5.34 billion at December 31, 2010, from $4.72 billion at
December
31, 2009, an increase of $616 million or 13.1%. This increase was primarily from non-interest
bearing demand deposits, interest bearing demand deposits, savings and money market accounts and
broker certificates of deposits which increased by $286.2 million, $161.1 million, $173.6 million
and $111.4 million, respectively. Non-broker certificates of deposits decreased by $116.0 million
from December 31, 2009 to December 31, 2010. Deposits have historically been the primary source of
funding the Company’s asset growth. In addition, all of the banking subsidiaries are members of
Certificate of Deposit Registry Service (“CDARS”). CDARS provides a mechanism for obtaining FDIC
insurance for large deposits.
Certificates of Deposit of $100,000 or More
The table below discloses the remaining maturity for certificates of deposit of $100,000 or more as
of December 31, 2010:
| December 31, | ||||||||
| 2010 | 2009 | |||||||
| (in thousands) | ||||||||
|
|
||||||||
|
3 months or less
|
$ | 435,400 | $ | 424,864 | ||||
|
3 to 6 months
|
299,710 | 308,006 | ||||||
|
6 to 12 months
|
470,847 | 372,304 | ||||||
|
Over 12 months
|
70,412 | 99,988 | ||||||
|
|
||||||||
|
Total
|
$ | 1,276,369 | $ | 1,205,162 | ||||
|
|
||||||||
Other Assets Acquired Through Foreclosure
The following table represents the changes in other assets acquired through foreclosure:
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (in thousands) | ||||||||||||
|
Balance, beginning of period
|
$ | 83,347 | $ | 14,545 | $ | 3,412 | ||||||
|
Additions
|
93,656 | 104,610 | 24,060 | |||||||||
|
Dispositions
|
(40,674 | ) | (17,858 | ) | (12,002 | ) | ||||||
|
Valuation adjustments in the period, net
|
(28,674 | ) | (17,950 | ) | (925 | ) | ||||||
|
|
||||||||||||
|
Balance, end of period
|
$ | 107,655 | $ | 83,347 | $ | 14,545 | ||||||
|
|
||||||||||||
Other assets acquired through foreclosure consist primarily of properties acquired as a result
of, or in-lieu-of, foreclosure. Properties or other assets (primarily repossessed assets formerly
leased) are classified as other real estate owned and other repossessed property and are reported
at the lower of carrying value or fair value, less estimated costs to sell the property. Costs
relating to the development or improvement of the assets are capitalized and costs relating to
holding the assets are charged to expense. The Company had $107.7 million, $83.3 million and $14.5
million, respectively of such assets at December 31, 2010, 2009 and 2008. At December 31, 2010,
the Company held 98 other real estate owned properties compared to 56 at December 31, 2009. When
significant adjustments were based on unobservable inputs, such as when a current appraised value
is not available or management determines the fair value of the collateral is further impaired
below appraised value and there is no observable market price, the resulting fair value measurement
has been categorized as a Level 3 measurement.
Capital Resources
The Company and the Banks are subject to various regulatory capital requirements administered by
the Federal banking agencies. Failure to meet minimum capital requirements could trigger certain
mandatory or discretionary actions that, if undertaken, could have a direct material effect on the
Company’s business and financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company and the Banks must meet
specific capital guidelines that involve qualitative measures of their assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting practices. The capital
amounts and classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
45
Table of Contents
Quantitative measures established by regulation to ensure capital adequacy require the Company and
the Banks to maintain minimum amounts and ratios of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I leverage (as defined) to average
assets (as defined). As of December 31, 2010, the Company and the Banks met all capital adequacy
requirements to which they are subject.
As of December 31, 2010, the Company and each of its subsidiaries met the minimum capital ratio
requirements necessary to be classified as well-capitalized, as defined by the banking agencies.
To be categorized as well-capitalized, the Banks must maintain minimum total risk-based, Tier I
risk-based and Tier I leverage ratios as set forth in the table below. In addition, memoranda of
understanding to which the Company’s bank subsidiaries are subject require them to maintain higher
Tier 1 leverage ratios than otherwise required to be considered well-capitalized. At December 31,
2010, the capital levels at each of the banks exceeded these elevated requirements.
The actual capital amounts and ratios for the Banks and Company as of December 31 are presented
in
the following table:
| Risk- | Tangible | Total | Tier 1 | Tier 1 | ||||||||||||||||||||||||
| Total | Tier 1 | Weighted | Average | Capital | Capital | Leverage | ||||||||||||||||||||||
| Capital | Capital | Assets | Assets | Ratio | Ratio | Ratio | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||||||
|
December 31, 2010
|
||||||||||||||||||||||||||||
|
WAL (Consolidated)
|
$ | 654,011 | $ | 591,633 | $ | 4,941,057 | $ | 6,198,903 | 13.2 | % | 12.0 | % | 9.5 | % | ||||||||||||||
|
Bank of Nevada
|
278,697 | 250,907 | 2,177,357 | 2,705,631 | 12.8 | % | 11.5 | % | 9.3 | % | ||||||||||||||||||
|
Western Alliance Bank
|
204,650 | 162,964 | 1,492,491 | 1,955,696 | 13.7 | % | 10.9 | % | 8.3 | % | ||||||||||||||||||
|
Torrey Pines Bank
|
170,342 | 135,126 | 1,215,825 | 1,453,686 | 14.0 | % | 11.1 | % | 9.3 | % | ||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Well-capitalized ratios
|
10.0 | % | 6.0 | % | 5.0 | % | ||||||||||||||||||||||
|
Minimum capital ratios
|
8.0 | % | 4.0 | % | 4.0 | % | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
December 31, 2009
|
||||||||||||||||||||||||||||
|
WAL (Consolidated)
|
$ | 666,287 | $ | 547,746 | $ | 4,632,891 | $ | 5,756,917 | 14.4 | % | 11.8 | % | 9.5 | % | ||||||||||||||
|
Bank of Nevada
|
272,703 | 183,639 | 2,286,178 | 2,755,559 | 11.9 | % | 8.0 | % | 6.7 | % | ||||||||||||||||||
|
Alliance Bank of Arizona
|
97,141 | 68,801 | 820,572 | 1,107,836 | 11.8 | % | 8.4 | % | 6.2 | % | ||||||||||||||||||
|
Torrey Pines Bank
|
125,870 | 94,073 | 948,241 | 1,116,767 | 13.3 | % | 9.9 | % | 8.4 | % | ||||||||||||||||||
|
First Independent Bank
|
54,669 | 44,058 | 444,981 | 526,746 | 12.3 | % | 9.9 | % | 8.4 | % | ||||||||||||||||||
|
Alta Alliance Bank
|
23,552 | 22,105 | 114,528 | 174,588 | 20.6 | % | 19.3 | % | 12.7 | % | ||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Well-capitalized ratios
|
10.0 | % | 6.0 | % | 5.0 | % | ||||||||||||||||||||||
|
Minimum capital ratios
|
8.0 | % | 4.0 | % | 4.0 | % | ||||||||||||||||||||||
Additionally, State of Nevada banking regulations restrict distribution of the net assets of
Bank of Nevada because such regulations require the sum of the bank’s stockholders’ equity and
reserve for loan losses to be at least 6% of the average of the bank’s total daily deposit
liabilities for the preceding 60 days. As a result of these regulations, approximately $145.2
million and $133.9 million of Bank of Nevada’s stockholders’ equity was restricted at December 31,
2010 and 2009, respectively.
For
information on the Companies capital raises, see Item 5 – “Market for Registrants
Common
Equity, Related Shareholder Matters and Issuer Purchases of Equity
Securities – Sales of
Unregistered Securities.”
JUNIOR SUBORDINATED AND SUBORDINATED DEBT
The Company has formed or acquired through mergers six statutory business trusts, which exist for
the exclusive purpose of issuing Cumulative Trust Preferred Securities. All of the funds raised
from the issuance of these securities were passed to the Company and are reflected in the
accompanying balance sheet as junior subordinated debt in the amount of $43.0 million. The junior
subordinated debt has contractual balances and maturity dates as follows:
46
Table of Contents
| December 31, | ||||||||||
| Name of Trust | Maturity | 2010 | 2009 | |||||||
|
|
||||||||||
|
BankWest Nevada Capital Trust II
|
2033 | 15,464 | 15,464 | |||||||
|
First Independent Capital Trust I
|
2034 | 7,217 | 7,217 | |||||||
|
Intermountain First Statutory Trust I
|
2034 | 10,310 | 10,310 | |||||||
|
WAL Trust No. 1
|
2036 | 20,619 | 20,619 | |||||||
|
WAL Statutory Trust No. 2
|
2037 | 5,155 | 5,155 | |||||||
|
WAL Statutory Trust No. 3
|
2037 | 7,732 | 7,732 | |||||||
|
|
||||||||||
|
|
$ | 66,497 | $ | 66,497 | ||||||
|
Unrealized gains on trust preferred securities
measured at fair value, net |
(23,463 | ) | (24,059 | ) | ||||||
|
|
||||||||||
|
|
$ | 43,034 | $ | 42,438 | ||||||
|
|
||||||||||
The weighted average contractual rate of the junior subordinated debt was 4.34% and 4.37% as
of December 31, 2010 and 2009, respectively.
In the event of certain changes or amendments to regulatory requirements or Federal tax rules, the
debt is redeemable in whole. The obligations under these instruments are fully and unconditionally
guaranteed by the Company and rank subordinate and junior in right of payment to all other
liabilities of the Company. The trust preferred securities qualify as Tier 1 Capital for the
Company, subject to certain limitations, with the excess being included in total capital for
regulatory purposes. As of December 31, 2009 the Company had $60 million of subordinated debt with
a weighted average contractual rate of 3.09%. The Company paid this debt in 2010 and recorded a
gain on extinguishment of debt of $3.0 million.
Contractual Obligations and Off-Balance Sheet Arrangements
The Company enters into contracts for services in the ordinary course of business that may require
payment for services to be provided in the future and may contain penalty clauses for early
termination of the contracts. To meet the financing needs of customers, the Company has financial
instruments with off-balance sheet risk, including commitments to extend credit and standby letters
of credit. The Company has also committed to irrevocably and unconditionally guarantee the
following payments or distributions with respect to the holders of preferred securities to the
extent that BankWest Nevada Trust I, BankWest Nevada Trust II, Intermountain First Statutory Trust
I, and WAL Trust No. 1 have not made such payments or distributions: (1) accrued and unpaid
distributions, (2) the redemption price, and (3) upon a dissolution or termination of the trust,
the lesser of the liquidation amount and all accrued and unpaid distributions and the amount of
assets of the trust remaining available for distribution. The Company does not believe that these
off-balance sheet arrangements have or are reasonably likely to have a material effect on its
financial condition, changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures, or capital resources. However, there can be no assurance that
such arrangements will not have a future effect.
The following table sets forth our significant contractual obligations as of December 31, 2010.
| Payments Due by Period | ||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Less Than | 1-3 | 3-5 | After | |||||||||||||||||
| Total | 1 Year | Years | Years | 5 Years | ||||||||||||||||
| (in thousands) | ||||||||||||||||||||
|
Time deposit maturities
|
$ | 1,445,303 | $ | 1,363,424 | $ | 80,063 | $ | 1,816 | $ | - | ||||||||||
|
Long-term borrowed funds
|
75,000 | - | - | - | 75,000 | |||||||||||||||
|
Junior subordinated deferrable interest debentures
|
43,034 | - | - | - | 43,034 | |||||||||||||||
|
Purchase obligations
|
3,910 | 2,475 | 1,435 | - | - | |||||||||||||||
|
Operating lease obligations
|
24,831 | 4,917 | 8,724 | 4,716 | 6,474 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total
|
$ | 1,592,078 | $ | 1,370,816 | $ | 90,222 | $ | 6,532 | $ | 124,508 | ||||||||||
|
|
||||||||||||||||||||
Off balance sheet commitments associated with outstanding letters of credit, commitments to
extend credit, and credit card guarantees as of December 31, 2010 are summarized below. Since
commitments associated with letters of credit and commitments to extend credit may expire unused,
the amounts shown do not necessarily reflect the actual future cash funding requirements.
47
Table of Contents
| Total | Amount of Commitment Expiration Per Period | |||||||||||||||||||
| Amounts | Less Than | 1-3 | 3-5 | After | ||||||||||||||||
| Committed | 1 Year | Years | Years | 5 Years | ||||||||||||||||
| (in thousands) | ||||||||||||||||||||
|
Commitments to extend credit
|
$ | 702,336 | $ | 482,320 | $ | 85,638 | $ | 43,154 | $ | 91,224 | ||||||||||
|
Credit card commitments and guarantees
|
322,798 | 322,798 | - | - | - | |||||||||||||||
|
Standby letters of credit
|
28,013 | - | 27,858 | 155 | - | |||||||||||||||
|
|
||||||||||||||||||||
|
Total
|
$ | 1,053,147 | $ | 805,118 | $ | 113,496 | $ | 43,309 | $ | 91,224 | ||||||||||
|
|
||||||||||||||||||||
The following table sets forth certain information regarding FHLB and FRB advances and
customer repurchase agreements.
| December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| ($ in thousands) | ||||||||||||
|
FHLB and FRB Advances and other:
|
||||||||||||
|
|
||||||||||||
|
Maximum month-end balance
|
$ | 20,000 | $ | 635,500 | $955,100 | |||||||
|
|
||||||||||||
|
Balance at end of year
|
- | - | 586,120 | |||||||||
|
|
||||||||||||
|
Average balance
|
5,367 | 228,951 | 643,698 | |||||||||
|
|
||||||||||||
|
Customer Repurchase Accounts:
|
||||||||||||
|
|
||||||||||||
|
Maximum month-end balance
|
211,046 | 307,367 | 345,182 | |||||||||
|
|
||||||||||||
|
Balance at end of year
|
109,409 | 223,269 | 321,004 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Average balance
|
126,511 | 279,477 | 252,611 | |||||||||
|
|
||||||||||||
|
Total Short-Term Borrowed Funds
|
$ | 109,409 | $ | 223,269 | $907,124 | |||||||
|
|
||||||||||||
|
Weighted average interest rate at end of year
|
0.23% | 1.02% | 0.85% | |||||||||
|
|
||||||||||||
|
Weighted average interest rate during year
|
0.81% | 0.99% | 2.20% | |||||||||
Short-Term Borrowed Funds.
The Company from time to time utilizes short-term borrowed funds
to support short-term liquidity needs generally created by increased loan demand. The majority of
these short-term borrowed funds consist of advances from the FHLB and FRB and customer repurchase
agreements. The Company’s borrowing capacity at FHLB and FRB is determined based on collateral
pledged, generally consisting of securities and loans. In addition, the Company has borrowing
capacity from other sources pledged by securities, including securities sold under agreements to
repurchase, which are reflected at the amount of cash received in connection with the transaction,
and may require additional collateral based on the fair value of the underlying securities. At
December 31, 2010, total short-term borrowed funds consisted of customer repurchases of $109.4
million. No advances were outstanding from the FHLB or FRB at December 31, 2010. At December 31,
2009, total short-term borrowed funds were $223.3 million, with a weighted average interest rate at
year end of 1.02%. compared to total short-term borrowed funds of $907.1 million as of December 31,
2008 with a weighted average interest rate at year end of 0.85%. The decrease of $113.9 million in
short-term borrowings for 2010 compared to 2009 is due to the Company’s increased liquidity as a
result of successful growth in deposits during the year and capital raise in the third quarter of
2010.
Critical Accounting Policies
The Notes to Consolidated Financial Statements contain a discussion of our significant accounting
policies, including information regarding recently issued accounting pronouncements, our adoption
of such policies and the related impact of their adoption. We believe that certain of these
policies, along with various estimates that we are required to make in recording our financial
transactions, are important to have a complete understanding of our financial position. In
addition, these estimates require us to make complex and subjective judgments, many of which
include matters with a high degree of uncertainty. The following is a summary of these critical
accounting policies and significant estimates.
Allowance for credit losses
Credit risk is inherent in the business of extending loans and leases to borrowers. Like other
financial institutions, the Company must maintain an adequate allowance for credit losses. The
allowance for credit losses is established through a provision for credit losses charged to
expense. Loans are charged against the allowance for credit losses when Management believes that
the contractual principal or interest will not be collected. Subsequent recoveries, if any, are
48
Table of Contents
credited to the allowance. The allowance is an amount believed adequate to absorb probable losses
on existing loans that may become uncollectable, based on evaluation of the collectability of loans
and prior credit loss experience, together with other factors. The Company formally re-evaluates
and establishes the appropriate level of the allowance for credit losses on a quarterly basis.
Our allowance for credit loss methodology incorporates several quantitative and qualitative risk
factors used to establish the appropriate allowance for credit losses at each reporting date.
Quantitative factors include our historical loss experience, delinquency and charge-off trends,
collateral values, changes in the level of nonperforming loans and other factors. Qualitative
factors include the economic condition of our operating markets and the state of certain
industries. Specific changes in the risk factors are based on perceived risk of similar groups of
loans classified by collateral type, purpose and terms. An internal one-year and three-year loss
history are also incorporated into the allowance calculation model. Due to the credit
concentration of our loan portfolio in real estate secured loans, the value of collateral is
heavily dependent on real estate values in Nevada, Arizona and California, which have declined
significantly in recent periods. While management uses the best information available to make its
evaluation, future adjustments to the allowance may be necessary if there are significant changes
in economic or other conditions. In addition, the FDIC, and state banking
regulatory agencies, as an integral part of their examination processes, periodically review our
subsidiary banks’ allowances for credit losses, and may require us to make additions to our
allowance based on their judgment about information available to them at the time of their
examinations. Management regularly reviews the assumptions and formulae used in determining the
allowance and makes adjustments if required to reflect the current risk profile of the portfolio.
The allowance consists of specific and general components. The specific allowance relates to
impaired loans. In general, impaired loans include those where interest recognition has been
suspended, loans that are more than 90 days delinquent but because of adequate collateral coverage
income continues to be recognized, and other criticized and classified loans not paying
substantially according to the original contract terms. For such loans, an allowance is
established when the discounted cash flows, collateral value or observable market price of the
impaired loan are lower than the carrying value of that loan, pursuant to FASB ASC 310
Receivables
(“ASC 310”). Loans not collateral dependent are evaluated based on the expected future cash flows
discounted at the original contractual interest rate. The amount to which the present value falls
short of the current loan obligation will be set up as a reserve for that account or charged-off.
The Company uses an appraised value method to determine the need for a reserve on impaired,
collateral dependent loans and further discounts the appraisal for disposition costs. Due to the
rapidly changing economic and market conditions of the regions within which we operate, the Company
obtains independent collateral valuation analysis on a regular basis for each loan, typically every
six months.
The general allowance covers all non-impaired loans and is based on historical loss experience
adjusted for the various qualitative and quantitative factors listed above. The change in the
allowance from one reporting period to the next may not directly correlate to the rate of change of
the nonperforming loans for the following reasons:
1. A loan moving from impaired performing to impaired nonperforming does not mandate an increased
reserve. The individual account is evaluated for a specific reserve requirement when the loan
moves to impaired status, not when it moves to nonperforming status, and is reevaluated at each
subsequent reporting period. Because our nonperforming loans are predominately collateral
dependent, reserves are primarily based on collateral value, which is not affected by borrower
performance but rather by market conditions.
2. Not all impaired accounts require a specific reserve. The payment performance of the borrower
may require an impaired classification, but the collateral evaluation may support adequate
collateral coverage. For a number of impaired accounts in which borrower performance has ceased,
the collateral coverage is now sufficient because a partial charge off of the account has been
taken. In those instances, neither a general reserve nor a specific reserve is assessed.
Although we believe the levels of the allowance as of December 31, 2010 and 2009 were adequate to
absorb probable losses in the loan portfolio, a further decline in economic conditions or other
factors could result in increasing losses that cannot be reasonably estimated at this time.
Investment securities
Investment securities may be classified as held-to-maturity (“HTM”), available-for-sale (“AFS”) or
trading. The appropriate classification is initially decided at the time of purchase. Securities
classified as held-to-maturity are those debt securities the Company has both the intent and
ability to hold to maturity regardless of changes in market conditions, liquidity needs or general
economic conditions. These securities are carried at amortized cost. The sale of a security within
three months of its maturity date or after at least 85 percent of the principal outstanding has
been collected is considered a maturity for purposes of classification and disclosure.
49
Table of Contents
Securities classified as AFS or trading are reported as an asset on the Consolidated Balance Sheets
at their estimated fair value. As the fair value of AFS securities changes, the changes are
reported net of income tax as an element of other comprehensive income (“OCI”), except for impaired
securities. When AFS securities are sold, the unrealized gain or loss is reclassified from OCI to
non-interest income. The changes in the fair values of trading securities are reported in
non-interest income. Securities classified as AFS are both equity and debt securities the Company
intends to hold for an indefinite period of time, but not necessarily to maturity. Any decision to
sell a security classified as AFS would be based on various factors, including significant
movements in interest rates, changes in the maturity mix of the Company’s assets and liabilities,
liquidity needs, and regulatory capital considerations.
Interest income is recognized based on the coupon rate and increased by accretion of discounts
earned or decreased by the amortization of premiums paid over the contractual life of the security
using the interest method. For mortgage-backed securities, estimates of prepayments are considered
in the constant yield calculations.
In estimating whether there are any other than temporary impairment losses, management considers 1)
the length of time and the extent to which the fair value has been less than amortized cost, 2) the
financial condition and near term
prospects of the issuer, 3) the impact of changes in market interest rates and 4) the intent and
ability of the Company to retain its investment for a period of time sufficient to allow for any
anticipated recovery in fair value.
Declines in the fair value of individual debt securities available for sale that are deemed to be
other than temporary are reflected in earnings when identified. The fair value of the debt
security then becomes the new cost basis. For individual debt securities where the Company does
not intend to sell the security and it is not more likely than not that the Company will be
required to sell the security before recovery of its amortized cost basis, the other than temporary
decline in fair value of the debt security related to 1) credit loss is recognized in earnings and
2) market or other factors is recognized in other comprehensive income or loss. Credit loss is
recorded if the present value of cash flows is less than amortized cost. For individual debt
securities where the Company intends to sell the security or more likely than not will not recover
all of its amortized cost, the other than temporary impairment is recognized in earnings equal to
the entire difference between the securities cost basis and its fair value at the balance sheet
date. For individual debt securities that credit loss has been recognized in earnings, interest
accruals and amortization and accretion of premiums and discounts are suspended when the credit
loss is recognized. Interest received after accruals have been suspended is recognized on a cash
basis.
Securities measured at fair value are equity and debt securities for which the Company elected
early adoption of FASB ASC 825
“Financial Instruments"
, effective January 1, 2007. Securities for
which the fair value measurement classification was made generally were fixed rate with a
relatively long duration and low coupon rates. Securities measured at fair value are reported at
fair value with unrealized gains and losses included in current period earnings.
Goodwill
The Company recorded as goodwill the excess of the purchase price over the fair value of the
identifiable net assets acquired in accordance with applicable guidance. As per this guidance, a
two-step process is outlined for impairment testing of goodwill. Impairment testing is generally
performed annually, as well as when an event triggering impairment may have occurred. The first
step tests for impairment, while the second step, if necessary, measures the impairment. The
resulting impairment amount if any is charged to current period earnings as non-interest expense.
Other intangible assets
The Company’s intangible assets consist of core deposit intangible assets, investment advisory and
trust customer relationship intangibles, and are amortized over periods ranging from 6 to 12 years.
The Company evaluates the remaining useful lives of its core deposit intangible assets each
reporting period, as required by FASB ASC 350,
Intangibles — Goodwill and Other,
to determine
whether events and circumstances warrant a revision to the remaining period of amortization. If
the estimate of an intangible asset’s remaining useful life has changed, the remaining carrying
amount of the intangible asset is amortized prospectively over that revised remaining useful life.
As a result of current economic conditions, the Company revised its estimates of the useful lives
of its core deposit intangibles during the year ended December 31, 2008. The Company made no
further changes to these revised lives in 2010 or 2009.
Stock compensation plans
The Company has the 2005 Stock Incentive Plan as amended (the “Incentive Plan”), which is described
more fully in Note 13, “Stockholders’ Equity.” Compensation expense for stock options and
non-vested restricted stock awards is based on the fair value of the award on the measurement date,
which, for the Company, is the date of the grant and is recognized ratably over the service period
of the award. Prior to the Company’s initial public offering (“IPO”); the Company used the minimum
value method to calculate the fair value of stock options. Subsequent to the Company’s IPO, the
Company utilizes the Black-Scholes option-pricing model to calculate the fair value of stock
options. The fair value of non-vested restricted stock awards is the market price of the Company’s
stock on the date of grant. Prior to the Company’s initial public offering (“IPO”) the Company
used the minimum value method to calculate the fair value of stock options. Subsequent to the IPO,
the Company utilizes the Black-Scholes model to calculate the fair value of options.
50
Table of Contents
During the years ended December 31, 2010, 2009 and 2008, the Company granted stock options to the
non-executive directors of its subsidiaries. These directors do not meet the definition of an
employee under FASB ASC 718
Compensation
. Accordingly, the Company applies FASB ASC 505
Equity
to
determine the measurement date for options granted to these directors. Therefore, the expense
related to these options is re-measured each reporting date until the options are vested.
Income taxes
Western Alliance Bancorporation and its subsidiaries, other than BW Real Estate, Inc., file a
consolidated federal tax return. Due to tax regulations, several items of income and expense are
recognized in different periods for tax return purposes than for financial reporting purposes.
These items represent “temporary differences.” Deferred taxes are provided on an asset and
liability method whereby deferred tax assets are recognized for deductible temporary differences
and tax credit carry-forwards and deferred tax liabilities are recognized for taxable temporary
differences. Temporary differences are the differences between the reported amounts of assets and
liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in
the opinion of Management, it is more likely than not
that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effect of changes in tax laws and rates on the date of enactment.
Although realization is not assured, the Company believes that the realization of the recognized
net deferred tax asset of $79.9 million at December 31, 2010 is more likely than not based on
expectations as to future taxable income and based on available tax planning strategies as defined
in ASC 740 that could be implemented if necessary to prevent a carry forward from expiring.
The most significant source of these timing differences are the credit loss reserve build and net
operating loss carry forwards which account for substantially all of the net deferred tax asset.
In general, the Company will need to generate approximately $222 million of taxable income during
the respective carryforward periods to fully realize its deferred tax assets.
As a result of the recent losses, the Company is in a three-year cumulative pretax loss position at
December 31, 2010. A cumulative loss position is considered significant negative evidence in
assessing the realizability of a deferred tax asset. The Company has concluded that there is
sufficient positive evidence to overcome this negative evidence. This positive evidence includes
Company forecasts, exclusive of tax planning strategies, that show realization of deferred tax
assets by the end of 2013 based on current projections. In addition, the Company has evaluated tax
planning strategies, including potential sales of businesses and assets in which it could realize
the excess of appreciated value over the tax basis of its assets. The amount of deferred tax
assets considered realizable, however, could be significantly reduced in the near term if estimates
of future taxable income during the carryforward period are significantly lower than forecasted due
to deterioration in market conditions.
Based on the above discussion, the net operating loss carryforward of 20 years provides sufficient
time to utilize deferred federal and state tax assets pertaining to the existing net operating loss
carryforwards and any NOL that would be created by the reversal of the future net deductions that
have not yet been taken on a tax return.
We do not anticipate that current market events will adversely impact our ability to realize the
future tax benefits of the net deferred tax assets. See Note 8,
“Income Taxes”
to the Consolidated
Financial Statements for further discussion on income taxes.
Liquidity
Liquidity is the ongoing ability to accommodate liability maturities and deposit withdrawals, fund
asset growth and business operations, and meet contractual obligations through unconstrained access
to funding at reasonable market rates. Liquidity management involves forecasting funding
requirements and maintaining sufficient capacity to meet the needs and accommodate fluctuations in
asset and liability levels due to changes in our business operations or unanticipated events.
The ability to have readily available funds sufficient to repay fully maturing liabilities is of
primary importance to depositors, creditors and regulators. Our liquidity, represented by cash and
amounts due from banks, federal funds sold and non-pledged marketable securities, is a result of
our operating, investing and financing activities and related cash flows. In order to ensure funds
are available when necessary, on at least a quarterly basis, we project the amount of funds that
will be required, and we strive to maintain relationships with a diversified customer base.
Liquidity requirements can also be met through short-term borrowings or the disposition of
short-term assets. The Company has unsecured borrowing lines at correspondent banks totaling $43
million and $11 million in secured lines form correspondent banks. In addition, loans and
securities are pledged to the FHLB providing $748.3 million in borrowing capacity with outstanding
letters of credit of
51
Table of Contents
$72.0 million, leaving $676.3 million in available credit as of December 31,
2010. Loans and securities pledged to the FRB discount window providing $547.0 million in
borrowing capacity. As of December 31, 2010, there were no outstanding borrowings from the FRB,
thus our available credit totaled $547.0 million.
The Company has a formal liquidity policy, and in the opinion of management, our liquid assets are
considered adequate to meet cash flow needs for loan funding and deposit cash withdrawals for the
next 90-120 days. At December 31, 2010, there was $1.03 billion in liquid assets comprised of
$254.5 million in cash and cash equivalents (including federal funds sold of $0.9 million) and
$780.0 million in unpledged marketable securities. At December 31, 2009, the Company maintained
$732.2 million in liquid assets comprised of $450.9 million of cash and cash equivalents (including
federal funds sold of $3.5 million) and $281.3 million of unpledged marketable securities.
The holding company maintains additional liquidity that would be sufficient to fund its operations
and certain nonbank affiliate operations for an extended period should funding from normal sources
be disrupted. Since deposits are taken by the bank operating subsidiaries and not by the parent
company, parent company liquidity is not dependant on the bank operating subsidiaries’ deposit
balances. In our analysis of parent company liquidity, we assume that the parent company is unable
to generate funds from additional debt or equity issuance, receives no dividend income from
subsidiaries, and does not pay dividends to shareholders, while continuing to meet nondiscretionary uses needed to
maintain operations and repayment of contractual principal and interest payments owed by the parent
company and affiliated companies. Under this scenario, the amount of time the parent company and
its nonbank subsidiaries can operate and meet all obligations before the current liquid assets are
exhausted is considered as part of the parent company liquidity analysis. Management believes the
parent company maintains adequate liquidity capacity to operate without additional funding from new
sources for over 12 months. The Banks maintain sufficient funding capacity to address large
increases in funding requirements, such as deposit outflows. This capacity is comprised of
liquidity derived from a reduction in asset levels and various secured funding sources.
On a long-term basis, the Company’s liquidity will be met by changing the relative distribution of
our asset portfolios, for example, reducing investment or loan volumes, or selling or encumbering
assets. Further, the Company can increase liquidity by soliciting higher levels of deposit
accounts through promotional activities and/or borrowing from correspondent banks, the FHLB of San
Francisco and the FRB. At December 31, 2010, our long-term liquidity needs primarily relate to
funds required to support loan originations and commitments and deposit withdrawals which can be
met by cash flows from investment payments and maturities, and investment sales if necessary.
The Company’s liquidity is comprised of three primary classifications: (i) cash flows provided by
operating activities; (ii) cash flows used in investing activities; and (iii) cash flows provided
by financing activities. Net cash provided by or used in operating activities consists primarily
of net income, adjusted for changes in certain other asset and liability accounts and certain
non-cash income and expense items, such as the loan loss provision, investment and other
amortization and depreciation. For the years ended December 31, 2010, 2009 and 2008 net cash
provided by operating activities was $0.3 million, $74.8 million and $81.0 million, respectively.
Our primary investing activities are the origination of real estate, commercial and consumer loans
and purchase and sale of securities. Our net cash provided by and used in investing activities has
been primarily influenced by our loan and securities activities. The net increase in loans for the
years ended December 31, 2010, 2009 and 2008, was $339.3 million, $112.1 million and $505.4
million, respectively.
Net cash provided by financing activities has been impacted significantly by increased deposit
levels. During the years ended December 31, 2010, 2009 and 2008, deposits increased $616.3
million, increased $938.1 million and $105.3 million, respectively.
Fluctuations in core deposit levels may increase our need for liquidity as certificates of deposit
mature or are withdrawn before maturity and as non-maturity deposits, such as checking and savings
account balances, are withdrawn. Additionally, we are exposed to the risk that customers with
large deposit balances will withdraw all or a portion of such deposits, due in part to the FDIC
limitations on the amount of insurance coverage provided to depositors. To mitigate the uninsured
deposit risk, we have joined the Certificate of Deposit Account Registry Service (CDARS), a program
that allows customers to invest up to $50 million in certificates of deposit through one
participating financial institution, with the entire amount being covered by FDIC insurance. As of
December 31, 2010, we had $357.1 million of CDARS deposits.
As of December 31, 2010, we had $20.0 million of wholesale brokered deposits outstanding. Brokered
deposits are generally considered to be deposits that have been received from a registered broker
that is acting on behalf of that broker’s customer. Often, a broker will direct a customer’s
deposits to the banking institution offering the highest interest rate available. Federal banking
law and regulation places restrictions on depository institutions regarding brokered deposits
because of the general concern that these deposits are at a greater risk of being withdrawn and
placed on deposit at another institution offering a higher interest rate, thus posing liquidity
risk for institutions that gather brokered
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deposits in significant amounts. The Company does not
anticipate using brokered deposits as a significant liquidity source in the near future.
The Company paid-off $60 million in subordinated debt and a $9 million building loan both owed by
Bank of Nevada during 2010. In August 2010, the Company issued $75 million of five-year senior
notes to provide additional liquidity for the holding company and increase the ability to
downstream capital to the subsidiary banks. There was no other increase in borrowings for the
year. Letters of credit outstanding at FHLB increased by $13 million during 2010. These letters of
credit are used to collateralize state and municipal deposits and are not direct borrowings but do
reduce our borrowing capacity at the FHLB.
Federal and state banking regulations place certain restrictions on dividends paid by the Banks to
Western Alliance. The total amount of dividends which may be paid at any date is generally limited
to the retained earnings of each Bank. Dividends paid by the Banks to the Company would be
prohibited if the effect thereof would cause the respective Bank’s capital to be reduced below
applicable minimum capital requirements or by regulatory action. In addition, the MOU’s presently
require prior regulatory approval of the payments of dividends by the banks to Western Alliance.
Quantitative and Qualitative Disclosures About Market Risk
Market risk is the risk of loss in a financial instrument arising from adverse changes in market
prices and rates, foreign currency exchange rates, commodity prices and equity prices. Our market
risk arises primarily from interest rate risk inherent in our lending, investing and deposit taking
activities. To that end, management actively monitors and manages our interest rate risk exposure.
We generally manage our interest rate sensitivity by evaluating re-pricing opportunities on our
earning assets to those on our funding liabilities.
Management uses various asset/liability strategies to manage the re-pricing characteristics of our
assets and liabilities, all of which are designed to ensure that exposure to interest rate
fluctuations is limited to within our guidelines of acceptable levels of risk-taking. Hedging
strategies, including the terms and pricing of loans and deposits and management of the deployment
of our securities, are used to reduce mismatches in interest rate re-pricing opportunities of
portfolio assets and their funding sources.
Interest rate risk is addressed by each Bank’s respective Asset and Liability Management Committee,
or ALCO, (or its equivalent), which includes members of executive management, senior finance and
operations. ALCO monitors interest rate risk by analyzing the potential impact on the net economic
value of equity and net interest income from potential changes in interest rates, and considers the
impact of alternative strategies or changes in balance sheet structure. We manage our balance sheet
in part to maintain the potential impact on economic value of equity and net interest income within
acceptable ranges despite changes in interest rates.
Our exposure to interest rate risk is reviewed on at least a quarterly basis by the ALCO. Interest
rate risk exposure is measured using interest rate sensitivity analysis to determine our change in
economic value of equity in the event of hypothetical changes in interest rates. If potential
changes to net economic value of equity and net interest income resulting from hypothetical
interest rate changes are not within the limits established by each Bank’s Board of Directors, the
respective Board of Directors may direct management to adjust the asset and liability mix to bring
interest rate risk within board-approved limits.
Economic Value of Equity.
We measure the impact of market interest rate changes on the net present
value of estimated cash flows from our assets, liabilities and off-balance sheet items, defined as
economic value of equity, using a simulation model. This simulation model assesses the changes in
the market value of interest rate sensitive financial instruments that would occur in response to
an instantaneous and sustained increase or decrease (shock) in market interest rates.
At December 31, 2010, our economic value of equity exposure related to these hypothetical changes
in market interest rates was within the current guidelines established by us. The following table
shows our projected change in economic value of equity for this set of rate shocks at December 31,
2010.
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Economic Value of Equity
| Interest Rate Scenario (change in basis points from Base) | |||||||||||||||||||||||||
| Down 200 | Down 100 | Base | UP 100 | UP 200 | Up 300 | ||||||||||||||||||||
|
Present Value (000’s)
|
|||||||||||||||||||||||||
|
Assets
|
$ | 6,351,840 | $ | 6,266,253 | $ | 6,167,367 | $ | 6,052,971 | $ | 5,939,525 | $ | 5,833,039 | |||||||||||||
|
Liabilities
|
$ | 5,550,248 | $ | 5,504,354 | $ | 5,407,304 | $ | 5,321,767 | $ | 5,241,594 | $ | 5,167,431 | |||||||||||||
|
Net Present Value
|
$ | 801,592 | $ | 761,899 | $ | 760,063 | $ | 731,204 | $ | 697,931 | $ | 665,608 | |||||||||||||
|
% Change
|
5.5 | % | 0.2 | % | -3.8 | % | -8.2 | % | -12.4 | % | |||||||||||||||
The computation of prospective effects of hypothetical interest rate changes are based on
numerous assumptions, including relative levels of market interest rates, asset prepayments and
deposit decay, and should not be relied upon as indicative of actual results. Further, the
computations do not contemplate any actions we may undertake in response to
changes in interest rates. Actual amounts may differ from the projections set forth above should
market conditions vary from the underlying assumptions.
Net Interest Income Simulation.
In order to measure interest rate risk at December 31, 2010, we
used a simulation model to project changes in net interest income that result from forecasted
changes in interest rates. This analysis calculates the difference between net interest income
forecasted using an immediate increase and decrease in interest rates and a net interest income
forecast using a flat market interest rate environment derived from spot yield curves typically
used to price our assets and liabilities. The income simulation model includes various assumptions
regarding the re-pricing relationships for each of our products. Many of our assets are floating
rate loans, which are assumed to re-price immediately, and proportional to the change in market
rates, depending on their contracted index. Some loans and investments include the opportunity of
prepayment (embedded options), and accordingly the simulation model uses estimated market speeds to
derive prepayments and reinvests proceeds at modeled yields. Our non-term deposit products
re-price more slowly, usually changing less than the change in market rates and at our discretion.
This analysis indicates the impact of changes in net interest income for the given set of rate
changes and assumptions. It assumes the balance sheet remains static and that its structure does
not change over the course of the year. It does not account for all factors that could impact our
results, including changes by management to mitigate interest rate changes or secondary factors
such as changes to our credit risk profile as interest rates change.
Furthermore, loan prepayment rate estimates and spread relationships change regularly. Interest
rate changes create changes in actual loan prepayment speeds that will differ from the market
estimates incorporated in this analysis. Changes that vary significantly from the modeled
assumptions may have significant effects on our actual net interest income.
This simulation model assesses the changes in net interest income that would occur in response to
an instantaneous and sustained increase or decrease (shock) in market interest rates. At December
31, 2010, our net interest margin exposure related to these hypothetical changes in market interest
rates was within the current guidelines established by us.
Sensitivity of Net Interest Income
| Interest Rate Scenario (change in basis points from Base) | |||||||||||||||||||||||||
| (in 000’s) | Down 200 | Down 100 | Flat | UP 100 | UP 200 | Up 300 | |||||||||||||||||||
|
Interest Income
|
$ | 282,659 | $ | 289,424 | $ | 298,718 | $ | 312,215 | $ | 328,307 | $ | 347,426 | |||||||||||||
|
Interest Expense
|
$ | 18,288 | $ | 23,273 | $ | 36,564 | $ | 54,978 | $ | 74,740 | $ | 95,217 | |||||||||||||
|
Net Interest Income
|
$ | 264,371 | $ | 266,151 | $ | 262,154 | $ | 257,237 | $ | 253,567 | $ | 252,209 | |||||||||||||
|
% Change
|
0.8 | % | 1.5 | % | -1.9 | % | -3.3 | % | -3.8 | % | |||||||||||||||
Derivative Contracts.
In the normal course of business, the Company uses derivative
instruments to meet the needs of its customers and manage exposure to fluctuations in interest
rates. The following table summarizes the aggregate notional amounts, market values and terms of
the Company’s derivative holdings as of December 31, 2010.
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Outstanding Derivatives Positions
| Weighted Average | ||||
| Notional | Net Value | Term (in yrs) | ||
| 12,860,170 | (1,395,856) | 3.9 | ||
The following table summarizes the aggregate notional amounts, market values and terms of the
Company’s derivative holdings as of December 31, 2009:
Outstanding Derivatives Positions
| Weighted | ||||
| Notional | Average | |||
| Notional | Net Value | Term (in years) | ||
| 13,378,675 | (1,138,878) | 4.9 | ||
Recent accounting pronouncements
FASB ASC 810,
Consolidation
(“ASC 810”). Effective January 1, 2010, further new authoritative
accounting guidance under ASC Topic 810 amends prior guidance to change how a company determines
when an entity that is insufficiently capitalized or is not controlled through voting (or similar
rights) should be consolidated. The determination of whether a company is required to consolidate
an entity is based on, among other things, an entity’s purpose and design and a company’s ability
to direct the activities of the entity that most significantly impact the entity’s economic
performance. The new authoritative accounting guidance requires additional disclosures about the
reporting entity’s involvement with variable-interest entities and any significant changes in risk
exposure due to that involvement as well as its affect on the entity’s financial statements. The
new authoritative accounting guidance under ASC Topic 810 was effective January 1, 2010 and did not
have a significant impact on the Company’s consolidated financial statements.
FASB ASC Topic 860,
Transfers and Servicing
(“ASC 860”) was amended to enhance reporting about
transfers of financial assets including securitizations, and where companies have continuing
exposure to the risks related to transferred financial assets. The new authoritative accounting
guidance eliminates the concept of a “qualifying special-purpose entity” and changes the
requirements for derecognizing financial assets. The new authoritative guidance also requires
additional disclosures about all continuing involvements with transferred financial assets
including information about gains and losses resulting from transfers during the period. The new
authoritative accounting guidance under ASC 860 was effective January 1, 2010 and did not have a
significant impact on the Company’s consolidated financial statements.
Issued October 2009, ASU 2009-15,
Accounting for Own-Share Lending Arrangements in Contemplation of
Convertible Debt Issuance or Other Financing
amends FASB ASC Topic 470,
Debt
(“ASC 470”), and
provides guidance for accounting and reporting for own-share lending arrangements issued in
contemplation of a convertible debt issuance. At the date of issuance, a share-lending arrangement
entered into on an entity’s own shares should be measured at fair value in accordance with ASC 820
and recognized as an issuance cost, with an offset to additional paid-in capital. Loaned shares
are excluded from basic and diluted earnings per share unless default of the share-lending
arrangement occurs. The amendments also require several disclosures including a description and
the terms of the arrangement and the reason for entering into the arrangement. The effective dates
of the amendments are dependent upon the date the share-lending arrangement was entered into and
include retrospective application for arrangements outstanding as of the beginning of fiscal years
beginning on or after December 15, 2009. The Company has no plans to issue convertible debt and,
therefore, does not expect the update to have an impact on its consolidated financial statements.
In January 2010 the FASB issued ASU 2010-06,
Fair Value Measurements and Disclosures
Topic 820
which provides guidance requiring enhanced fair value disclosures about (1) the different classes
of assets and liabilities measured at fair value, (2) the valuation techniques and inputs used, (3)
the activity in level 3 fair value measurements and (4) the transfers between levels 1, 2, and 3.
The increased disclosure requirements further set forth in the update that in the reconciliation
for fair value measurements using significant unobservable inputs (level 3), a reporting entity
should present separately information about purchases, sales, issuances and settlements (that is,
gross amounts shall be disclosed as opposed to a single net figure).
The company accepted these new disclosure requirements during 2010
except for the Level 3 activity which is not required until the first
quarter of 2011.
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In April 2010 the FASB issued ASU 2010-18,
Loan Modifications
Topic 310 which provides guidance
that loans accounted for within a pool need not be removed from the pool when loan modifications
are made, even if the modifications would otherwise be considered trouble debt restructurings.
Under this guidance an entity will continue to evaluate the pool of loans when performing its
impairment analysis. The effective date of the amendments in this update is in the first interim
period ending on or after July 15, 2010. The amendments are to be applied prospectively. The
Company does not expect the adoption to have a significant impact on its consolidated financial
statements.
In July 2010 the FASB issued ASU 2010-20,
Receivables
Topic 310 which amends Topic 310 to improve
the disclosures that an entity provides about the credit quality of its financing receivables and
related allowance for credit losses. An entity is required to disaggregate by portfolio segment or
class certain existing disclosures and provide certain new disclosures about its financing
receivables and related allowance for credit losses. The Company adopted the period end
disclosures provisions of the new authoritative guidance under ASC Topic 310 in the reporting
period ending December 31, 2010. Adoption of the new guidance did not have an impact on the
Company’s consolidated financial statements. The disclosures about activity that occurs will be
effective for reporting periods after January 1, 2011, and will have no impact on the Company’s
consolidated financial statements.
SUPERVISION AND REGULATION
Bank holding companies and banks operate in an extensively regulated environment under state and
federal law. These laws and regulations are intended primarily for the protection of depositors
and the Deposit Insurance Fund (the “DIF”) and not for the benefit of shareholders or creditors.
The following discussion is only intended to summarize some of the
significant statutes and regulations that affect the banking industry, and therefore is not a
comprehensive survey of the field. These summaries are not intended to be complete and are
qualified in their entirety by reference to the particular statute or regulation described.
Moreover, recent legislation, such as the Dodd-Frank Wall Street Reform and Consumer Protection
Act, or Dodd-Frank Act, and regulations have been adopted relating to the regulation, supervision,
examination and operation of financial institutions. These laws and regulations have been in
effect for only a limited time, and we cannot predict the long-term impact their implementation
will have on the capital, credit and real estate markets as well as our operations and activities.
Regulatory oversight of financial institutions, including banks and bank holding companies, has
increased in recent periods. Regulators conduct a variety of evaluations, including compliance
audits and safety and soundness reviews. As a result of these reviews, regulators may require that
we change our practices or policies, write down assets or increase reserves (and therefore reduce
our capital base), and take or omit to take other actions deemed prudent by the regulator. Given
the implementation of these new laws and regulations, the Company cannot predict the outcome of
future regulatory evaluations or whether it will become subject to conditions, policies or
directives resulting from regulatory evaluations.
TARP Programs and Compliance
On October 3, 2008, the United States Government enacted the Emergency Economic Stabilization
Act of 2008 (“EESA”) to provide the U.S. Department of the Treasury (“Treasury”) the resources to
stabilize the country’s financial markets, including the Troubled Asset Repurchase Program
(“TARP”). On October 14, 2008, the Treasury announced a generally available capital access program
under the TARP known as the Capital Purchase Program (“CPP”) under which financial institutions
issued preferred shares and warrants to purchase shares of its common stock to the Treasury,
subject to certain conditions.
On November 21, 2008, as part of the CPP, the Company sold to the Treasury (i) 140,000 shares
of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A, par value $0.0001 per
share, having a liquidation preference of $1,000 per share (the “Series A Preferred Stock”) and
(ii) a ten-year warrant to purchase up to 1,574,213 shares of the Company’s common stock, par value
$0.0001 per share, at an initial exercise price of $13.34 per share (the “Warrant”), for an
aggregate purchase price of $140 million. On May 20, 2009, the Company completed a “Qualified
Equity Offering,” as defined by the Warrant, which resulted in a reduction in the number of shares
underlying the Warrant by one-half, to 787,107 shares of the Company’s common stock. All of the
proceeds from the sale of the Series A Preferred Stock were treated as Tier 1 capital for
regulatory purposes.
For additional information regarding the terms of the Series A Preferred Stock and the warrant,
please see the notes to our financial statements and other filings we have made with the SEC.
In connection with the investment by the Treasury, the Company agreed that, until such time as
the Treasury does not own any debt or equity securities of the Company or the Warrant, the Company
will take all necessary action to ensure that its benefit plans applicable to its senior executive
officers comply with Section 111(b) of EESA. These conditions will cease to be binding on the
Company at such time as it repurchases all the Series A Preferred Stock and warrant from Treasury.
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On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment
Act of 2009 (the “stimulus bill” or “ARRA”). The final version of the stimulus bill amended the
executive compensation provisions of Section 111 of EESA to set forth new restrictions on executive
compensation paid by financial institutions participating in TARP. On June 15, 2009, the Treasury
issued interim final rules on TARP Standards for Compensation and Corporate Governance,
implementing the limitations on executive compensation set forth in ARRA (the “Interim Final
Rules”).
Set forth below is a summary of certain of the executive compensation restrictions required by
ARRA and the Interim Final Rules, and an explanation of the Company’s compliance with those
restrictions.
Prohibition on Bonuses, Retention Awards and Incentive Compensation.
ARRA prohibits the
payment or accrual of any bonus, retention award or incentive compensation to the Company’s five
most highly compensated employees (“MHCE”), except for the payment of long term restricted stock,
provided that such restricted stock: (1) is issued with respect to common stock of the Company;
(2) is not transferable to the recipient except as the Company repays the TARP funds received, in
increments of no less than 25%; and (3) must be forfeited if the employee does not continue
performing substantial services for the Company for at least two years from the date of the grant.
For the 2009 fiscal year, the Company did not pay, accrue or grant a bonus, retention award or
incentive compensation to its five MHCEs except as allowed by the Interim Final Rules.
Shareholder Say on Pay Vote.
Under ARRA, the Company must provide its stockholders with an
annual advisory “say on pay” vote on executive compensation that is non-binding on the Company and
its Board of Directors. The Company has included a non-binding advisory vote on executive
compensation this year for its stockholders to consider (Item 3). The Company’s compensation
programs fully comply with the requirements of ARRA and the Interim Final
Rules; however, the Company may make changes to its compensation programs to ensure future
compliance, regardless of the outcome of this year’s non-binding advisory vote on executive
compensation.
Clawback of Bonuses, Retention Awards and Incentive Compensation.
ARRA and the Interim Final
Rules require the Company to ensure the recovery of any bonus, retention award or incentive
compensation paid to its top five senior executive officers and any of its next 20 most highly
compensated employees that was paid based on statements of earnings, revenues, gains or other
criteria which are later found to be materially inaccurate. Each of the Company’s NEOs
contractually agreed to abide by this requirement prior to the Company receiving funds pursuant to
the Capital Purchase Program. In September 2009, the Company adopted a Policy on the Recoupment of
Bonuses and Incentive or Equity Based Compensation Based on Materially Inaccurate Related Financial
Statements or Performance Metric Criteria that applies to all Company executive officers and the
twenty MHCEs.
Prohibition on Golden Parachute Payments.
ARRA and the Interim Final Rules prohibit the
Company from making any golden parachute payment to any of its five senior executive officers and
its next five most highly compensated employees. A “golden parachute payment” is defined as any
payment made upon departure from the Company for any reason or any payment due to a change in
control of the Company or any of its affiliates under TARP, except for payments for services
performed or benefits accrued. The Company carefully evaluates every severance payment an employee
may otherwise be eligible for to ensure that the Company does not make a golden parachute payment
to its SEOs or next five MHCEs.
Compensation Committee; Prohibition on “Encouraging” Earnings Manipulation.
The Interim Final
Rules require the Company’s Compensation Committee to discuss, evaluate and review at least every
six months the terms of each employee compensation plan and identify and eliminate the features in
these plans that could encourage the manipulation of reported earnings of the Company to enhance
the compensation of any employee. The Compensation Committee performed its review of the Company’s
employee compensation plans for purposes of this and other TARP requirements on August 18, 2010 and
again more recently on February 25, 2011. ]
Luxury Policy.
Under ARRA and the Interim Final Rules, the Company’s Board of Directors was
required to adopt a Company-wide policy on excessive or luxury expenditures, including
entertainment, office renovations, transportation services and other unreasonable expenditures by
September 14, 2009. The Board of Directors adopted the necessary Luxury Expenditures Policy on
September 9, 2009, and it is available on the Company’s website,
www.westernalliancebancorp.com
.
Compliance Certification.
ARRA requires the Company’s CEO and CFO to annually certify that
the Company is in compliance with the TARP compensation requirements. The CEO and CFO
certifications have been included as Exhibits 99.1 and 99.2 to this document.
Annual Deduction Limit.
EESA and ARRA prohibit the Company from deducting annual compensation
paid to any of its top five senior executive officers in excess of $500,000 under Section 162(m)(5)
of the Code. Prior to EESA, certain performance based compensation paid under shareholder approved
plans did not count toward such deduction limit. EESA and Code Section 162(m)(5) eliminate that
exclusion and other previously permitted exceptions for the Company.
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No Unnecessary and Excessive Risk Taking.
ARRA and the Interim Final Rules required the
Company’s Compensation Committee to do the following, prior to September 14, 2009:
| (1) |
Discuss, evaluate, and review at least every six months with the Company’s senior
risk officers the SEO compensation plans to ensure that the SEO compensation plans do
not encourage SEOs to take unnecessary and excessive risks that threaten the value or
the Company;
|
|
| (2) |
Discuss, evaluate, and review with senior risk officers at least every six months
employee compensation plans in light of the risks posed to the Company by such plans and
how to limit such risks;
|
|
| (3) |
Discuss, evaluate, and review at least every six months the employee compensation
plans of the Company to ensure that these plans do not encourage the manipulation of
reported earnings of the Company to enhance the compensation of any of the Company’s
employees; and
|
|
| (4) |
At least once per fiscal year, provide a narrative description of how the SEO
compensation plans do not encourage excessive risks that threaten the value of the
Company, including how these compensation plans do not encourage behavior focused on
short-term results rather than long-term value creation, the risks posed by employee
compensation plans and how these risks were limited, including how these employee
compensation plans do not encourage behavior focused on short-term results rather than
long-term value creation, and how the Company has ensured that the employee compensation
plans do not encourage the manipulation of reported earnings of the Company to enhance
the compensation of any of the Company’s employees.
|
The Compensation Committee’s narrative descriptions of SEO and employee compensation plans, and its
certification of the completion of reviews listed in paragraphs 1 through 3 above, are included in
the Compensation Committee Report of the Company’s most recent proxy statement.
In February 2009, the Treasury also announced a financial stability plan for the country’s
financial institutions. The financial stability plan included five major elements: (i) a capital
assistance program to invest in convertible preferred stock of certain qualifying financial
institutions to ensure they have sufficient capital; (ii) a consumer and business lending
initiative to fund consumer loans, small business loans and commercial mortgage asset-backed
securities issuances by expansion of the Term Asset-Backed Securities Loan Facility (“TALF”); (iii)
a public-private investment fund to leverage public and private capital with public financing to
purchase legacy “toxic assets” from financial institutions; (iv) an extension of the Temporary
Liquidity Program (“TLGP”); and (v) assistance for homeowners to reduce mortgage payments and
interest rates and establishing loan modification guidelines for government and private programs.
In addition, all banking institutions with assets over $100 billion were required to undergo a
comprehensive “stress test” to determine if they had sufficient capital to continue lending and to
absorb losses that could result from a more severe decline in the economy than projected. The
Company was not subject to this comprehensive stress test.
The Dodd-Frank Wall Street Reform and Consumer Protection Act
As a result of the financial crisis, the U.S. Congress passed, and on July 21, 2010 President Obama
signed into law, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank
Act. The Dodd-Frank Act has had, and will continue to have, a broad impact on the financial
services industry. Many of the provisions of the Dodd-Frank Act codify or direct the appropriate
Federal regulatory agency, including the SEC, Federal Reserve or FDIC, to promulgate regulations to
implement, the requirements discussed above for TARP participants. The Federal regulatory agencies
have issued a number of requests for public comment, proposed rules and final regulations to
implement the requirements of the Dodd-Frank Act. The following items provide a brief description
of the impact of the Dodd-Frank Act on the operations and activities, both currently and
prospectively, of the Company and its subsidiaries.
Deposit Insurance.
The Dodd-Frank Act and implementing final rules from the FDIC make permanent
the $250,000 deposit insurance limit for insured deposits. The assessment base against which an
insured depository institution’s deposit insurance premiums paid to the FDIC’s Deposit Insurance
Fund (or the DIF) has been revised to use the institution’s average consolidated total assets less
its average equity rather than its deposit base. These provisions could increase the FDIC deposit
insurance premiums paid by our insured depository institution subsidiaries. The Dodd-Frank Act
also amended the Federal Deposit Insurance Act to provide full deposit insurance coverage for
noninterest-bearing transaction accounts beginning on December 31, 2010. As a result, the FDIC
discontinued its Transaction Account Guarantee Program, created under the Temporary Liquidity
Guarantee Program. Unlike the FDIC’s programs, no opt outs from participation in the Dodd-Frank
Act’s insurance protection were allowed and institutions were not required to pay a separate
assessment for participation.
Increased Capital Standards and Enhanced Supervision.
The federal banking agencies are required to
establish minimum leverage and risk-based capital requirements for banks and bank holding
companies. These new standards will be no lower than existing regulatory capital and leverage
standards applicable to insured depository institutions and may, in fact, be higher when
established by the agencies. Compliance with heightened capital standards may reduce our ability
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to generate or originate revenue-producing assets and thereby restrict revenue generation from
banking and non-banking operations. The Dodd-Frank Act also increases regulatory oversight,
supervision and examination of banks, bank holding companies and their respective subsidiaries by
the appropriate regulatory agency. Compliance with new regulatory requirements and expanded
examination processes could increase our cost of operations.
Trust Preferred Securities.
Under the increased capital standards established by the Dodd-Frank
Act, bank holding companies are prohibited from including in their regulatory Tier 1 capital hybrid
debt and equity securities issued on or after May 19, 2010. Among the hybrid debt and equity
securities included in this prohibition are trust preferred securities, which the Company has used
in the past as a tool for raising additional Tier 1 capital and otherwise improving its regulatory
capital ratios. Although the Company may continue to include our existing trust preferred
securities as Tier 1 capital, the prohibition on the use of these securities as Tier 1 capital
going forward may limit the Company’s ability to raise capital in the future.
The Consumer Financial Protection Bureau.
The Dodd-Frank Act creates a new, independent Consumer
Financial Protection Bureau (or the Bureau) within the Federal Reserve that is tasked with
establishing and implementing rules and regulations under certain federal consumer protection laws.
These consumer protection laws govern the manner in which we offer many of our financial products
and services. Regulatory and rulemaking authority over these laws is expected to be transferred to
the Bureau in July 2011.
State Enforcement of Consumer Financial Protection Laws.
The Dodd-Frank Act permits states to
adopt consumer protection laws and regulations that are stricter than those regulations promulgated
by the Bureau. State attorneys
general are permitted to enforce consumer protection rules adopted by the Bureau against certain
state-chartered institutions. Although our subsidiaries do not currently offer many of these
consumer products or services, compliance with any such new regulations would increase our cost of
operations and, as a result, could limit our ability to expand into these products and services.
Transactions with Affiliates and Insiders.
The Dodd-Frank Act enhances the requirements for
certain transactions with affiliates under Section 23A and 23B of the Federal Reserve Act,
including an expansion of the definition of “covered transactions” and an increase in the amount of
time for which collateral requirements regarding covered transactions must be maintained.
Additionally, limitations on transactions with insiders are expanded through the (i) strengthening
on loan restrictions to insiders; and (ii) expansion of the types of transactions subject to the
various limits, including derivative transactions, repurchase agreements, reverse repurchase
agreements and securities lending or borrowing transactions. Restrictions are also placed on
certain asset sales to and from an insider to an institution, including requirements that such
sales be on market terms and, in certain circumstances, approved by the institution’s board of
directors.
Corporate Governance.
The Dodd-Frank Act addresses many corporate governance and executive
compensation matters that will affect most U.S. publicly traded companies, including us. The
Dodd-Frank Act (1) grants shareholders of U.S. publicly traded companies an advisory vote on
executive compensation; (2) enhances independence requirements for compensation committee members;
(3) requires companies listed on national securities exchanges to adopt incentive-based
compensation claw-back policies for executive officers; and (4) provides the SEC with authority to
adopt proxy access rules that would allow shareholders of publicly traded-companies to nominate
candidates for election as a director and have those nominees included in a company’s proxy
materials. The SEC recently adopted final rules implementing rules for the shareholder advisory
vote on executive compensation and golden parachute payments.
Additional regulations called for in the Dodd-Frank Act, including regulations dealing with the
risk retention requirements for, and disclosures required from, residential mortgage originators
will be implemented over time. Although the Dodd-Frank Act contains some specific timelines for
the Federal regulatory agencies to follow, it remains unclear whether the agencies will be able to
meet these deadlines and when rules will be proposed and finalized. We continue to monitor the
rulemaking process and, while our current assessment is that the Dodd-Frank Act and the
implementing regulations will not have a material effect on the Company, given the uncertainty
associated with the manner in which the provisions of the Dodd-Frank Act will be implemented, the
full extent of the impact such requirements will have on our operations is unclear. The changes
resulting from the Dodd-Frank Act may impact the profitability of our business activities, require
changes to certain of our business practices, impose upon us more stringent capital, liquidity and
leverage requirements or otherwise adversely affect our business. These changes may also require
us to invest significant management attention and resources to evaluate and make any changes
necessary to comply with new statutory and regulatory requirements. Failure to comply with the new
requirements would negatively impact our results of operations and financial condition. While we
cannot predict what effect any presently contemplated or future changes in the laws or regulations
or their interpretations would have on us, these changes could be materially adverse to our
investors.
Bank Holding Company Regulation
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General.
Western Alliance Bancorporation is a bank holding company, registered with the Board of
Governors of the Federal Reserve (the “Federal Reserve”) under the Bank Holding Company Act of 1956
(the “BHC Act”). As such, the Federal Reserve is Western Alliance’s primary federal regulator, and
Western Alliance is subject to extensive regulation, supervision and examination by the Federal
Reserve. Western Alliance must file reports with the Federal Reserve and provide it with such
additional information as it may require.
Under Federal Reserve policy, a bank holding company is required to serve as a source of financial
and managerial strength for its subsidiary banks and may not conduct its operations in an unsafe or
unsound manner. Accordingly, the Company must stand ready to use its available resources to
provide adequate capital to its subsidiary banks during a period of financial stress or adversity
and should maintain the financial flexibility and capital-raising capacity to obtain additional
resources for assisting its subsidiary banks. Such support may be required at times when, absent
the Federal Reserve’s policy, a bank holding company may not be inclined to provide it. The
expectation to serve as a source of financial strength is in addition to certain guarantees
required under the prompt correction action provisions discussed below. A bank holding company’s
failure to meet these obligations will generally be considered by the Federal Reserve to be an
unsafe and unsound banking practice or a violation of Federal Reserve regulations, or both.
Among its powers, the Federal Reserve may require a bank holding company to terminate an activity
or terminate control of, divest or liquidate subsidiaries or affiliates that the Federal Reserve
determines constitute a significant risk to the financial safety or soundness of the bank holding
company or any of its bank subsidiaries. Subject to certain exceptions, bank holding companies
also are required to give written notice to and receive approval from the Federal Reserve before
purchasing or redeeming their common stock or other equity securities. The Federal Reserve also
may regulate provisions of a bank holding company’s debt, including by imposing interest rate
ceilings and reserve requirements. In addition, the Federal Reserve requires all bank holding
companies to maintain capital at or above certain prescribed
levels. Additionally, as a result of the Dodd-Frank Act, the Company’s cannot engage in
proprietary trading or establish or invest in private equity or hedge funds, subject to a few
narrow exemptions.
Holding Company Bank Ownership.
The BHC Act requires every bank holding company to obtain the
approval of the Federal Reserve before it may acquire, directly or indirectly, ownership or control
of any voting shares of another bank or bank holding company if, after such acquisition, it would
own or control more than 5% of any class of the outstanding voting shares of such other bank or
bank holding company, acquire all or substantially all the assets of another bank or bank holding
company or merge or consolidate with another bank holding company. The BHC Act further provides
that the Federal Reserve may not approve any transaction that would result in a monopoly or would
be in furtherance of any combination or conspiracy to monopolize or attempt to monopolize the
business of banking in any section of the United States, or the effect of which may be
substantially to lessen competition or to tend to create a monopoly in any section of the country,
or that in any other manner would be in restraint of trade, unless the anticompetitive effects of
the proposed transaction are clearly outweighed by the public interest in meeting the convenience
and needs of the community to be served. The Federal Reserve is also required to consider the
financial and managerial resources and future prospects of the bank holding companies and banks
concerned and the convenience and needs of the community to be served. Consideration of financial
resources generally focuses on capital adequacy, and consideration of convenience and needs issues
includes the parties’ performance under the Community Reinvestment Act (“CRA”). In addition, the
Federal Reserve must take into account the institutions’ effectiveness in combating money
laundering.
Holding Company Non-bank Ownership.
With certain exceptions, the BHC Act prohibits a bank holding
company from acquiring or retaining, directly or indirectly, ownership or control of more than 5%
of the outstanding voting shares of any company that is not a bank or bank holding company, or from
engaging, directly or indirectly, in activities other than those of banking, managing or
controlling banks, or providing services for its subsidiaries. The principal exceptions to these
prohibitions involve certain non-bank activities that have been identified, by statute or by
Federal Reserve regulation or order as activities so closely related to the business of banking or
of managing or controlling banks as to be a proper incident thereto. Business activities that have
been determined to be so related to banking include securities brokerage services, investment
advisory services, fiduciary services and certain management advisory and data processing services,
among others. A bank holding company that qualifies as a “financial holding company” also may
engage in a broader range of activities that are financial in nature (and complementary to such
activities). Additional limitations on expansion were implemented by the Dodd-Frank Act’s
amendments to the BHC Act, which prohibit mergers or acquisitions if the resulting institution
would own or control more than 10% of the aggregate consolidated liabilities of all U. S. financial
companies.
Bank holding companies that qualify and elect to become financial holding companies may engage in
non-bank activities that have been identified by the Gramm-Leach-Bliley Act of 1999 (“GLB Act”) or
by Federal Reserve and Treasury regulation as financial in nature or incidental to a financial
activity. The Federal Reserve may also determine that a financial holding company may engage in
certain activities that are complementary to a financial activity. Activities that are defined as
financial in nature include securities underwriting, dealing and market making, sponsoring mutual
funds and investment companies, engaging in insurance underwriting and agency activities, and
making merchant banking investments in non-financial companies. In order to become or remain a
financial holding company, a bank holding company must be well-capitalized, well-managed, and,
except in limited circumstances, have at least satisfactory CRA
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ratings. A financial holding
company must also file a certification with the Federal Reserve that all its depository institution
subsidiaries are well-capitalized and well managed. If, after becoming a financial holding company
and undertaking activities not permissible for a bank holding company, the company fails to
continue to meet any of the prerequisites for financial holding company status, the company must
enter into an agreement with the Federal Reserve to comply with all applicable capital and
management requirements. If the company does not return to compliance within 180 days, the Federal
Reserve may order the company to divest its subsidiary banks or the company may discontinue or
divest investments in companies engaged in, activities permissible only for a bank holding company
that has elected to be treated as a financial holding company. On March 30, 2009, the Company
withdrew its election to be a financial holding company, and is now required to limit its
activities to those permissible for a bank holding company.
Change in Control.
In the event that the BHC Act is not applicable to a person or entity, the
Change in Bank Control Act of 1978 (“CIBC Act”) requires, that such person or entity give notice to
the Federal Reserve and the Federal Reserve not disapprove such notice before such person or entity
may acquire “control” of a bank or bank holding company. A limited number of exemptions apply to
such transactions. Subject to more recent guidance issued by the Federal Reserve, control is
conclusively presumed to exist if a person or entity acquires 25% or more of the outstanding shares
of any class of voting stock of the bank holding company or insured depository institution.
Control is rebuttably presumed to exist if a person or entity acquires 10% or more but less than
25% of such voting stock and either the issuer has a class of registered securities under Section
12 of the Exchange Act, or no other person or entity will own, control or hold the power to vote a
greater percentage of such voting stock immediately after the transaction. In recent guidance, the
Federal Reserve has stated that generally it will be able to conclude that an investor does not
have “control” of a bank or bank holding company if it does not own in excess of 15% of the voting
power and 33% of the total equity of the relevant bank or bank holding company. Under prior
Federal Reserve guidance, a board seat was generally not permitted for non-
controlling investment of 10% or greater of the equity or voting power. Under recent guidance,
however, the Federal Reserve may permit a non-controlling investor to have up to two board seats if
the investor’s aggregate board representation is proportionate to its total interest in the bank or
bank holding company but does not exceed 25% of the voting members of the board and another
shareholder of the bank or bank holding company controls the bank or bank holding company under the
BHC Act. The Federal Reserve has also set forth the terms of nonvoting equity securities it will
deem to be voting securities and gives examples of other indicia of control beyond just equity
ownership limits.
State Law Restrictions.
As a Nevada corporation, Western Alliance is subject to certain
limitations and restrictions under applicable Nevada corporate law. For example, Nevada law
imposes restrictions relating to indemnification of directors, maintenance of books, records and
minutes and observance of certain corporate formalities. Western Alliance is also a bank holding
company within the meaning of state law in the states where its subsidiary banks are located. As
such, it is subject to examination by and may be required to file reports with the Nevada Financial
Institutions Division (“Nevada FID”) under sections 666.095 and 666.105 of the Nevada Revised
Statutes. Western Alliance must obtain the approval of the Nevada Commissioner of Financial
Institutions (“Nevada Commissioner”) before it may acquire another bank. Any transfer of control
of a Nevada bank holding company must be approved in advance by the Nevada Commissioner.
Under section 6-142 of the Arizona Revised Statutes, no person may acquire control of a company
that controls an Arizona bank without the prior approval of the Arizona Superintendent of Financial
Institutions (“Arizona Superintendent”). A person who has the power to vote 15% or more of the
voting stock of a controlling company is presumed to control the company.
Western Alliance also is subject to examination and reporting requirements of the California
Department of Financial Institutions (“California DFI”) under sections 3703 and 3704 of the
California Financial Code. Any transfer of control of a corporation that controls a California
bank requires the prior approval of the California Commissioner of Financial Institutions
(“California Commissioner”).
Bank Regulation
General.
On December 31, 2010, the Company merged its former Alta Alliance Bank subsidiary into
its Torrey Pines Bank subsidiary, and its former First Independent Bank of Nevada subsidiary into
its Alliance Bank of Arizona subsidiary. As part of the latter merger, Alliance Bank of Arizona was
renamed Western Alliance Bank doing business as Alliance Bank of Arizona (in Arizona) and First
Independent Bank (in Nevada). Following this charter consolidation, Western Alliance controls three
subsidiary banks: Bank of Nevada located in Las Vegas, Nevada, Western Alliance Bank located in
Phoenix, Arizona, and Torrey Pines Bank located in San Diego, California. All three banks are
state-chartered, nonmember banks and are subject to regulation, supervision and examination by the
FDIC, which is their primary federal banking agency. In addition, Bank of Nevada is chartered in
Nevada and subject to supervision by the Nevada FID, Western Alliance Bank is chartered in Arizona
and is subject to supervision by the Arizona Department of Financial Institutions (“Arizona DFI”),
and Torrey Pines Bank is chartered in California and is subject to supervision by the California
DFI.
Federal and state banking laws and the implementing regulations promulgated by the federal and
state banking regulatory agencies cover most aspects of the banks’ operations, including capital
requirements, reserve requirements against
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deposits and for possible loan losses and other
contingencies, dividends and other distributions to shareholders, customers’ interests in deposit
accounts, payment of interest on certain deposits, permissible activities and investments,
securities that a bank may issue and borrowings that a bank may incur, rate of growth, number and
location of branch offices and acquisition and merger activity with other financial institutions.
Deposit Insurance Assessments.
Deposits in the banks are insured by the FDIC to applicable limits
through the Deposit Insurance Fund (“DIF”). All of Western Alliance’s subsidiary banks are
required to pay deposit insurance premiums, which are generally assessed semiannually and paid
quarterly. The FDIC utilizes a risk-based assessment system that imposes insurance premiums based
upon a risk matrix that takes into account a bank’s capital level and supervisory rating (“CAMELS
rating”). The risk matrix utilizes four risk categories which are distinguished by capital levels
and supervisory ratings. Banks with higher levels of capital and a low degree of supervisory
concern are assessed lower premiums than banks with lower levels of capital or a higher degree of
supervisory concern. On February 7, 2011, the FDIC approved a final rule to implement deposit
insurance assessment changes called for under the Dodd-Frank Act. The final rate schedule will go
into effect on April 1, 2011. The deposit insurance initial base assessment rates currently rage
from 12 basis points on deposits (for a financial institution in Risk Category I) to 45 basis
points on deposits (for financial institutions in Risk Category IV), but may be higher under
certain conditions. After adjustments, the total base assessment rates range from 7 basis points
(for Risk Category I financial institutions) to 77.5 basis points (for Risk Category IV financial
institutions). In addition, the FDIC collects The Financing Corporation (“FICO”) deposit
assessments on assessable deposits. FICO assessments are set quarterly, and in 2009 ranged from
1.14 basis points in the first quarter to 1.02 basis points in the fourth quarter.
In the second quarter of 2009, the FDIC levied a special assessment on all insured depository
institutions totaling 5 basis points of each institution’s total assets less Tier 1 capital. The
special assessment was part of the FDIC’s efforts to
rebuild the DIF. In November 2009, the FDIC issued a rule that required all insured depository
institutions, with limited exceptions, to prepay their estimated quarterly risk-based assessments
for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. The FDIC also adopted a uniform
three-basis point increase in assessment rates effective on January 1, 2011. In December 2009, the
Company paid $34.3 million in prepaid risk-based assessments, which included $2.2 million related
to the fourth quarter of 2009 that would have otherwise been payable in the first quarter of 2010.
This amount is included in deposit insurance expense for 2009. The remaining $32.1 million in
pre-paid deposit insurance is included in other assets in the accompanying consolidated balance
sheets as of December 31, 2009.
Supervision and Examination
. Federal banking agencies have broad enforcement powers, including the
power to terminate deposit insurance, impose substantial fines and other civil and criminal
penalties, and appoint a conservator or receiver. If, as a result of an examination, the FDIC or
the Federal Reserve, as applicable, were to determine that the financial condition, capital
resources, asset quality, earnings prospects, management, liquidity or other aspects of any of the
banks’ operations had become unsatisfactory, or that any of the banks or their management was in
violation of any law or regulation, the FDIC or the Federal Reserve may take a number of different
remedial actions as it deems appropriate. These actions include the power to enjoin “unsafe or
unsound” practices, to require affirmative actions to correct any conditions resulting from any
violation or practice, to issue an administrative order that can be judicially enforced, to direct
an increase in the bank’s capital, to restrict the bank’s growth, to assess civil monetary
penalties against the bank’s officers or directors, to remove officers and directors and, if the
FDIC concludes that such conditions cannot be corrected or there is an imminent risk of loss to
depositors, to terminate the bank’s deposit insurance.
Under Nevada, Arizona and California law, the respective state banking supervisory authority has
many of the same remedial powers with respect to its state-chartered banks.
On October 21, 2010, the Company received notification from the FDIC that the previously disclosed
Consent Order with respect to Torrey Pines Bank, dated November 16, 2009, was terminated as of
October 20, 2010.
The Company’s banking subsidiaries, including Bank of Nevada, have been placed under informal
supervisory oversight by banking regulators in the form of memoranda of understanding. The
oversight requires enhanced supervision by the Board of Directors of each bank, and the adoption or
revision of written plans and/or policies addressing such matters as asset quality, credit
underwriting and administration, the allowance for loan and lease losses, loan and investment
portfolio risks, asset-liability management and loan concentrations, as well as the formulation and
adoption of comprehensive strategic plans. The banks also are prohibited from paying dividends or
making other distributions to the Company without prior regulatory approval and are required to
maintain higher levels of Tier 1 capital than otherwise would be required to be considered
well-capitalized under federal capital guidelines. In addition, the banks are required to provide
regulators with prior notice of certain management and director changes and, in certain cases, to
obtain their non-objection before engaging in a transaction that would materially change its
balance sheet composition. The Company believes each bank is in full compliance with the
requirements of the applicable memorandum of understanding.
Regulation of Non-banking Subsidiaries
Shine Investment Advisory Services, Inc.
Shine, a Colorado corporation, are investment advisers
that are registered with the SEC under the Investment Advisers Act of 1940 (“Advisers Act”). Under
the Advisers Act, an investment adviser is
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subject to supervision and inspection by the SEC. A
significant element of supervision under the Advisers Act is the requirement to make significant
disclosures to the public under Part II of Form ADV of the adviser’s services and fees, the
qualifications of its associated persons, financial difficulties and potential conflicts of
interests. An investment adviser must keep extensive books and records, including all customer
agreements, communications with clients, orders placed and proprietary trading by the adviser or
any advisory representative.
Capital Standards
Regulatory Capital Guidelines.
The Federal Reserve and the FDIC have risk-based capital adequacy
guidelines intended to measure capital adequacy with regard to the degree of risk associated with a
banking organization’s operations for transactions reported on the balance sheet as assets and
transactions, such as letters of credit and recourse arrangements, that are reported as
off-balance-sheet items. The Company and its subsidiary banks are required to comply with these
capital adequacy standards. Under these guidelines, the nominal dollar amounts of assets on the
balance sheet and credit-equivalent amounts of off- balance-sheet items are multiplied by one of
several risk adjustment percentages. These range from 0.0% for assets with low credit risk, such
as cash and certain U.S. government securities, to 100.0% for assets with relatively higher credit
risk, such as business loans. A banking organization’s risk-based capital ratios are obtained by
dividing its Tier 1 capital and total qualifying capital (Tier 1 capital and a limited amount of
Tier 2 capital) by its total risk-adjusted assets certain and off-balance-sheet items. Tier 1
capital consists of common stock, retained earnings, non-cumulative perpetual preferred stock,
trust preferred securities up to a certain limit, and minority interests in certain subsidiaries,
less most other intangible assets. Tier 2 capital consists of preferred stock not qualifying as
Tier 1 capital, limited amounts of subordinated debt, other qualifying term debt, a limited amount
of the allowance for loan and lease losses and certain other instruments that have some
characteristics of equity. The inclusion of elements of Tier 2 capital as qualifying capital is
subject to certain other requirements and limitations of the federal banking
supervisory agencies. Since December 31, 1992, the Federal Reserve and the FDIC have required a
minimum ratio of Tier 1 capital to risk-adjusted assets and certain off-balance-sheet items of 4.0%
and a minimum ratio of qualifying total capital to risk-adjusted assets and certain
off-balance-sheet items of 8.0%.
The Federal Reserve and the FDIC require banking organizations to maintain a minimum amount of Tier
1 capital relative to average total assets, referred to as the leverage ratio. The principal
objective of the leverage ratio is to constrain the maximum degree to which a bank holding company
may leverage its equity capital base. For a banking organization rated in the highest of the five
categories used by regulators to rate banking organizations, the minimum leverage ratio of Tier 1
capital to total assets is 3.0%. However, an institution with a 3.0% leverage ratio would be
unlikely to receive the highest rating since a strong capital position is a significant part of the
regulators’ rating criteria. All banking organizations not rated in the highest category must
maintain an additional capital cushion of 100 to 200 basis points. The Federal Reserve and the
FDIC have the discretion to set higher minimum capital requirements for specific institutions.
Furthermore, the Federal Reserve has previously indicated that it may consider a “tangible Tier 1
capital leverage ratio” (thereby deducting all intangibles from Tier 1 capital) and other
indicators of capital strength in evaluating proposals for expansion or new activities. The
Company’s tier one leverage ratio at December 31, 2010 was 9.5%. A bank that does not achieve and
maintain the required capital levels may be issued a capital directive by the Federal Reserve or
the FDIC, as appropriate, to ensure the maintenance of required capital levels.
The federal regulatory authorities’ risk-based capital guidelines are based upon the 1988 capital
accord (“Basel I”) of the Basel Committee on Banking Supervision (the “Basel Committee”). The
Basel Committee is a committee of central banks and bank supervisors/regulators from the major
industrialized countries that develops broad policy guidelines for use by each country’s
supervisors in determining the supervisory policies they apply. In 2004, the Basel Committee
published a new capital accord (“Basel II”) to replace Basel I. Basel II provides two approaches
for setting capital standards for credit risk — an internal ratings-based approach tailored to
individual institutions’ circumstances and a standardized approach that bases risk weightings on
external credit assessments to a much greater extent than permitted in existing risk-based capital
guidelines. Basel II also would set capital requirements for operational risk and refine the
existing capital requirements for market risk exposures. In July 2010, the Basel Committee adopted
the key design elements for Basel III and, in September 2010, adopted the transition measures. The
requirements of the Dodd-Frank Act have largely surpassed the regulatory requirements called for by
Basel III. Regulators have begun the process of adopting standards required under the Dodd-Frank
Act to remove reliance on credit rating agencies. This reliance is important in Basel III, and
regulators are considering the impact of this requirement in international standards.
Prompt Corrective Action.
Federal banking agencies possess broad powers to take corrective and
other supervisory action to resolve the problems of insured depository institutions, including
institutions that fall below one or more of the prescribed minimum capital ratios described above.
The federal banking regulators are required to take “prompt corrective action” with respect to
capital-deficient institutions. An institution that is classified based upon its capital levels as
well-capitalized, adequately capitalized, or undercapitalized may be treated as though it was in
the next lower capital category if its primary federal banking supervisory authority, after notice
and opportunity for hearing, determines that an unsafe or unsound condition or practice warrants
such treatment. At each successively lower capital category, an insured depository institution is
subject to additional restrictions. A bank holding company must guarantee that a subsidiary bank
that adopts a capital restoration plan will meet its plan obligations, in an amount not to exceed
5% of the subsidiary bank’s
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assets or the amount required to meet regulatory capital requirements,
whichever is less. Any capital loans made by a bank holding company to a subsidiary bank are
subordinated to the claims of depositors in the bank and to certain other indebtedness of the
subsidiary bank. In the event of the bankruptcy of a bank holding company, any commitment by the
bank holding company to a federal banking regulatory agency to maintain the capital of a subsidiary
bank would be assumed by the bankruptcy trustee and would be entitled to priority of payment.
In addition to measures that may be taken under the prompt corrective action provisions, federal
banking regulatory authorities may bring enforcement actions against banks and bank holding
companies for unsafe or unsound practices in the conduct of their businesses or for violations of
any law, rule or regulation, any condition imposed in writing by the appropriate federal banking
regulatory authority or any written agreement with the authority. Possible enforcement actions
include the appointment of a conservator or receiver, the issuance of a cease-and-desist order that
could be judicially enforced, the termination of insurance of deposits (in the case of a depository
institution), the imposition of civil money penalties, the issuance of directives to increase
capital, the issuance of formal and informal agreements, including memoranda of understanding, the
issuance of removal and prohibition orders against institution-affiliated parties and the
enforcement of such actions through injunctions or restraining orders. In addition, a bank holding
company’s inability to serve as a source of strength for its subsidiary banks could serve as an
additional basis for a regulatory action against the bank holding company.
Under Nevada law, if the stockholders’ equity of a Nevada state-chartered bank becomes impaired,
the Nevada Commissioner must require the bank to make the impairment good within three months after
receiving notice from the Nevada Commissioner. If the impairment is not made good, the Nevada
Commissioner may take possession of the bank and liquidate it.
Dividends.
Western Alliance has never declared or paid cash dividends on its capital stock.
Western Alliance currently intends to retain any future earnings for future growth and does not
anticipate paying any cash dividends in the foreseeable future. Any determination in the future to
pay dividends will be at the discretion of Western Alliance’s board of directors and will depend on
the company’s earnings, financial condition, results of operations, business prospects, capital
requirements, regulatory restrictions, contractual restrictions and other factors that the board of
directors may deem relevant.
Western Alliance’s ability to pay dividends is subject to the regulatory authority of the Federal
Reserve. The supervisory concern of the Federal Reserve focuses on a bank holding company’s
capital position, its ability to meet its financial obligations as they come due, and its capacity
to act as a source of financial strength to its subsidiaries. In addition, Federal Reserve policy
discourages the payment of dividends by a bank holding company that are not supported by current
operating earnings. Furthermore, a condition to the Company’s acceptance of TARP funds is that it
not pay dividends until it repurchases the preferred stock that was issued to the Treasury.
As a Nevada corporation, Western Alliance also is subject to limitations under Nevada law on the
payment of dividends. Under Nevada corporate law, section 78.288 of the Nevada Revised Statutes
provides that no cash dividend or other distribution to shareholders, other than a stock dividend,
may be made if, after giving effect to the dividend, the corporation would not be able to pay its
debts as they become due or, unless specifically allowed by the articles of incorporation, the
corporation’s total assets would be less than the sum of its total liabilities and the claims of
preferred stockholders upon dissolution of the corporation.
From time to time, Western Alliance may become a party to financing agreements and other
contractual obligations that have the effect of limiting or prohibiting the declaration or payment
of dividends such as the Series A Preferred Stock it issued pursuant to TARP. Holding company
expenses and obligations with respect to its outstanding trust preferred securities and
corresponding subordinated debt also may limit or impair Western Alliance’s ability to declare and
pay dividends.
Since Western Alliance has no significant assets other than the voting stock of its subsidiaries,
it currently depends on dividends from its bank subsidiaries and, to a lesser extent, its non-bank
subsidiaries, for a substantial portion of its revenue and as the primary sources of its cash flow.
The ability of a state non-member bank to pay cash dividends is not restricted by federal law or
regulations. For example, under the Federal Deposit Insurance Corporation Act (“FDIA”), an insured
institution may not pay a dividend if payment would cause it to become undercapitalized or if it is
already undercapitalized. Furthermore, the FDIC has issued a policy statement indicating that
banks should generally pay dividends only out of current operating earnings. In addition, the
memoranda of understanding to which our bank subsidiaries currently are subject prohibit the
payment of dividends or other distributions to the Company without prior regulatory approval.
State laws also impose restrictions on the ability of each of Western Alliance’s subsidiary banks
to pay dividends:
| • |
Under sections 661.235 and 661.240 of the Nevada Revised Statutes, Bank of Nevada and
First Independent Bank of Nevada may not pay dividends unless the bank’s surplus fund, not
including any initial surplus fund, equals the bank’s initial stockholders’ equity, plus
10% of the previous year’s net profits, and the dividend would
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not reduce the bank’s
stockholders’ equity below the initial stockholders’ equity of the bank, which must be at
least 6% of the total deposit liability of the bank.
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Under section 6-187 of the Arizona Revised Statutes, Alliance Bank of Arizona may pay
dividends on the same basis as any other Arizona corporation. Under section 10-640 of the
Arizona Revised Statutes, a corporation may not make a distribution to shareholders if to
do so would render the corporation insolvent or unable to pay its debts as they become due.
However, an Arizona bank may not declare a non-stock dividend out of capital surplus
without the approval of the Arizona Superintendent.
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| • |
Under section 642 of the California Financial Code, Torrey Pines Bank and Alta Alliance
Bank may not, without the prior approval of the California Commissioner, make a
distribution to its shareholders in an amount exceeding the bank’s retained earnings or its
net income during its last three fiscal years, less any previous distributions made during
that period by the bank or its subsidiaries, whichever is less. Under section 643 of the
California Financial Code, the California Commissioner may approve a larger distribution,
but in no event to exceed the bank’s net income during the year, net income during the
prior fiscal year or retained earnings, whichever is greatest.
|
Redemption.
A bank holding company may not purchase or redeem its equity securities without the
prior written approval of the Federal Reserve if the purchase or redemption combined with all other
purchases and redemptions by the bank holding company during the preceding 12 months equals or
exceeds 10% of the bank holding company’s consolidated net worth. However, prior approval is not
required if the bank holding company is well-managed, not the subject of any unresolved supervisory
issues and both before and immediately after the purchase or redemption is well-capitalized.
Increasing Competition in Financial Services
The Dodd-Frank Act has established new standards for branching by out-of-state banks. Under the
new standard, a bank may establish a
de novo
branch in any location in any state where a bank
chartered in that state would be permitted to locate a branch.
Selected Regulation of Banking Activities
Transactions with Affiliates.
Banks are subject to restrictions imposed by Sections 23A and 23B of
Federal Reserve Act and regulations adopted by the Federal Reserve thereunder with regard to
extensions of credit to affiliates, investments in securities issued by affiliates and the use of
affiliates’ securities as collateral for loans to any borrower. Specifically, the Company’s
subsidiary banks may only engage in lending and other “covered transactions” with non-bank and
non-savings bank affiliates to the following extent: (a) in the case of any single such affiliate,
the aggregate amount of covered transactions of the applicable subsidiary bank and its subsidiaries
may not exceed 10% of the capital stock and surplus of the applicable subsidiary bank; and (b) in
the case of all affiliates, the aggregate amount of covered transactions of the applicable
subsidiary bank and its subsidiaries may not exceed 20% of the capital stock and surplus of the
applicable subsidiary bank. Covered transactions are also subject to certain collateralization
requirements. “Covered transactions” are defined by statute to include a loan or extension of
credit, as well as a purchase of securities issued by an affiliate, a purchase of assets (unless
otherwise exempted by the Federal Reserve) from the affiliate, the acceptance of securities issued
by the affiliate as collateral for a loan, and the issuance of a guarantee, acceptance or letter of
credit on behalf of an affiliate. The Dodd-Frank Act has expanded the definition of covered
transactions and increased the timing and other aspects of the collateral requirements associated
with covered transactions. All covered transactions, including certain additional transactions
(such as transactions with a third party in which an affiliate has a financial interest), must be
conducted on prevailing market terms and on terms substantially the same, or at least as favorable,
to the bank as those prevailing at that time for comparable transactions with or involving other
non-affiliated persons. These laws and regulations may limit the ability of Western Alliance to
obtain funds from its subsidiary banks for its cash needs, including funds for payment of
dividends, interest and operational expenses.
Insider Credit Transactions.
Banks also are subject to certain restrictions regarding extensions
of credit to executive officers, directors or principal shareholders of a bank and its affiliates
or to any related interests of such persons (
i.e.
, insiders). All extensions of credit to insiders
must be made on substantially the same terms and pursuant to the same credit underwriting
procedures as are applicable to comparable transactions with persons who are neither insiders nor
employees, and must not involve more than the normal risk of repayment or present other unfavorable
features. Insider loans also are subject to certain lending limits, restrictions on overdrafts to
insiders and requirements for prior approval by the bank’s board of directors. In addition to
enhancing restrictions on insider transactions, the Dodd-Frank Act increases the types of
transactions with insiders subject to restrictions, including certain asset sales with insiders.
Lending Limits
. In addition to the limits set forth above, state banking law generally limits the
amount of funds that a bank may lend to a single borrower. Under Nevada law, the total obligations
owed to a bank by one person generally may not exceed 25% of stockholders’ tangible equity. Under
Arizona law, the obligations of one borrower to a bank may not exceed 20% of the bank’s capital,
plus an additional 10% of its capital if the additional amounts are fully secured by readily
marketable collateral. Under California law, the obligations of any one borrower to a bank
generally may not
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exceed 25% of an amount equal to the sum of the bank’s shareholders’ equity,
allowance for loan losses, capital notes and debentures, provided that the total unsecured
obligations may not exceed 15% of such amount.
Cross-Guarantee Provisions
. Each insured depository institution “controlled” (as defined in the
BHC Act) by the same bank holding company can be held liable to the FDIC for any loss incurred, or
reasonably expected to be incurred, by the FDIC due to the default of any other insured depository
institution controlled by that holding company and for any assistance provided by the FDIC to any
of those banks that is in danger of default. Such a “cross-guarantee” claim against a depository
institution is generally superior in right of payment to claims of the holding company and its
affiliates against that depository institution. As a result, one or more of the Company’s
subsidiary banks may be required by the FDIC to satisfy the claims of another subsidiary bank if
such a default were to ever occur.
Banking Agency Loan Guidance
. In December 2006, the Federal Reserve, FDIC and other federal
banking agencies issues final guidance on sound risk management practices for concentrations in
commercial real estate (“CRE”) lending. The CRE guidance provided supervisory criteria, including
numerical indicators to direct examiners in identifying institutions with potentially significant
CRE loan concentrations that may warrant greater supervisory scrutiny. The CRE criteria do not
constitute limits on CRE lending, but the CRE guidance does provide certain additional
expectations, such as enhanced risk management practices and levels of capital, for banks with
concentrations in CRE lending. The FDIC issued additional guidance in March 2008 reinforcing the
2006 guidance and addressing steps institutions with potentially significant CRE concentrations
should take to reduce or mitigate the risk of the concentration.
During 2007, the Federal Reserve, FDIC and other federal banking agencies issued final guidance on
subprime mortgage lending to address issues relating to certain subprime mortgages, especially
adjustable-rate mortgage (“ARM”) products that can cause payment shock. The subprime guidance
described the prudent safety and soundness and consumer
protection standards that the regulators expect banks and financial institutions to follow to
ensure borrowers obtain loans they can afford to repay.
Tying Arrangements.
Western Alliance and its subsidiary banks are prohibited from engaging in
certain tying arrangements in connection with any extension of credit, sale or lease of property or
furnishing of services. With certain exceptions for traditional banking services, Western
Alliance’s subsidiary banks may not condition an extension of credit to a customer on a requirement
that the customer obtain additional credit, property or services from the bank, Western Alliance or
any of Western Alliance’s other subsidiaries, that the customer provide some additional credit,
property or services to the bank, Western Alliance or any of Western Alliance’s other subsidiaries
or that the customer refrain from obtaining credit, property or other services from a competitor.
Regulation of Management.
Federal law sets forth circumstances under which officers or directors
of a bank or bank holding company may be removed by the institution’s primary federal banking
supervisory authority. Federal law also prohibits a management official of a bank or bank holding
company from serving as a management official with an unaffiliated bank or bank holding company
that has offices within a specified geographic area that is related to the location of the bank’s
offices and the asset size of the institutions.
Safety and Soundness Standards.
Federal law imposes upon banks certain non-capital safety and
soundness standards. The federal banking agencies issued joint guidelines for safe and sound
banking operations. These standards cover internal controls, information systems, internal audit
systems, loan documentation, credit underwriting, interest rate risk exposure, earnings asset
growth, compensation and benefits. Additional standards apply to asset quality, earnings and stock
valuation. An institution that fails to meet these standards must develop a plan, acceptable to
its regulators, specifying the steps that the institution will take to meet the standards. Failure
to submit or implement such a plan may subject the institution to regulatory sanctions.
Consumer Protection Laws and Regulations
The banking regulatory authorities have increased their attention in recent years to compliance
with the consumer protection laws and their implementing regulations. Examination and enforcement
have become more intense in nature, and insured institutions have been advised to monitor carefully
compliance with such laws and regulations. The bank is subject to many federal consumer protection
statutes and regulations, some of which are discussed below. The Dodd-Frank Act created the
Consumer Financial Protection Bureau (“Bureau”), which will obtain rulemaking and oversight
authority of the federal consumer financial protection laws. The Bureau is expected to have
regulatory authority transferred to it in July 2011.
Community Reinvestment Act.
The Community Reinvestment Act (“CRA”) and its implementing
regulations are intended to encourage insured depository institutions, while operating safely and
soundly, to help meet the credit needs of their communities. The CRA specifically directs the
federal regulatory agencies, when examining insured depository institutions, to assess a bank’s
record of helping meet the credit needs of its entire community, including low- and moderate-income
neighborhoods, consistent with safe and sound banking practices. The CRA further requires the
agencies to take a financial institution’s record of meeting its community credit needs into
account when evaluating applications for, among other things, domestic branches, mergers or
acquisitions, or holding company formations. A CRA
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rating other than “outstanding” or
“satisfactory” can substantially delay or block a transaction. Based upon their most recent CRA
examinations, Bank of Nevada received a rating of “outstanding”; First Independent Bank of Nevada
received a rating of “outstanding”; Alliance Bank of Arizona received a rating of “satisfactory”;
Torrey Pines Bank received a rating of “needs to improve”; and Alta Alliance Bank received a rating
of “satisfactory.”
Equal Credit Opportunity Act.
The Equal Credit Opportunity Act generally prohibits discrimination
in any credit transaction, whether for consumer or business purposes, on the basis of race, color,
religion, national origin, sex, marital status, age (except in limited circumstances), receipt of
income from public assistance programs, or good faith exercise of any rights under the Consumer
Credit Protection Act.
Truth in Lending Act.
The Truth in Lending Act (“TILA”) is designed to ensure that credit terms
are disclosed in a meaningful way so that consumers may compare credit terms more readily and
knowledgeably. As a result of TILA, all creditors must use the same credit terminology to express
rates and payments, including the annual percentage rate, the finance charge, the amount financed,
the total of payments and the payment schedule, among other things.
Fair Housing Act.
The Fair Housing Act (“FHA”) regulates many practices, and makes it unlawful for
any lender to discriminate in its housing-related lending activities against any person because of
race, color, religion, national origin, sex, handicap or familial status. A number of lending
practices have been found by the courts to be illegal under the FHA, including some practices that
are not specifically mentioned in the FHA.
Home Mortgage Disclosure Act.
The Home Mortgage Disclosure Act (“HMDA”) grew out of public concern
over credit shortages in certain urban neighborhoods and provides public information that is
intended to help to show whether financial institutions are serving the housing credit needs of the
neighborhoods and communities in which they are located. The HMDA also includes a “fair lending”
aspect that requires the collection and disclosure of data about
applicant and borrower characteristics as a way of identifying possible discriminatory lending
patterns and enforcing anti-discrimination statutes. Beginning with data reported for 2005, the
amount of information that financial institutions collect and disclose concerning applicants and
borrowers has expanded, which has increased the attention that HMDA data receives from state and
federal banking supervisory authorities, community-oriented organizations and the general public.
Real Estate Settlement Procedures Act.
The Real Estate Settlement Procedures Act (“RESPA”)
requires lenders to provide borrowers with disclosures regarding the nature and cost of real estate
settlements. RESPA also prohibits certain abusive practices, such as kickbacks and fee-splitting
without providing settlement services.
Penalties under the above laws may include fines, reimbursements and other penalties. Due to
heightened regulatory concern related to compliance with these laws generally, Western Alliance and
its subsidiary banks may incur additional compliance costs or be required to expend additional
funds for investments in its local community.
Predatory Lending
“Predatory lending” is a far-reaching concept and potentially covers a broad range of behavior. As
such, it does not lend itself to a concise or comprehensive definition. However, predatory lending
typically involves one or more of the following elements:
| • |
making unaffordable loans based on the borrower’s assets rather than the borrower’s
ability to repay an obligation;
|
||
| • |
inducing a borrower to refinance a loan repeatedly in order to charge high points and
fees each time the loan is refinanced, or loan flipping; and
|
||
| • |
engaging in fraud or deception to conceal the true nature of the loan obligation from an
unsuspecting or unsophisticated borrower.
|
The Home Ownership Equity and Protection Act of 1994 (“HOEPA”) and regulations adopted by the
Federal Reserve thereunder require certain disclosures and extend additional protection to
borrowers in closed end consumer credit transactions, such as home repairs or renovation, that are
secured by a mortgage on the borrower’s primary residence. The HOEPA disclosures and protections
are applicable to such “high cost” transactions with any of the following features:
| • |
interest rates for first lien mortgage loans more than eight percentage points above the
yield on U.S. Treasury securities having a comparable maturity;
|
||
| • |
interest rates for subordinate lien mortgage loans more than 10 percentage points above
the yield on U.S. Treasury securities having a comparable maturity; or
|
||
| • |
total points and fees paid in connection with the credit transaction exceed the greater
of either 8% of the loan amount or a specified dollar amount that is inflation-adjusted
each year.
|
HOEPA prohibits or restricts numerous credit practices including loan flipping by the same lender
or loan servicer within a year of the loan being refinanced. Lenders are presumed to have violated
the law unless they document that the
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borrower has the ability to repay. Lenders that violate the
rules face cancellation of loans and penalties equal to the finance charges paid. HOEPA also
regulates so-called “reverse mortgages.”
In December 2007, the Federal Reserve issued proposed rules under HOEPA in order to address recent
practices in the subprime mortgage market. The proposed rules would require disclosures and
additional protections or prohibitions on certain practices connected with “higher-priced
mortgages,” which the proposed rules define as closed-end mortgage loans that are secured by a
consumer’s principal dwelling that carry interest rates that exceed the yield on comparable U.S.
Treasury securities by at least 3 percentage points for first-lien loans, or 5 percentage points
for subordinate-lien loans.
Privacy
Under the Graham Leach Bliley Act (“GLBA”), all financial institutions, including Western Alliance,
its bank subsidiaries and certain of their non-banking affiliates and subsidiaries are required to
establish policies and procedures to restrict the sharing of non-public customer data with
non-affiliated parties at the customer’s request and to protect customer data from unauthorized
access. In addition, the Fair Credit Reporting Act of 1971 (“FCRA”) includes many provisions
concerning national credit reporting standards and permits consumers, including customers of
Western Alliance’s subsidiary banks, to opt out of information-sharing for marketing purposes among
affiliated companies. The Fair and Accurate Credit Transactions Act of 2004 amended certain
provisions of the FRCA and requires banks and other financial institutions to notify their
customers if they report negative information about them to a credit bureau or if they are granted
credit on terms less favorable than those generally available. The Federal Reserve and the Federal
Trade Commission have extensive rulemaking authority under the FCRA, and Western Alliance and its
subsidiary banks are subject to these provisions. Western Alliance has developed policies and
procedures for itself and its subsidiaries to maintain compliance
and believes it is in compliance with all privacy, information sharing and notification provisions
of the GLBA Act and the FCRA.
Under California law, every business that owns or licenses personal information about a California
resident must maintain reasonable security procedures and policies to protect that information.
All customer records that contain personal information and that are no longer required to be
retained must be destroyed. Any person that conducts business in California maintains customers’
personal information in unencrypted computer records and experiences a breach of security with
regard to those records must promptly disclose the breach to all California residents whose
personal information was or is reasonably believed to have been acquired by unauthorized persons as
a result of such breach. Any person who maintains computerized personal data for others and
experiences a breach of security must promptly inform the owner or licensee of the breach. A
business may not provide personal information of its customers to third parties for direct mailing
purposes unless the customer “opts in” to such information sharing. A business that fails to
provide this privilege to its customers must report the uses made of its customers’ data upon a
customer’s request.
Compliance
In order to assure that Western Alliance and its subsidiary banks are in compliance with the laws
and regulations that apply to their operations, including those summarized herein, Western Alliance
and each of its subsidiary banks employs a compliance officer. Western Alliance is regularly
reviewed by the Federal Reserve and the subsidiary banks are regularly reviewed by their respective
state and federal banking agencies, as part of which their compliance with applicable laws and
regulations is assessed.
Corporate Governance and Accounting Legislation
Sarbanes-Oxley Act of 2003.
The Sarbanes-Oxley Act (“SOX”) was adopted for the stated purpose to
increase corporate responsibility, enhance penalties for accounting and auditing improprieties at
publicly traded companies, and protect investors by improving the accuracy and reliability of
corporate disclosures pursuant to the securities laws. It applies generally to all companies that
file or are required to file periodic reports with the SEC under the Exchange Act, which includes
Western Alliance. Under SOX, the SEC and securities exchanges adopted extensive additional
disclosure, corporate governance and other related rules. Among its provisions, SOX subjects
bonuses issued to top executives to disgorgement if a subsequent restatement of a company’s
financial statements was due to corporate misconduct, prohibits an officer or director from
misleading or coercing an auditor, prohibits insider trades during pension fund “blackout periods,”
imposes new criminal penalties for fraud and other wrongful acts and extends the period during
which certain securities fraud lawsuits can be brought against a company or its officers.
Anti-Money Laundering and Anti-Terrorism Legislation
Congress enacted the Bank Secrecy Act of 1970 (the “BSA”) to require financial institutions,
including Western Alliance and its subsidiary banks, to maintain certain records and to report
certain transactions to prevent such institutions from being used to hide money derived from
criminal activity and tax evasion. The BSA establishes, among other things: (a) record keeping
requirements to assist government enforcement agencies in tracing financial transactions and flow
of funds; (b) reporting requirements for Suspicious Activity Reports and Currency Transaction
Reports to assist government enforcement agencies in detecting patterns of criminal activity; (c)
enforcement provisions authorizing criminal and civil
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penalties for illegal activities and
violations of the BSA and its implementing regulations; and (d) safe harbor provisions that protect
financial institutions from civil liability for their cooperative efforts.
Title III of the USA PATRIOT Act of 2001 (the “USA PATRIOT Act”) amended the BSA and incorporates
anti-terrorist financing provisions into the requirements of the BSA and its implementing
regulations. Among other things, the USA PATRIOT Act requires all financial institutions,
including Western Alliance, its subsidiary banks and several of their non-banking affiliates and
subsidiaries, to institute and maintain a risk-based anti-money laundering compliance program that
includes a customer identification program, provides for information sharing with law enforcement
and between certain financial institutions by means of an exemption from the privacy provisions of
the GLB Act, prohibits U.S. banks and broker-dealers from maintaining accounts with foreign “shell”
banks, establishes due diligence and enhanced due diligence requirements for certain foreign
correspondent banking and foreign private banking accounts and imposes additional record keeping
requirements for certain correspondent banking arrangements. The USA PATRIOT Act also grants broad
authority to the Secretary of the Treasury to take actions to combat money laundering, and federal
bank regulators are required to evaluate the effectiveness of an applicant in combating money
laundering in determining whether to approve any application submitted by a financial institution.
Western Alliance and its affiliates have adopted policies, procedures and controls to comply with
the BSA and the USA PATRIOT Act, and they engage in very few transactions of any kind with foreign
financial institutions or foreign persons.
The Treasury’s Office of Foreign Asset Control (“OFAC”) administers and enforces economic and trade
sanctions against targeted foreign countries, entities and individuals based on U.S. foreign policy
and national security goals. As a result, financial institutions, including Western Alliance, its
subsidiary banks and several of their non-banking affiliates and subsidiaries, must scrutinize
transactions to ensure that they do not represent obligations of, or ownership interests in,
entities owned or controlled by sanctioned targets. In addition, Western Alliance, its subsidiary
banks and several of their non-banking affiliates and subsidiaries restrict transactions with
certain targeted countries except as permitted by OFAC.
Regulatory Reform
As noted throughout, the requirements of the Dodd-Frank Act call for a number of rulemakings,
studies and regulatory guidance from federal regulators. Additionally, some rulemaking, regulatory
and oversight functions currently exercised by the Federal banking agencies, such as the Federal
Reserve and the FDIC, will be transferred to the Bureau, which will be tasked with rulemaking and,
in some cases, oversight and examination for consumer financial protection laws. The Company and
its subsidiary banks continue to monitor this ongoing regulatory process to determine the level of
impact that it will have on its operations and activities.
Although the Dodd-Frank Act contains some specific timelines for the Federal regulatory agencies to
follow, it remains unclear whether the agencies will be able to meet these deadlines and when rules
will be proposed and finalized. While our current assessment is that the Dodd-Frank Act and the
implementing regulations will not have a material effect on the Company, given the uncertainty
associated with the manner in which the provisions of the Dodd-Frank Act will be implemented, the
full extent of the impact such requirements will have on our operations is unclear. The changes
resulting from the Dodd-Frank Act may impact the profitability of our business activities, require
changes to certain of our business practices, impose upon us more stringent capital, liquidity and
leverage requirements or otherwise adversely affect our business. These changes may also require
us to invest significant management attention and resources to evaluate and make any changes
necessary to comply with new statutory and regulatory requirements. Failure to comply with the new
requirements would negatively impact our results of operations and financial condition. While we
cannot predict what effect any presently contemplated or future changes in the laws or regulations
or their interpretations would have on us, these changes could be materially adverse to our
investors.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a discussion of quantitative and qualitative disclosures about market risk, please see
Item 7 “
Management’s Discussion and Analysis of
Financial Condition and results of Operations –
Quantitative and Qualitative Disclosure about Market Risk”
on page 51.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements and supplementary data included in this annual report
begin at page 70 immediately following the index to consolidated financial statements page to this
annual report.
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McGladrey & Pullen, LLP
Certified Public Accountants
Certified Public Accountants
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Western Alliance Bancorporation
Western Alliance Bancorporation
We have audited the accompanying consolidated balance sheets of Western Alliance Bancorporation and
Subsidiaries (collectively referred to herein as the Company) as of December 31, 2010 and 2009, and
the related consolidated statements of operations, comprehensive income (loss), stockholders’
equity, and cash flows for each of the three years in the period ended December 31, 2010. These
financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of December 31, 2010 and 2009, and the
results of their operations and their cash flows for each of the three years in the period ended
December 31, 2010, in conformity with U.S. generally accepted accounting principles.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the Company’s internal control over financial reporting as of December 31,
2010, based on criteria established in
Internal Control — Integrated Framework
issued by the
Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 4,
2011 expressed an unqualified opinion on the effectiveness of the Company’s internal control over
financial reporting.
/s/ McGLADREY & PULLEN, LLP
Las Vegas, Nevada
March 4, 2011
March 4, 2011
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| PAGE | ||||
|
|
||||
| 70 | ||||
|
|
||||
| 71 | ||||
|
|
||||
| 72 | ||||
|
|
||||
| 73 | ||||
|
|
||||
| 75 | ||||
|
|
||||
| 76 | ||||
|
|
||||
| 77 | ||||
|
|
||||
| 79 | ||||
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WESTERN
ALLIANCE BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| December 31, | ||||||||
| 2010 | 2009 | |||||||
| (in thousands, except per share | ||||||||
| amounts) | ||||||||
|
Assets:
|
||||||||
|
Cash and due from banks
|
$ | 87,984 | $ | 116,841 | ||||
|
Federal funds sold and other
|
918 | 3,473 | ||||||
|
Interest-bearing demand deposits in other financial institutions
|
127,844 | 276,516 | ||||||
|
|
||||||||
|
Cash and cash equivalents
|
216,746 | 396,830 | ||||||
|
Money market investments
|
37,733 | 54,029 | ||||||
|
Investment securities - measured, at fair value
|
14,301 | 58,670 | ||||||
|
Investment securities - available-for-sale, at fair value; amortized cost of
$1,187,608 at December 31, 2010 and $740,783 at December 31, 2009 |
1,172,913 | 744,598 | ||||||
|
Investment securities - held-to-maturity, at amortized cost; fair value of
$47,996 at December 31, 2010 and $7,482 at December 31, 2009 |
48,151 | 7,482 | ||||||
|
Investments in restricted stock, at cost
|
36,877 | 41,378 | ||||||
|
Loans:
|
||||||||
|
Held for investment, net of deferred fees
|
4,240,542 | 4,079,639 | ||||||
|
Less: allowance for credit losses
|
(110,699 | ) | (108,623 | ) | ||||
|
|
||||||||
|
Total loans
|
4,129,843 | 3,971,016 | ||||||
|
Premises and equipment, net
|
114,372 | 125,883 | ||||||
|
Goodwill and other intangible assets
|
39,291 | 43,121 | ||||||
|
Other assets acquired through foreclosure, net
|
107,655 | 83,347 | ||||||
|
Bank owned life insurance
|
129,808 | 92,510 | ||||||
|
Deferred tax assets, net
|
79,860 | 68,957 | ||||||
|
Prepaid expenses
|
24,741 | 35,323 | ||||||
|
Other assets
|
41,501 | 30,135 | ||||||
|
Discontinued operations, assets held for sale
|
91 | — | ||||||
|
|
||||||||
|
Total assets
|
$ | 6,193,883 | $ | 5,753,279 | ||||
|
|
||||||||
|
Liabilities:
|
||||||||
|
Deposits:
|
||||||||
|
Non-interest-bearing demand
|
$ | 1,443,251 | $ | 1,157,013 | ||||
|
Interest-bearing
|
3,895,190 | 3,565,089 | ||||||
|
|
||||||||
|
Total deposits
|
5,338,441 | 4,722,102 | ||||||
|
Customer repurchase agreements
|
109,409 | 223,269 | ||||||
|
Other borrowings
|
72,964 | 29,352 | ||||||
|
Junior subordinated debt, at fair value
|
43,034 | 42,438 | ||||||
|
Subordinated debt
|
— | 60,000 | ||||||
|
Other liabilities
|
27,861 | 100,393 | ||||||
|
|
||||||||
|
Total liabilities
|
5,591,709 | 5,177,554 | ||||||
|
|
||||||||
|
|
||||||||
|
Commitments and contingencies (Note 12)
|
||||||||
|
|
||||||||
|
Stockholders’ equity:
|
||||||||
|
Preferred stock — par value $.0001 and liquidation value per share
of $1,000; 20,000,000 authorized; 140,000 issued and outstanding |
130,827 | 127,945 | ||||||
|
Common stock — par value $.0001; 200,000,000 authorized;
81,668,565 shares issued and outstanding at December 31,
2010 and 72,503,902 at December 31, 2009
|
8 | 7 | ||||||
|
Surplus
|
739,561 | 684,092 | ||||||
|
Retained deficit
|
(258,800 | ) | (241,724 | ) | ||||
|
Accumulated other comprehensive income (loss)
|
(9,422 | ) | 5,405 | |||||
|
|
||||||||
|
Total stockholders’ equity
|
602,174 | 575,725 | ||||||
|
|
||||||||
|
Total liabilities and stockholders’ equity
|
$ | 6,193,883 | $ | 5,753,279 | ||||
|
|
||||||||
See the accompanying notes.
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WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (in thousands except per share amounts) | ||||||||||||
|
Interest income:
|
||||||||||||
|
Loans, including fees
|
$ | 255,626 | $ | 248,098 | $ | 257,528 | ||||||
|
Investment securities - taxable
|
22,818 | 24,318 | 32,017 | |||||||||
|
Investment securities - non-taxable
|
122 | 404 | 747 | |||||||||
|
Dividends - taxable
|
617 | 680 | 2,828 | |||||||||
|
Dividends - non-taxable
|
1,359 | 1,287 | 2,149 | |||||||||
|
Other
|
1,271 | 1,236 | 322 | |||||||||
|
|
||||||||||||
|
Total interest income
|
281,813 | 276,023 | 295,591 | |||||||||
|
|
||||||||||||
|
Interest expense:
|
||||||||||||
|
Deposits
|
41,329 | 61,905 | 69,136 | |||||||||
|
Customer repurchase agreements
|
538 | 3,629 | 5,999 | |||||||||
|
Other borrowings
|
3,745 | 3,234 | 18,291 | |||||||||
|
Junior subordinated and subordinated debt
|
3,648 | 4,966 | 7,257 | |||||||||
|
|
||||||||||||
|
Total interest expense
|
49,260 | 73,734 | 100,683 | |||||||||
|
|
||||||||||||
|
Net interest income
|
232,553 | 202,289 | 194,908 | |||||||||
|
Provision for credit losses
|
93,211 | 149,099 | 68,189 | |||||||||
|
|
||||||||||||
|
Net interest income after provision for credit losses
|
139,342 | 53,190 | 126,719 | |||||||||
|
|
||||||||||||
|
Non-interest income:
|
||||||||||||
|
Securities impairment charges, net
|
(1,186 | ) | (45,831 | ) | (156,832 | ) | ||||||
|
Portion of impairment charges recognized in other
comprehensive loss (before taxes) |
— | 2,047 | — | |||||||||
|
|
||||||||||||
|
Net securities impairment charges recognized in earnings
|
(1,186 | ) | (43,784 | ) | (156,832 | ) | ||||||
|
Gain on sales of securities, net
|
19,757 | 16,100 | 138 | |||||||||
|
Service charges and fees
|
8,969 | 8,172 | 6,135 | |||||||||
|
Trust and investment advisory fees
|
4,003 | 9,287 | 10,489 | |||||||||
|
Operating lease income
|
3,793 | 4,066 | 3,659 | |||||||||
|
Other fee revenue
|
3,324 | 2,754 | 3,918 | |||||||||
|
Income from bank owned life insurance
|
3,299 | 2,193 | 2,639 | |||||||||
|
Gain on extinguishment of debt
|
3,000 | — | — | |||||||||
|
Mark to market (losses) gains, net
|
(369 | ) | 3,631 | 9,033 | ||||||||
|
Derivative (losses) gains, net
|
(269 | ) | (263 | ) | 1,607 | |||||||
|
Other
|
2,515 | 2,279 | 1,956 | |||||||||
|
|
||||||||||||
|
Total non-interest income (loss)
|
46,836 | 4,435 | (117,258 | ) | ||||||||
|
|
||||||||||||
|
Non-interest expense:
|
||||||||||||
|
Salaries and employee benefits
|
86,586 | 91,504 | 84,347 | |||||||||
|
Occupancy expense, net
|
19,580 | 20,802 | 20,727 | |||||||||
|
Net loss on sales/valuations of repossessed assets and bank
premises, net
|
28,826 | 21,274 | 679 | |||||||||
|
Goodwill impairment
|
— | 49,671 | 138,844 | |||||||||
|
Insurance
|
15,475 | 12,525 | 4,089 | |||||||||
|
Loan and repossessed asset expense
|
8,076 | 6,363 | 2,601 | |||||||||
|
Customer service
|
4,256 | 4,290 | 2,620 | |||||||||
|
Legal, professional and director fees
|
7,591 | 8,973 | 5,221 | |||||||||
|
Marketing
|
4,061 | 4,915 | 5,409 | |||||||||
|
Data processing
|
3,374 | 4,274 | 5,755 | |||||||||
|
Intangible amortization
|
3,604 | 3,781 | 3,631 | |||||||||
|
Operating lease depreciation
|
2,506 | 3,229 | 2,886 | |||||||||
|
Merger expenses
|
1,651 | — | — | |||||||||
|
Other
|
11,172 | 11,376 | 12,158 | |||||||||
|
|
||||||||||||
|
Total non-interest expense
|
196,758 | 242,977 | 288,967 | |||||||||
|
|
||||||||||||
|
Loss from continuing operations before provision income taxes
|
(10,580 | ) | (185,352 | ) | (279,506 | ) | ||||||
|
Benefit for income taxes
|
(6,410 | ) | (38,453 | ) | (49,496 | ) | ||||||
|
|
||||||||||||
|
Loss from continuing operations
|
(4,170 | ) | (146,899 | ) | (230,010 | ) | ||||||
|
Loss from discontinued operations, net of tax benefit
|
(3,025 | ) | (4,507 | ) | (6,450 | ) | ||||||
|
|
||||||||||||
|
Net loss
|
(7,195 | ) | (151,406 | ) | (236,460 | ) | ||||||
|
Dividends and accretion on preferred stock
|
9,882 | 9,742 | 1,081 | |||||||||
|
|
||||||||||||
|
Net loss available to common shareholders
|
$ | (17,077 | ) | $ | (161,148 | ) | $ | (237,541 | ) | |||
|
|
||||||||||||
73
Table of Contents
WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(continued)
CONSOLIDATED STATEMENTS OF OPERATIONS
(continued)
|
Loss per share - basic and diluted
|
||||||||||||
|
Continuing operations
|
$ | (0.19 | ) | $ | (2.66 | ) | $ | (7.08 | ) | |||
|
Discontinued
|
(0.04 | ) | (0.08 | ) | (0.20 | ) | ||||||
|
|
||||||||||||
|
|
$ | (0.23 | ) | $ | (2.74 | ) | $ | (7.27 | ) | |||
|
Average number of common shares - basic
|
75,083 | 58,836 | 32,652 | |||||||||
|
Average number of common shares - diluted
|
75,083 | 58,836 | 32,652 | |||||||||
|
Dividends declared per common share
|
$ | — | $ | — | $ | — | ||||||
See the accompanying notes.
74
Table of Contents
WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (in thousands) | ||||||||||||
|
Net loss
|
$ | (7,195 | ) | $ | (151,406 | ) | $ | (236,460 | ) | |||
|
|
||||||||||||
|
Other comprehensive (loss)/ income, net:
|
||||||||||||
|
Unrealized (loss)/ gain on securities AFS, net
|
(2,865 | ) | 13,422 | (99,198 | ) | |||||||
|
Impairment loss on securities, net
|
736 | 32,858 | 99,541 | |||||||||
|
Realized loss/ (gain) on sale of securities AFS included in income, net
|
(12,698 | ) | (7,536 | ) | (90 | ) | ||||||
|
|
||||||||||||
|
Net other comprehensive (loss)/ income
|
(14,827 | ) | 38,744 | 253 | ||||||||
|
|
||||||||||||
|
Comprehensive (loss)/ income
|
$ | (22,022 | ) | $ | (112,662 | ) | $ | (236,207 | ) | |||
|
|
||||||||||||
Amount of impairment losses reclassified out of accumulated other comprehensive income into
earnings for the period was $1.2 million in 2010, $44.1 million in 2009 and $156.7 million in 2008.
The income tax benefit related to these losses were $0.5 million, $11.2 million, and $57.2 million
in 2010, 2009, and 2008, respectively.
See the accompanying notes.
75
Table of Contents
WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
| Accumulated | ||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Other | Retained | Total | ||||||||||||||||||||||||||||
| Comprehensive | Earnings | Shareholders’ | ||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Surplus | Income (Loss) | (Deficit) | Equity | |||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||||
|
Balance, December 31, 2007:
|
— | $ | — | 30,157 | $ | 3 | $ | 377,973 | $ | (28,744 | ) | $ | 152,286 | $ | 501,518 | |||||||||||||||||
|
Net loss
|
— | — | — | — | — | — | (236,460 | ) | (236,460 | ) | ||||||||||||||||||||||
|
Adoption of ASC 715
|
— | — | — | — | — | — | (169 | ) | (169 | ) | ||||||||||||||||||||||
|
Exercise of stock options, net of tax of $115
|
— | — | 183 | — | 1,404 | — | — | 1,404 | ||||||||||||||||||||||||
|
Repuchase shares, net
|
— | — | (20 | ) | — | (356 | ) | — | — | (356 | ) | |||||||||||||||||||||
|
Stock issued in private placements (1)
|
— | — | 8,146 | 1 | 80,075 | — | — | 80,076 | ||||||||||||||||||||||||
|
Stock-based compensation
|
— | — | 135 | — | 10,059 | — | — | 10,059 | ||||||||||||||||||||||||
|
Issuance of
preferred stock and
common stock warrants |
140 | 124,900 | — | — | 15,050 | — | — | 139,950 | ||||||||||||||||||||||||
|
Accretion on preferred stock discount
|
— | 303 | — | — | — | — | (303 | ) | — | |||||||||||||||||||||||
|
Dividends on preferred stock
|
— | — | — | — | — | — | (778 | ) | (778 | ) | ||||||||||||||||||||||
|
Other comprehensive income, net
|
— | — | — | — | — | 253 | — | 253 | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Balance, December 31, 2008
|
140 | 125,203 | 38,601 | 4 | 484,205 | (28,491 | ) | (85,424 | ) | 495,497 | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Adoption of ASC 320
|
— | — | — | — | — | (4,848 | ) | 4,848 | — | |||||||||||||||||||||||
|
Net loss
|
— | — | — | — | — | — | (151,406 | ) | (151,406 | ) | ||||||||||||||||||||||
|
Issuance of common stock (2)
|
— | — | 33,441 | 3 | 191,056 | — | — | 191,059 | ||||||||||||||||||||||||
|
Exercise of stock options
|
— | — | 28 | — | 78 | — | — | 78 | ||||||||||||||||||||||||
|
Stock-based compensation
|
— | — | 247 | — | 3,283 | — | — | 3,283 | ||||||||||||||||||||||||
|
Restricted stock grants, net
|
— | — | 187 | — | 5,470 | — | — | 5,470 | ||||||||||||||||||||||||
|
Accretion on preferred stock discount
|
— | 2,742 | — | — | — | — | (2,742 | ) | — | |||||||||||||||||||||||
|
Dividends on preferred stock
|
— | — | — | — | — | — | (7,000 | ) | (7,000 | ) | ||||||||||||||||||||||
|
Other comprehensive income, net
|
— | — | — | — | — | 38,744 | — | 38,744 | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Balance, December 31, 2009
|
140 | 127,945 | 72,504 | 7 | 684,092 | 5,405 | (241,724 | ) | 575,725 | |||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Net loss
|
— | — | — | — | — | — | (7,195 | ) | (7,195 | ) | ||||||||||||||||||||||
|
Exercise of stock options
|
— | — | 30 | — | 164 | — | — | 164 | ||||||||||||||||||||||||
|
Exercise of common stock warrants
|
— | — | 162 | — | 195 | — | — | 195 | ||||||||||||||||||||||||
|
Issuance of common stock, net (3)
|
— | — | 8,050 | 1 | 47,573 | — | — | 47,574 | ||||||||||||||||||||||||
|
Stock-based compensation
|
— | — | 276 | — | 3,126 | — | — | 3,126 | ||||||||||||||||||||||||
|
Restricted stock grants, net
|
— | — | 647 | — | 4,411 | — | — | 4,411 | ||||||||||||||||||||||||
|
Dividends on preferred stock
|
— | — | — | — | — | — | (7,000 | ) | (7,000 | ) | ||||||||||||||||||||||
|
Accretion on preferred stock discount
|
— | 2,882 | — | — | — | — | (2,882 | ) | — | |||||||||||||||||||||||
|
Other comprehensive loss, net
|
— | — | — | — | — | (14,827 | ) | — | (14,827 | ) | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Balance, December 31, 2010
|
140 | $ | 130,827 | 81,669 | $ | 8 | $ | 739,561 | $ | (9,422 | ) | $ | (258,800 | ) | $ | 602,174 | ||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
(1) Net of offering costs of $139
(2) Net of offering costs of $9,582
(3) Net of offering costs of $2,738
(2) Net of offering costs of $9,582
(3) Net of offering costs of $2,738
See the accompanying notes.
76
Table of Contents
WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (in thousands) | ||||||||||||
|
Cash flows from operating activities:
|
||||||||||||
|
Net Loss
|
$ | (7,195 | ) | $ | (151,406 | ) | $ | (236,460 | ) | |||
|
Adjustments to reconcile net loss
to cash provided by operating activities:
|
||||||||||||
|
Provision for credit losses
|
93,211 | 149,099 | 68,189 | |||||||||
|
Depreciation and amortization
|
14,091 | 15,489 | 12,873 | |||||||||
|
Stock-based compensation
|
7,539 | 8,753 | 10,059 | |||||||||
|
Excess tax benefit of stock-based compensation
|
— | — | (23 | ) | ||||||||
|
Deferred income taxes and income taxes receivable
|
(7,592 | ) | (46,300 | ) | (11,000 | ) | ||||||
|
Net amortization of discounts and premiums for investment securities
|
6,309 | 1,664 | (364 | ) | ||||||||
|
Goodwill impairment
|
— | 49,671 | 138,844 | |||||||||
|
Securities impairment
|
1,186 | 43,784 | 156,832 | |||||||||
|
(Gains)/Losses on:
|
||||||||||||
|
Sales of securities, AFS
|
(19,757 | ) | (16,100 | ) | (138 | ) | ||||||
|
Derivatives
|
269 | 263 | (1,607 | ) | ||||||||
|
Sale of repossessed assets, net
|
29,224 | 21,274 | 679 | |||||||||
|
Sale of premises and equipment, net
|
(398 | ) | (112 | ) | (32 | ) | ||||||
|
Sale of loans, net
|
(16 | ) | (328 | ) | (148 | ) | ||||||
|
Sale of subsidiary, net
|
(568 | ) | (54 | ) | — | |||||||
|
Extinguishment of debt
|
(3,000 | ) | — | — | ||||||||
|
Changes in:
|
||||||||||||
|
Other assets
|
(40,994 | ) | (63,571 | ) | (58,379 | ) | ||||||
|
Other liabilities
|
(72,411 | ) | 66,555 | 7,978 | ||||||||
|
Fair value of assets and liabilities measured at fair value
|
369 | (3,631 | ) | (9,033 | ) | |||||||
|
Servicing rights, net
|
35 | 37 | 13 | |||||||||
|
Other, net
|
— | (332 | ) | 2,720 | ||||||||
|
|
||||||||||||
|
Net cash provided by operating activities
|
300 | 74,755 | 81,003 | |||||||||
|
|
||||||||||||
|
Cash flows from investing activities:
|
||||||||||||
|
Proceeds from loan sales
|
— | 13,242 | — | |||||||||
|
Proceeds from sale of securities measured at fair value
|
29,415 | 22,419 | 101,232 | |||||||||
|
Principal pay downs and maturities of securities measured at fair value
|
15,609 | 39,664 | 38,734 | |||||||||
|
Purchases of securities measured at fair value
|
— | — | (24,266 | ) | ||||||||
|
Proceeds from sale of available-for-sale securities
|
492,159 | 88,489 | 19,177 | |||||||||
|
Principal pay downs and maturities of available-for-sale securities
|
867,667 | 117,757 | 62,341 | |||||||||
|
Purchase of available-for-sale securities
|
(1,790,489 | ) | (503,285 | ) | (194,501 | ) | ||||||
|
Purchases of securities held-to-maturity
|
(45,000 | ) | — | — | ||||||||
|
Proceeds from maturities of securities held-to-maturity
|
3,686 | 495 | 2,439 | |||||||||
|
Loan originations and principal collections, net
|
(339,331 | ) | (112,143 | ) | (505,369 | ) | ||||||
|
Investment in money market
|
16,296 | (54,029 | ) | — | ||||||||
|
Liquidation (purchase) of restricted stock
|
4,501 | (1,174 | ) | (14,004 | ) | |||||||
|
Sale and purchase of premises and equipment, net
|
1,422 | 4,951 | (6,795 | ) | ||||||||
|
Proceeds from sale of other real estate owned, net
|
33,777 | 15,418 | — | |||||||||
|
Other, net
|
— | (46 | ) | 256 | ||||||||
|
|
||||||||||||
|
Net cash (used) in investing activities
|
(710,288 | ) | (368,242 | ) | (520,756 | ) | ||||||
|
|
||||||||||||
77
Table of Contents
WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (in thousands) | ||||||||||||
|
Cash flows from financing activities:
|
||||||||||||
|
Net increase in deposits
|
616,339 | 938,116 | 105,344 | |||||||||
|
Deposits purchased from the FDIC
|
— | 131,720 | — | |||||||||
|
Net increase/ (decrease) in borrowings
|
(127,368 | ) | (703,986 | ) | 137,660 | |||||||
|
Proceeds from issuance of common stock options and stock warrants
|
359 | 78 | 1,381 | |||||||||
|
Payments to repurchase common stock
|
— | — | (356 | ) | ||||||||
|
Excess tax benefit of stock-based compensation
|
— | — | 23 | |||||||||
|
Proceeds from issuance stock, net
|
47,574 | 191,268 | 220,026 | |||||||||
|
Cash dividends paid on preferred stock
|
(7,000 | ) | (6,833 | ) | — | |||||||
|
|
||||||||||||
|
Net cash provided by financing activities
|
529,904 | 550,363 | 464,078 | |||||||||
|
|
||||||||||||
|
Net increase/ (decrease) in cash and cash equivalents
|
(180,084 | ) | 256,876 | 24,325 | ||||||||
|
Cash and cash equivalents at beginning of year
|
396,830 | 139,954 | 115,629 | |||||||||
|
|
||||||||||||
|
Cash and cash equivalents at end of year
|
$ | 216,746 | $ | 396,830 | $ | 139,954 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Supplemental disclosure:
|
||||||||||||
|
Cash paid during the period for:
|
||||||||||||
|
Interest
|
$ | 47,354 | $ | 73,851 | $ | 101,974 | ||||||
|
Income taxes
|
— | (47,249 | ) | 7,020 | ||||||||
|
Non-cash investing and financing activity:
|
||||||||||||
|
Transfers to other assets acquired through foreclosure, net
|
87,310 | 68,802 | 25,485 | |||||||||
|
Change in unrealized holding loss on AFS securities, net of tax
|
(15,489 | ) | 34,558 | 254 | ||||||||
|
Change in OTTI on HTM securities, net of tax
|
662 | (662 | ) | — | ||||||||
See the accompanying notes.
78
Table of Contents
WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operation
Western Alliance Bancorporation (“WAL or “the Company”), incorporated in the state of Nevada, is a
bank holding company providing full service banking and related services to locally owned
businesses, professional firms, real estate developers and investors, local non-profit
organizations, high net worth individuals and other consumers through its three wholly owned
subsidiary banks; Bank of Nevada, operating in Nevada, Western Alliance Bank, operating in Arizona
and Northern Nevada and Torrey Pines Bank, operating in California. As of December 31, 2010, the
Company merged its Alta Alliance Bank subsidiary into its Torrey Pines Bank subsidiary, and its
First Independent Bank of Nevada subsidiary into its Alliance Bank of Arizona subsidiary. As part
of the latter merger, Alliance Bank of Arizona was renamed Western Alliance Bank doing business as
Alliance Bank of Arizona (in Arizona) and First Independent Bank (in Nevada). In addition, its
non-bank subsidiaries, Shine Investment Advisory Services, Inc. and Western Alliance Equipment
Finance, offer an array of financial products and services aimed at satisfying the needs of small
to mid-sized businesses and their proprietors, including financial planning, custody and
investments, and equipment leasing nationwide. These entities are collectively referred to herein
as the Company. The Company divested its wholly owned subsidiary Premier Trust, Inc as of
September 1, 2010.
Basis of Presentation
The accounting and reporting policies of the Company are in accordance with accounting principles
generally accepted in the United States (“GAAP”) and conform to practices within the financial
services industry. The accounts of the Company and its consolidated subsidiaries are included in
these Consolidated Financial Statements. All significant intercompany balances and transactions
have been eliminated.
In June 2009, the Financial Accounting Standards Board (“FASB”) established the FASB Accounting
Standards Codification (“FASB ASC”), as the source of authoritative GAAP recognized by the FASB to
be applied by nongovernmental entities in the preparation of financial statements. Rules and
releases of the United States Securities and Exchange Commission (“SEC”) under authority of federal
securities laws are also sources of authoritative GAAP for SEC registrants. The FASB ASC became
effective for the Company on September 30, 2009 and supersedes all then-existing non-SEC accounting
and reporting standards. All other non-grandfathered non-SEC accounting literature not included in
the FASB ASC became non-authoritative. The FASB ASC does not change or alter GAAP and, therefore,
the adoption of the FASB ASC did not impact the Company’s Consolidated Financial Statements.
Use of estimates in the preparation of financial statements
The preparation of financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates. Material
estimates that are particularly susceptible to significant changes in the near term relate to the
determination of the allowance for credit losses; fair value of other real estate owned;
determination of the valuation allowance related to deferred tax assets; impairment of goodwill and
other intangible assets and other than temporary impairment on securities. Although Management
believes these estimates to be reasonably accurate, actual amounts may differ. In the opinion of
Management, all adjustments considered necessary have been reflected in the financial statements
during their preparation.
Principles of consolidation
WAL has 10 wholly-owned subsidiaries; Bank of Nevada (“BON”), Western Alliance Bank (“WAB”), Torrey
Pines Bank (“TPB”), which are all banking subsidiaries; Western Alliance Equipment Finance, Inc.
(“WAEF”), which provides equipment leasing; and six unconsolidated subsidiaries used as business
trusts in connection with issuance of trust-preferred securities. In addition, WAL maintains an 80
percent interest in Shine Investment Advisory Services Inc. (“Shine”), a registered investment
advisor. WAL divested formerly wholly-owned subsidiary Premier Trust, Inc. as of September 1,
2010.
BON has a wholly-owned Real Estate Investment Trust (“REIT”) that is used to hold certain
commercial real estate loans, residential real estate loans and other loans in a real estate
investment trust. The Company does not have any other entities that should be considered for
consolidation. All significant intercompany balances and transactions have been eliminated in
consolidation.
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Reclassifications
Certain amounts in the consolidated financial statements as of and for the years ended December 31,
2009 and 2008 have been reclassified to conform to the current presentation. The reclassifications
have no effect on net income or stockholders’ equity as previously reported.
Cash and cash equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due
from banks (including cash items in process of clearing) and federal funds sold. Cash flows from
loans originated by the Company and deposits are reported net.
The Company maintains amounts due from banks, which at times may exceed federally insured limits.
The Company has not experienced any losses in such accounts.
Cash reserve requirements
Depository institutions are required by law to maintain reserves against their transaction
deposits. The reserves must be held in cash or with the Federal Reserve Bank (“FRB”). The amount
of the reserve varies by bank as the banks are permitted to meet this requirement by maintaining
the specified amount as an average balance over a two-week period. The total of reserve balances
was approximately $18.4 million and $14.0 million as of December 31, 2010 and 2009, respectively.
Investment securities
Investment securities may be classified as held-to-maturity (“HTM”), available-for-sale (“AFS”) or
trading. The appropriate classification is initially decided at the time of purchase. Securities
classified as held-to-maturity are those debt securities the Company has both the intent and
ability to hold to maturity regardless of changes in market conditions, liquidity needs or general
economic conditions. These securities are carried at amortized cost. The sale of a security within
three months of its maturity date or after at least 85 percent of the principal outstanding has
been collected is considered a maturity for purposes of classification and disclosure.
Securities classified as AFS or trading are reported as an asset on the Consolidated Balance Sheets
at their estimated fair value. As the fair value of AFS securities changes, the changes are
reported net of income tax as an element of other comprehensive income (“OCI”), except for impaired
securities. When AFS securities are sold, the unrealized gain or loss is reclassified from OCI to
non-interest income. The changes in the fair values of trading securities are reported in
non-interest income. Securities classified as AFS are both equity and debt securities the Company
intends to hold for an indefinite period of time, but not necessarily to maturity. Any decision to
sell a security classified as AFS would be based on various factors, including significant
movements in interest rates, changes in the maturity mix of the Company’s assets and liabilities,
liquidity needs, and regulatory capital considerations.
Interest income is recognized based on the coupon rate and increased by accretion of discounts
earned or decreased by the amortization of premiums paid over the contractual life of the security
using the interest method. For mortgage-backed securities, estimates of prepayments are considered
in the constant yield calculations.
In estimating whether there are any other than temporary impairment losses, management considers 1)
the length of time and the extent to which the fair value has been less than amortized cost, 2) the
financial condition and near term prospects of the issuer, 3) the impact of changes in market
interest rates and 4) the intent and ability of the Company to retain its investment for a period
of time sufficient to allow for any anticipated recovery in fair value.
Declines in the fair value of individual debt securities available for sale that are deemed to be
other than temporary are reflected in earnings when identified. The fair value of the debt
security then becomes the new cost basis. For individual debt securities where the Company does
not intend to sell the security and it is not more likely than not that the Company will be
required to sell the security before recovery of its amortized cost basis, the other than temporary
decline in fair value of the debt security related to 1) credit loss is recognized in earnings and
2) market or other factors is recognized in other comprehensive income or loss. Credit loss is
recorded if the present value of cash flows is less than amortized cost. For individual debt
securities where the Company intends to sell the security or more likely than not will not recover
all of its amortized cost, the other than temporary impairment is recognized in earnings equal to
the entire difference between the securities cost basis and its fair value at the balance sheet
date. For individual debt securities that credit loss has been recognized in earnings, interest
accruals and amortization and accretion of premiums and discounts are suspended when the credit
loss is recognized. Interest received after accruals have been suspended is recognized on a cash
basis.
Restricted stock
The Company’s subsidiary banks are members of the Federal Home Loan Bank (“FHLB”) system and
maintain an investment in capital stock of the FHLB based on the borrowing capacity used by each
bank. The Company’s subsidiary banks also maintain an investment in their primary correspondent
bank. These investments are considered equity securities with no actively traded market.
Therefore, the shares are considered restricted investment securities. These investments are
carried at cost, which is equal to the value at which they may be redeemed. The dividend income
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received from the stock is reported in interest income. Our investment in FHLB stock is carried at
cost. We conduct a periodic review and evaluation of our FHLB stock to determine if any impairment
exists.
Derivative financial instruments
All derivatives are recognized on the balance sheet at their fair value, with changes in fair value
reported in current-period earnings. These instruments consist primarily of interest rate swaps.
Certain derivative transactions that meet specified criteria qualify for hedge accounting. The
Company occasionally purchases a financial instrument or originates a loan that contains an
embedded derivative instrument. Upon purchasing the instrument or originating the loan, the
Company assesses whether the economic characteristics of the embedded derivative are clearly and
closely related to the economic characteristics of the remaining component of the financial
instrument (i.e., the host contract) and whether a separate instrument with the same terms as the
embedded instrument would meet the definition of a derivative instrument. When it is determined
that (1) the embedded derivative possesses economic characteristics that are not clearly and
closely related to the economic characteristics of the host contract, and (2) a separate instrument
with the same terms would qualify as a derivative instrument, the embedded derivative is separated
from the host contract and carried at fair value. However, in cases where (1) the host contract is
measured at fair value, with changes in fair value reported in current earnings or (2) the Company
is unable to reliably identify and measure an embedded derivative for separation from its host
contract, the entire contract is carried on the balance sheet at fair value and is not designated
as a hedging instrument.
Loans, interest and fees from loans
The Company generally holds loans for investment and has the intent and ability to hold loans until
their maturity. Therefore, they are reported at book value. Net loans are stated at the amount of
unpaid principal, reduced by unearned loan fees and allowance for credit losses.
Interest income on loans is accrued daily using the effective interest method and recognized over
the terms of the loans. Loan fees collected for the origination of loans less direct loan
origination costs (net deferred loan fees) are amortized over the contractual life of the loan
through interest income. If the loan has scheduled payments, the amortization of the net deferred
loan fee is calculated using the interest method over the contractual life of the loan. If the
loan does not have scheduled payments, such as a line of credit, the net deferred loan fee is
recognized as interest income on a straight-line basis over the contractual life of the loan
commitment. Commitment fees based on a percentage of a customer’s unused line of credit and fees
related to standby letters of credit are recognized over the commitment period.
When loans are repaid, any remaining unamortized balances of unearned fees, deferred fees and costs
and premiums and discounts paid on purchased loans are accounted for though interest income.
Nonaccrual loans:
For all loan types except credit cards, when a borrower discontinues making
payments as contractually required by the note, the Company must determine whether it is
appropriate to continue to accrue interest. Generally, the Company places loans in a nonaccrual
status and ceases recognizing interest income when the loan has become delinquent by more than 90
days or when Management determines that the full repayment of principal and collection of interest
is unlikely. The Company may decide to continue to accrue interest on certain loans more than 90
days delinquent if they are well secured by collateral and in the process of collection. Credit
card loans and other personal loans are typically charged off no later than 180 days delinquent.
For all loan types, when a loan is placed on nonaccrual status, all interest accrued but
uncollected is reversed against interest income in the period in which the status is changed.
Subsequent payments received from the customer are applied to principal and no further interest
income is recognized until the principal has been paid in full or until circumstances have changed
such that payments are again consistently received as contractually required. The Company
occasionally recognizes income on a cash basis for non-accrual loans in which the collection of the
remaining principal balance is not in doubt.
Impaired loans:
A loan is identified as impaired when it is probable that interest and principal
will not be collected according to the contractual terms of the original loan agreement. Generally
these loans have balances greater than $250,000 and are rated substandard or worse. An exception
to this would be any known impaired loans regardless of balance. Most impaired loans are
classified as nonaccrual. However, there are some loans that are termed impaired due to doubt
regarding collectability according to contractual terms, but are both fully secured by collateral
and are current in their interest and principal payments. These impaired loans are not classified
as nonaccrual. Impaired loans are measured for reserve requirements in accordance with ASC Topic
310,
Receivables, based
on the present value of expected future cash flows discounted at the loan’s
effective interest rate or, as a practical expedient, at the loan’s observable market price or the
fair value of the collateral if the loan is collateral dependent. The amount of an impairment
reserve, if any and any subsequent changes are charged against the allowance for loan losses.
Troubled Debt Restructured Loans
: A troubled debt restructured loan is a loan on which the Bank,
for reasons related to a borrower’s financial difficulties, grants a concession to the borrower
that the Bank would not otherwise consider. The
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loan terms which have been modified or restructured due to a borrower’s financial situation
include, but are not limited to, a reduction in the stated interest rate, an extension of the
maturity at an interest rate below current market, a reduction in the face amount of the debt, a
reduction in the accrued interest, or re-aging, extensions, deferrals, renewals and rewrites. A
troubled debt restructured loan is also considered impaired. A loan that is modified at an
effective market rate of interest may no longer be classified as troubled debt restructuring in the
calendar year subsequent to the restructuring if it is in compliance with the modified terms and
the expectation exists for continued performance going forward.
Allowance for credit losses
Credit risk is inherent in the business of extending loans and leases to borrowers. Like other
financial institutions, the Company must maintain an adequate allowance for credit losses. The
allowance for credit losses is established through a provision for credit losses charged to
expense. Loans are charged against the allowance for credit losses when Management believes that
the contractual principal or interest will not be collected. Subsequent recoveries, if any, are
credited to the allowance. The allowance is an amount believed adequate to absorb probable losses
on existing loans that may become uncollectable, based on evaluation of the collectability of loans
and prior credit loss experience, together with other factors. The Company formally re-evaluates
and establishes the appropriate level of the allowance for credit losses on a quarterly basis.
Our allowance for credit loss methodology incorporates several quantitative and qualitative risk
factors used to establish the appropriate allowance for credit losses at each reporting date.
Quantitative factors include our historical loss experience, delinquency and charge-off trends,
collateral values, changes in the level of nonperforming loans and other factors. Qualitative
factors include the economic condition of our operating markets and the state of certain
industries. Specific changes in the risk factors are based on perceived risk of similar groups of
loans classified by collateral type, purpose and terms. An internal one-year and three-year loss
history are also incorporated into the allowance calculation model. Due to the credit
concentration of our loan portfolio in real estate secured loans, the value of collateral is
heavily dependent on real estate values in Nevada, Arizona and California, which have declined
significantly in recent periods. While management uses the best information available to make its
evaluation, future adjustments to the allowance may be necessary if there are significant changes
in economic or other conditions. In addition, the FDIC, and state banking regulatory agencies, as
an integral part of their examination processes, periodically review our subsidiary banks’
allowances for credit losses, and may require us to make additions to our allowance based on their
judgment about information available to them at the time of their examinations. Management
regularly reviews the assumptions and formulae used in determining the allowance and makes
adjustments if required to reflect the current risk profile of the portfolio.
The allowance consists of specific and general components. The specific allowance relates to
impaired loans. In general, impaired loans include those where interest recognition has been
suspended, loans that are more than 90 days delinquent but because of adequate collateral coverage
income continues to be recognized, and other criticized and classified loans not paying
substantially according to the original contract terms. For such loans, an allowance is
established when the discounted cash flows, collateral value or observable market price of the
impaired loan are lower than the carrying value of that loan, pursuant to FASB ASC 310
Receivables
(“ASC 310”). Loans not collateral dependent are evaluated based on the expected future cash flows
discounted at the original contractual interest rate. The amount to which the present value falls
short of the current loan obligation will be set up as a reserve for that account or charged-off.
The Company uses an appraised value method to determine the need for a reserve on impaired,
collateral dependent loans and further discounts the appraisal for disposition costs. Due to the
rapidly changing economic and market conditions of the regions within which we operate, the Company
obtains independent collateral valuation analysis on a regular basis for each loan, typically every
six months.
The general allowance covers all non-impaired loans and is based on historical loss experience
adjusted for the various qualitative and quantitative factors listed above. The change in the
allowance from one reporting period to the next may not directly correlate to the rate of change of
the nonperforming loans for the following reasons:
1. A loan moving from impaired performing to impaired nonperforming does not mandate an increased
reserve. The individual account is evaluated for a specific reserve requirement when the loan
moves to impaired status, not when it moves to nonperforming status, and is reevaluated at each
subsequent reporting period. Because our nonperforming loans are predominately collateral
dependent, reserves are primarily based on collateral value, which is not affected by borrower
performance but rather by market conditions.
2. Not all impaired accounts require a specific reserve. The payment performance of the borrower
may require an impaired classification, but the collateral evaluation may support adequate
collateral coverage. For a number of impaired accounts in which borrower performance has ceased,
the collateral coverage is now sufficient because a partial charge off of the account has been
taken. In those instances, neither a general reserve nor a specific reserve is assessed.
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Transfers of financial assets
Transfers of financial assets are accounted for as sales when control over the assets has been
surrendered. Control over transferred assets is deemed surrendered when 1) the assets have been
isolated from the Company, 2) the transferee obtains the right to pledge or exchange the
transferred assets and 3) the Company no longer maintains effective control over the transferred
assets through an agreement to repurchase the transferred assets before maturity.
Off-balance sheet instruments
In the ordinary course of business, the Company has entered into off-balance sheet financial
instruments consisting of commitments to extend credit and standby letters of credit. Such
financial instruments are recorded in the consolidated financial statements when they are funded.
In addition to the exposure to credit losses from outstanding loans, the Company is also exposed to
credit losses from certain off-balance sheet commitments such as unused loan commitments and
letters of credit. Losses would be experienced when the Company is contractually obligated to make
a payment under these instruments and must seek repayment from the borrower, which may not be as
financially sound in the current period as they were when the commitment was originally made.
As with outstanding loans, the Company applies qualitative factors and utilization rates to its
off-balance sheet obligations in determining an estimate of losses inherent in these contractual
obligations. The estimate for credit losses on off-balance sheet instruments is included within
other liabilities and the charge to income that establishes this liability is include in
non-interest expense.
Other assets acquired through foreclosure
Other assets acquired through foreclosure consist primarily of properties acquired as a result of,
or in-lieu-of, foreclosure. Properties or other assets (primarily repossessed assets formerly
leased) are classified as other real estate owned and other repossessed property and are initially
reported at fair value of the asset less selling costs, subsequent write downs are based on the
lower of carrying value or fair value, less estimated costs to sell the property. Costs relating
to the development or improvement of the assets are capitalized and costs relating to holding the
assets are charged to non-interest expense. Property is evaluated regularly to ensure the recorded
amount is supported by its current fair value and valuation allowances.
Premises and equipment
Premises and equipment are stated at cost less accumulated depreciation and amortization.
Depreciation is computed principally by the straight-line method over the estimated useful lives of
the assets. Leasehold improvements are amortized over the terms of the lease or the estimated
lives of the improvements, whichever is shorter. Depreciation and amortization is computed using
the following estimated lives:
| Years | ||
|
Bank premises
|
31 | |
|
Equipment and furniture
|
3 - 10 | |
|
Leasehold improvements
|
3 - 10 |
Management periodically reviews premises and equipment in order to determine if facts and
circumstances suggest that the value of an asset is not recoverable.
Goodwill
The Company recorded as goodwill the excess of the purchase price over the fair value of the
identifiable net assets acquired in accordance with applicable guidance. As per this guidance, a
two-step process is outlined for impairment testing of goodwill. Impairment testing is generally
performed annually, as well as when an event triggering impairment may have occurred. The first
step tests for impairment, while the second step, if necessary, measures the impairment. The
resulting impairment amount if any is charged to current period earnings as non-interest expense.
Other intangible assets
The Company’s intangible assets consist of core deposit intangible assets, investment advisory and
credit card intangibles, and are amortized over periods ranging from 6 to 12 years. The Company
evaluates the remaining useful lives of its core deposit intangible assets each reporting period,
as required by FASB ASC 350,
Intangibles — Goodwill and Other,
to determine whether events and
circumstances warrant a revision to the remaining period of amortization. If the
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estimate of an
intangible asset’s remaining useful life has changed, the remaining carrying amount of the
intangible asset is amortized prospectively over that revised remaining useful life. As a result
of current economic conditions, the
Company revised its estimates of the useful lives of its core deposit intangibles during the year
ended December 31, 2008. The Company made no further changes to these revised lives in 2010 or
2009.
Income taxes
Western Alliance Bancorporation and its subsidiaries, other than BW Real Estate, Inc., file a
consolidated federal tax return. Due to tax regulations, several items of income and expense are
recognized in different periods for tax return purposes than for financial reporting purposes.
These items represent “temporary differences.” Deferred taxes are provided on an asset and
liability method whereby deferred tax assets are recognized for deductible temporary differences
and tax credit carry-forwards and deferred tax liabilities are recognized for taxable temporary
differences. Temporary differences are the differences between the reported amounts of assets and
liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in
the opinion of Management, it is more likely than not that some portion or all of the deferred tax
assets will not be realized. Deferred tax assets and liabilities are adjusted for the effect of
changes in tax laws and rates on the date of enactment.
Although realization is not assured, The Company believes that the realization of the recognized
net deferred tax asset of $79.9 million at December 31, 2010 is more likely than not based on
expectations as to future taxable income and based on available tax planning strategies as defined
in ASC 740 that could be implemented if necessary to prevent a carryforward from expiring.
The most significant source of these timing differences are the credit loss reserve build and net
operating loss carryforwards which account for substantially all of the net deferred tax asset. In
general, the Company will need to generate approximately $222 million of taxable income during the
respective carryforward periods to fully realize its deferred tax assets.
As a result of the recent losses, the Company is in a three-year cumulative pretax loss position at
December 31, 2010. A cumulative loss position is considered significant negative evidence in
assessing the realizability of a deferred tax asset. The Company has concluded that there is
sufficient positive evidence to overcome this negative evidence. This positive evidence includes
Company forecasts, exclusive of tax planning strategies, that show realization of deferred tax
assets by the end of 2013 based on current projections. In addition, the Company has evaluated tax
planning strategies, including potential sales of businesses and assets in which it could realize
the excess of appreciated value over the tax basis of its assets. The amount of deferred tax
assets considered realizable, however, could be significantly reduced in the near term if estimates
of future taxable income during the carryforward period are significantly lower than forecasted due
to deterioration in market conditions.
Based on the above discussion, the net operating loss carryforward of 20 years provides sufficient
time to utilize deferred federal and state tax assets pertaining to the existing net operating loss
carryforwards and any NOL that would be created by the reversal of the future net deductions that
have not yet been taken on a tax return.
Bank owned life insurance
Bank owned life insurance is stated at its cash surrender value with changes recorded in other
non-interest income in the consolidated statements of operations. The face amount of the
underlying policies including death benefits was $324.0 million and $218.3 million as of December
31, 2010 and 2009, respectively. There are no loans offset against cash surrender values, and
there are no restrictions as to the use of proceeds.
Customer repurchase agreements
The Company occasionally enters into repurchase agreements with customers whereby it pledges
securities against overnight investments made from the customer’s excess collected funds. The
Company records these at the amount of cash received in connection with the transaction.
Stock compensation plans
The Company has the 2005 Stock Incentive Plan (the “Incentive Plan”), as amended, which is
described more fully in Note 13, “Stockholder’s Equity.” Compensation expense for stock options
and non-vested restricted stock awards is based on the fair value of the award on the measurement
date, which, for the Company, is the date of the grant and is recognized ratably over the service
period of the award. Prior to the Company’s initial public offering (“IPO”) the Company used the
minimum value method to calculate the fair value of stock options. Subsequent to the Company’s
IPO, the Company utilizes the Black-Scholes option-pricing model to calculate the fair value of
stock options. The fair value of non-vested restricted stock awards is the market price of the
Company’s stock on the date of grant. Prior to the Company’s initial public offering (“IPO”), the
Company used the minimum value method to calculate the fair value of stock options. Subsequent to
the IPO, the Company utilizes the Black-Scholes model to calculate the fair value of options.
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During the years ended December 31, 2010, 2009 and 2008, the Company granted stock options to
the directors of its subsidiaries. Directors of subsidiaries do not meet the definition of an
employee under FASB ASC 718,
Compensation
. Accordingly, the Company applies FASB ASC 505,
Equity
to
determine the measurement date for options granted to these directors. Therefore, the expense
related to these options is re-measured each reporting date until the options are vested.
The following table illustrates the effect on net income and earnings per share had compensation
cost for all of the stock-based compensation plans been determined based on the grant date fair
values of awards:
| December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (in thousands, except per share amounts) | ||||||||||||
| Net (loss) income: | ||||||||||||
|
Net (loss) income available to common stockholders
|
$ | (17,077 | ) | $ | (161,148 | ) | $ | (237,541 | ) | |||
|
Deduct stock-based employee compensation expense
determined under the minimum value method for all awards
issued prior to the IPO
|
(34 | ) | (423 | ) | (534 | ) | ||||||
|
Related tax benefit for nonqualified stock options
|
4 | 51 | 64 | |||||||||
|
Pro forma
|
$ | (17,107 | ) | $ | (161,520 | ) | $ | (238,011 | ) | |||
|
|
||||||||||||
|
Earnings (loss) per share:
|
||||||||||||
|
Basic - as reported
|
$ | (0.23 | ) | $ | (2.74 | ) | $ | (7.27 | ) | |||
|
Basic - pro forma
|
(0.23 | ) | (2.75 | ) | (7.29 | ) | ||||||
|
Diluted - as reported
|
(0.23 | ) | (2.74 | ) | (7.27 | ) | ||||||
|
Diluted - pro forma
|
(0.23 | ) | (2.75 | ) | (7.29 | ) | ||||||
See Note 13, “Stockholder’s Equity” for further discussion of stock options, stock warrants and
restricted stock awards.
Preferred stock
On November 21, 2008, as part of the Capital Purchase Program established by the U.S. Department of
the Treasury (“Treasury”) under the Emergency Economic Stabilization Act of 2008 (“EESA”), the
Company entered into a Letter Agreement with Treasury pursuant to which the Company issued and sold
to Treasury (i) 140,000 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock,
Series A, par value $0.0001 per share, having a liquidation preference of $1,000 per share (the
“Series A Preferred Stock”) and (ii) a ten-year warrant to purchase up to 1,574,213 shares of the
Company’s common stock, par value $0.0001 per share, at an initial exercise price of $13.34 per
share, for an aggregate purchase price of $140.0 million. The proceeds received were allocated to
the preferred stock and additional paid-in-capital based on their relative fair values. The
resulting discount on the preferred stock is amortized against retained earnings and is reflected
in the Company’s consolidated statement of income as “Accretion on preferred stock discount,”
resulting in additional dilution to the Company’s earnings per share. The warrants were included
in the Company’s diluted average common shares outstanding (subject to anti-dilution). Both the
preferred stock and warrants were accounted for as additions to the Company’s regulatory Tier 1 and
Total capital.
Cumulative dividends on the Series A Preferred Stock will accrue on the liquidation preference at a
rate of 5% per annum for the first five years, and at a rate of 9% per annum thereafter. The
Series A Preferred Stock has no maturity date and ranks senior to the common stock with respect to
the payment of dividends and distributions and amounts payable upon liquidation, dissolution and
winding up of the Company.
The Series A Preferred Stock generally is non-voting, other than class voting on certain matters
that could adversely affect the Series A Preferred Stock. If dividends on the Series A Preferred
Stock have not been paid for an aggregate of six quarterly dividend periods or more, whether
consecutive or not, the Company’s authorized number of directors will be automatically increased by
two and the holders of the Series A Preferred Stock, voting together with the holders of any then
outstanding voting parity stock, will have the right to elect those directors at the Company’s next
annual meeting of stockholders or at a special meeting of stockholders called for that purpose.
These two directors will be elected annually and will serve until all accrued and unpaid dividends
on the Series A Preferred Stock have been paid.
The Company may redeem the Series A Preferred Stock after February 15, 2012. Prior to this date,
the Company may redeem the Series A Preferred Stock if (i) the Company has raised aggregate gross
proceeds in one or more Qualified Equity Offerings (as defined below) in excess of $35 million and
(ii) the aggregate redemption price does not exceed the aggregate net cash proceeds from such
Qualified Equity Offerings. Any redemption is subject to the consent of the Board
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of Governors of the Federal Reserve System. A Qualified Equity Offering is the sale and issuance
for cash by the Company, to persons other than the Company or any Company subsidiary after the
closing, of shares of perpetual preferred stock, common stock or any combination of such stock,
that, in each case, qualify as and may be included in Tier 1 capital of the Company at the time of
issuance under the applicable risk-based capital guidelines of the Board of Governors of the FRB.
Prior to November 21, 2011, unless the Company has redeemed the Series A Preferred Stock or
Treasury has transferred the Series A Preferred Stock to a third party, the consent of Treasury
will be required for the Company to (1) pay any common stock dividend or (2) redeem, purchase or
acquire any shares of the Company’s common stock or other equity or capital securities, other than
in connection with benefit plans consistent with past practice and certain other circumstances
specified in the purchase agreement. The warrants are immediately exercisable.
The Company successfully completed a Qualified Equity Offering in May 2009. As a result, the
number of the shares of common stock underlying the portion of the warrant then held by Treasury
was reduced by one-half of the shares of common stock originally covered by the warrant. Pursuant
to the purchase agreement, Treasury has agreed not to exercise voting power with respect to any
shares of common stock issued upon exercise of the warrant. Based on a Black Scholes options
pricing model, the common stock warrants have been assigned a fair value of $15.1 million in the
aggregate, as of November 21, 2008. As a result, $15.1 million has been recorded as the discount
on the preferred stock obtained above and will be accreted as a reduction in net income available
for common stockholders over the next five years at approximately $2.7 million to $3.3 million per
year. As of December 31, 2010, $5.9 million of the discount on preferred stock had been accreted
resulting in an unaccreted discount on preferred stock on this date of $9.2 million.
No other shares of preferred stock are issued and outstanding. The Board of Directors has the
authority, without further action by the stockholders, to issue preferred stock in one or more
series and to fix the number of shares, designations, preferences, powers, and relative,
participating, optional or other special rights. The issuance of additional preferred stock could
decrease the amount of earnings and assets available for distribution to holders of common stock or
adversely affect the rights and powers, including voting rights, of the holders of common stock,
and may have the effect of delaying, deferring or preventing a change in control of the Company.
As discussed elsewhere in this Annual Report on Form 10-K, companies that participated in the
Capital Purchase Program are subject to a number of restrictions regarding, among other things,
executive compensation. See “Item 1 – “Supervision and Regulation – Recent Regulatory
Initiatives” beginning on page 54 for further information. In addition, provisions exist for
limitations on the issuance of additional debt, including trust preferred securities and provisions
that allow the Treasury to unilaterally amend the terms of the agreement.
Trust Assets and Investment Advisory Services
The Company had a trust subsidiary, Premier Trust, until September 1, 2010. In addition, the
Company held interests in two registered investment advisors that have fiduciary responsibility for
the assets they manage on behalf of customers. The Company divested 75% of its interest in
Miller/Russell & Associates on December 31, 2009. These assets are not owned by the Company and
are not reflected in the accompanying Consolidated Balance Sheets. Trust income was recorded on a
cash basis and investment advisory service income is recorded on an accrual basis. At December 31,
2009, Premier Trust had $293.9 million in assets under management and $518.5 million in total trust
assets. At December 31, 2009, Miller/ Russell & Associates had $1.08 billion in assets under
management. At December 31, 2010 and 2009, Shine had $357.4 million and $346.1 million,
respectively, in assets under management.
Fair values of financial instruments
The Company uses fair value measurements to record fair value adjustments to certain assets and
liabilities. FASB ASC 820,
Fair Value Measurements and Disclosures
(“ASC 820’) establishes a
framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of
fair value measurement and enhances disclosure requirements for fair value measurements. The
valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or
liability as of the measurement date. The Company uses various valuation approaches, including
market, income and/or cost approaches. ASC 820 establishes a hierarchy for inputs used in measuring
fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs
by requiring that observable inputs be used when available. Observable inputs are inputs that
market participants would use in pricing the asset or liability developed based on market data
obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the
Company’s assumptions about the assumptions market participants would use in pricing the asset or
liability developed based on the best information available in the circumstances. The hierarchy is
broken down into three levels based on the reliability of inputs, as follows:
| • |
Level 1— Observable quoted prices in active markets that are accessible at the
measurement date for identical,
|
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|
unrestricted assets or liabilities.
|
|||
| • |
Level 2— Observable quoted prices for similar instruments in active markets, quoted
prices for identical or similar instruments in markets that are not active, or model-based
valuation techniques where all significant assumptions are observable, either directly or
indirectly in the market.
|
||
| • |
Level 3— Model-based techniques where all significant assumptions are not observable,
either directly or indirectly, in the market. These unobservable assumptions reflect our
own estimates of assumptions that market participants would use in pricing the asset or
liability. Valuation techniques may include use of matrix pricing, discounted cash flow
models and similar techniques.
|
The availability of observable inputs varies based on the nature of the specific financial
instrument. To the extent that valuation is based on models or inputs that are less observable or
unobservable in the market, the determination of fair value requires more judgment. Accordingly,
the degree of judgment exercised by the Company in determining fair value is greatest for
instruments categorized in Level 3. In certain cases, the inputs used to measure fair value may
fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes,
the level in the fair value hierarchy within which the fair value measurement in its entirety falls
is determined based on the lowest level input that is significant to the fair value measurement in
its entirety.
Fair value is a market-based measure considered from the perspective of a market participant who
holds the asset or owes the liability rather than an entity-specific measure. When market
assumptions are available, ASC 820 requires the Company to make assumptions regarding the
assumptions that market participants would use to estimate the fair value of the financial
instrument at the measurement date.
FASB ASC 825,
Financial Instruments
(“ASC 825”) requires disclosure of fair value information about
financial instruments, whether or not recognized in the balance sheet, for which it is practicable
to estimate that value.
Management uses its best judgment in estimating the fair value of the Company’s financial
instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for
substantially all financial instruments, the fair value estimates presented herein are not
necessarily indicative of the amounts the Company could have realized in a sales transaction at
December 31, 2010 or 2009. The estimated fair value amounts for 2010 and 2009 have been measured
as of their year-end, and have not been reevaluated or updated for purposes of these consolidated
financial statements subsequent to those dates. As such, the estimated fair values of these
financial instruments subsequent to the reporting date may be different than the amounts reported
at year-end.
The information in Note 17, “Fair Value of Financial Instruments,” should not be interpreted as an
estimate of the fair value of the entire Company since a fair value calculation is only required
for a limited portion of the Company’s assets and liabilities.
Due to the wide range of valuation techniques and the degree of subjectivity used in making the
estimate, comparisons between the Company’s disclosures and those of other companies or banks may
not be meaningful.
The following methods and assumptions were used by the Company in estimating the fair value of its
financial instruments:
Cash and cash equivalents
The carrying amounts reported in the consolidated balance sheets for cash and due from banks and
federal funds sold and other approximates their fair value.
Securities
The fair values of U.S. Treasuries, corporate bonds, and exchange-listed preferred stock are based
on quoted market prices and are categorized as Level 1 of the fair value hierarchy.
The fair value of other investment securities were determined based on matrix pricing. Matrix
pricing is a mathematical technique that utilizes observable market inputs including, for example,
yield curves, credit ratings and prepayment speeds. Fair values determined using matrix pricing
are generally categorized as Level 2 in the fair value hierarchy.
The Company owns certain collateralized debt obligations (“CDOs”) and structured notes for which
quoted prices are not available. Quoted prices for similar assets are also not available for these
investment securities. In order to determine the fair value of these securities, the Company has
estimated the future cash flows and discount rate using observable
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market inputs adjusted based on assumptions regarding the adjustments a market participant would
assume necessary for each specific security. As a result, the resulting fair values have been
categorized as Level 3 in the fair value hierarchy.
Restricted stock
The Company’s subsidiary banks are members of the Federal Home Loan Bank (“FHLB”) system and
maintain an investment in capital stock of the FHLB. The Company’s subsidiary banks also maintain
an investment in their primary correspondent bank. These investments are carried at cost since no
ready market exists for them, and they have no quoted market value. The Company conducts a
periodic review and evaluation of our FHLB stock to determine if any impairment exists. The
balance in 2009 includes investment in capital stock of the Federal Reserve Bank.
Loans
For variable rate loans that reprice frequently and that have experienced no significant change in
credit risk, fair values are based on carrying values. Variable rate loans comprised approximately
64.1% and 66.8% of the loan portfolio at December 31, 2010 and 2009, respectively. Fair value for
all other loans is estimated based on discounted cash flows using interest rates currently being
offered for loans with similar terms to borrowers with similar credit quality with adjustments that
the Company believes a market participant would consider in determining fair value. As a result,
the fair value for loans disclosed in Note 17, “Fair Value of Financial Instruments,” is
categorized as Level 3 in the fair value hierarchy.
Accrued interest receivable and payable
The carrying amounts reported in the consolidated balance sheets for accrued interest receivable
and payable approximate their fair value. Accrued interest receivable and payable fair value
measurements disclosed in Note 17 “Fair Value of Financial Instruments,” are classified as Level 3
in the fair value hierarchy.
Derivative financial instruments
All derivatives are recognized on the balance sheet at their fair value. The fair value for
derivatives is determined based on market prices, broker-dealer quotations on similar product or
other related input parameters. As a result, the fair values have been categorized as Level 2 in
the fair value hierarchy.
Deposit liabilities
The fair value disclosed for demand and savings deposits is by definition equal to the amount
payable on demand at their reporting date (that is, their carrying amount) which the Company
believes a market participant would consider in determining fair value. The carrying amount for
variable-rate deposit accounts approximates their fair value. Fair values for fixed-rate
certificates of deposit are estimated using a discounted cash flow calculation that applies
interest rates currently being offered on certificates to a schedule of aggregated expected monthly
maturities on these deposits. The fair value measurement of the deposit liabilities disclosed in
Note 17, “Fair Value of Instruments,” is categorized as Level 3 in the fair value hierarchy.
Federal Home Loan Bank and Federal Reserve advances and other borrowings
The fair values of the Company’s borrowings are estimated using discounted cash flow analyses,
based on the market rates for similar types of borrowing arrangements. The FHLB and FRB advances
and other borrowings have been categorized as Level 3 in the fair value hierarchy.
Junior subordinated and subordinated debt
Junior subordinated debt and subordinated debt are valued by comparing interest rates and spreads
to benchmark indices offered to institutions with similar credit profiles to our own and
discounting the contractual cash flows on our debt using these market rates. The junior
subordinated debt and subordinated debt have been categorized as Level 3 in the fair value
hierarchy.
Off-balance sheet instruments
Fair values for the Company’s off-balance sheet instruments (lending commitments and standby
letters of credit) are based on quoted fees currently charged to enter into similar agreements,
taking into account the remaining terms of the agreements and the counterparties’ credit standing.
Earnings per share
Diluted earnings per share is based on the weighted average outstanding common shares during each
year, including common stock equivalents. Basic earnings per share is based on the weighted
average outstanding common shares during the year.
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Basic and diluted (loss) earnings per share, based on the weighted average outstanding shares, are
summarized as follows:
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (in thousands, except per share amounts) | ||||||||||||
| Basic: | ||||||||||||
|
Net income (loss) available to common stockholders
|
$ | (17,077 | ) | $ | (161,148 | ) | $ | (237,541 | ) | |||
|
Average common shares outstanding
|
75,083 | 58,836 | 32,652 | |||||||||
|
|
||||||||||||
|
Earnings (loss) per share
|
$ | (0.23 | ) | $ | (2.74 | ) | $ | (7.27 | ) | |||
|
|
||||||||||||
|
|
||||||||||||
|
Diluted:
|
||||||||||||
|
Net income (loss) available to common stockholders
|
$ | (17,077 | ) | $ | (161,148 | ) | $ | (237,541 | ) | |||
|
|
||||||||||||
|
Average common shares outstanding
|
75,083 | 58,836 | 32,652 | |||||||||
|
|
||||||||||||
|
Earnings (loss) per share
|
$ | (0.23 | ) | $ | (2.74 | ) | $ | (7.27 | ) | |||
|
|
||||||||||||
As of December 31, 2010, 2009 and 2008, all stock warrants, stock options and restricted stock were
considered anti-dilutive and excluded for purposes of calculating diluted loss per share.
Recent accounting pronouncements
FASB ASC 810,
Consolidation
(“ASC 810”). Effective January 1, 2010, further new authoritative
accounting guidance under ASC Topic 810 amends prior guidance to change how a company determines
when an entity that is insufficiently capitalized or is not controlled through voting (or similar
rights) should be consolidated. The determination of whether a company is required to consolidate
an entity is based on, among other things, an entity’s purpose and design and a company’s ability
to direct the activities of the entity that most significantly impact the entity’s economic
performance. The new authoritative accounting guidance requires additional disclosures about the
reporting entity’s involvement with variable-interest entities and any significant changes in risk
exposure due to that involvement as well as its affect on the entity’s financial statements. The
new authoritative accounting guidance under ASC Topic 810 was effective January 1, 2010 and did not
have a significant impact on the Company’s consolidated financial statements.
FASB ASC Topic 860,
Transfers and Servicing
(“ASC 860”) was amended to enhance reporting about
transfers of financial assets including securitizations, and where companies have continuing
exposure to the risks related to transferred financial assets. The new authoritative accounting
guidance eliminates the concept of a “qualifying special-purpose entity” and changes the
requirements for derecognizing financial assets. The new authoritative guidance also requires
additional disclosures about all continuing involvements with transferred financial assets
including information about gains and losses resulting from transfers during the period. The new
authoritative accounting guidance under ASC 860 was effective January 1, 2010 and did not have a
significant impact on the Company’s consolidated financial statements.
Issued October 2009, ASU 2009-15,
Accounting for Own-Share Lending Arrangements in Contemplation of
Convertible Debt Issuance or Other Financing
amends FASB ASC Topic 470,
Debt
(“ASC 470”), and
provides guidance for accounting and reporting for own-share lending arrangements issued in
contemplation of a convertible debt issuance. At the date of issuance, a share-lending arrangement
entered into on an entity’s own shares should be measured at fair value in accordance with ASC 820
and recognized as an issuance cost, with an offset to additional paid-in capital. Loaned shares
are excluded from basic and diluted earnings per share unless default of the share-lending
arrangement occurs. The amendments also require several disclosures including a description and
the terms of the arrangement and the reason for entering into the arrangement. The effective dates
of the amendments are dependent upon the date the share-lending arrangement was entered into and
include retrospective application for arrangements outstanding as of the beginning of fiscal years
beginning on or after December 15, 2009. The Company has no plans to issue convertible debt and,
therefore, does not expect the update to have an impact on its consolidated financial statements.
In January 2010 the FASB issued ASU 2010-06,
Fair Value Measurements and Disclosures
Topic 820
which provides guidance requiring enhanced fair value disclosures about (1) the different classes
of assets and liabilities measured at fair value, (2) the valuation techniques and inputs used, (3)
the activity in level 3 fair value measurements and (4) the transfers between levels 1, 2, and 3.
The increased disclosure requirements further set forth in the update that in the reconciliation
for fair value measurements using significant unobservable inputs (level 3), a reporting entity
should present separately information about purchases, sales, issuances and settlements (that is,
gross amounts shall be disclosed as
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opposed to a single net figure).
The Company adopted these new disclosure requirements during 2010
except for the Level 3 activity which is not required until the first
quarter of 2011.
In April 2010 the FASB issued ASU 2010-18,
Loan Modifications
Topic 310 which provides guidance
that loans accounted for within a pool need not be removed from the pool when loan modifications
are made, even if the modifications would otherwise be considered trouble debt restructurings.
Under this guidance, an entity will continue to evaluate the pool of loans when performing its
impairment analysis. The effective date of the amendments in this update is in the first interim
period ending on or after July 15, 2010. The amendments are to be applied prospectively. The
Company does not expect the adoption to have a significant impact on its consolidated financial
statements.
In July 2010 the FASB issued ASU 2010-20,
Receivables
Topic 310 which amends Topic 310 to improve
the disclosures that an entity provides about the credit quality of its financing receivables and
related allowance for credit losses. An entity is required to disaggregate by portfolio segment or
class certain existing disclosures and provide certain new disclosures about its financing
receivables and related allowance for credit losses. The Company adopted the period end
disclosures provisions of the new authoritative guidance under ASC Topic 310 in the reporting
period ending December 31, 2010. Adoption of the new guidance did not have an impact on the
Company’s consolidated financial statements. The disclosures about activity that occurs will be
effective for reporting periods after January 1, 2011, and will have no impact on the Company’s
consolidated financial statements.
2. MERGERS, AQUISITIONS AND DISPOSITIONS
Bank Subsidiary Mergers
As of December 31, 2010, the Company merged its Alta Alliance Bank subsidiary into its Torrey Pines
Bank subsidiary, and its First Independent Bank of Nevada subsidiary into its Alliance Bank of
Arizona subsidiary. As part of the latter merger, Alliance Bank of Arizona was renamed Western
Alliance Bank doing business as Alliance Bank of Arizona (in Arizona) and First Independent Bank
(in Nevada). As the bank mergers did not meet the definition of a business combination under the
guidance of ASC 805,
Business Combinations
, the entities were combined in method similar to a
pooling of interests. There were $1.7 million of merger related expenses in the twelve months
ended December 31, 2010.
Premier Trust Disposition
The Company divested its wholly owned subsidiary Premier Trust, Inc as of September 1, 2010 and
recorded a $0.6 million gain on sale.
PartnersFirst Discontinued Operations
In the first quarter of 2010, the Company decided to discontinue its affinity credit card platform,
PartnersFirst, and has presented certain activities as discontinued operations. The Company
transferred certain assets with balances at December 31, 2010 of $0.1 million to held-for-sale and
reported a portion of its operations as discontinued. At December 31, 2010 and 2009, the Company
had $45.6 million and $50.2 million, respectively, of outstanding credit card loans which will have
continuing cash flows related to the collection of these loans. These credit card loans are
included in loans held for investment as of December 31, 2010 and 2009.
The following table summarizes the operating results of the discontinued operations for the periods
indicated:
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (in thousands) | ||||||||||||
|
Affinity card revenue
|
$ | 1,808 | $ | 1,823 | $ | 891 | ||||||
|
Non-interest expenses
|
(7,023 | ) | (9,483 | ) | (12,011 | ) | ||||||
|
|
||||||||||||
|
Loss before income taxes
|
(5,215 | ) | (7,660 | ) | (11,120 | ) | ||||||
|
Income tax benefit
|
(2,190 | ) | (3,153 | ) | (4,670 | ) | ||||||
|
|
||||||||||||
|
Net loss
|
$ | (3,025 | ) | $ | (4,507 | ) | $ | (6,450 | ) | |||
|
|
||||||||||||
Miller Russell Disposition
Effective December 31, 2009, the Company sold a 75% interest in Miller/Russell & Associates, Inc
(“MRA”) to certain members of the Miller/Russell management team for $2.7 million. The Company
retains a 25% non-controlling interest in the post merger Miller/Russell Acquisition LLC. Alliance
Bank of Arizona (now known as Western Alliance Bank), a
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wholly-owned subsidiary of the Company provided the buyers with a $2.1 million secured term loan
for the purchase. For the year ended December 31, 2009, MRA contributed a small loss to the
consolidated operations of the Company and was deconsolidated from the consolidated balance sheet.
The Company retained the 25% non-controlling interest at cost, which approximated fair value at the
close of the transaction and records its prorata share of income.
3. INVESTMENT SECURITIES
Carrying amounts and fair values of investment securities at December 31, 2010 and 2009 are
summarized as follows:
| December 31, 2010 | ||||||||||||||||||||||||
| Gross | Gross | |||||||||||||||||||||||
| Amortized | Unrealized | Unrealized | Fair | |||||||||||||||||||||
| Securities held-to-maturity | Cost | Gains | (Losses) | Value | ||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||
|
Collateralized debt obligations
|
$ | 276 | $ | 459 | $ | - | $ | 735 | ||||||||||||||||
|
Corporate
bonds
|
45,000 | - | (632 | ) | 44,368 | |||||||||||||||||||
|
Municipal obligations
|
1,375 | 18 | - | 1,393 | ||||||||||||||||||||
|
Other
|
1,500 | - | - | 1,500 | ||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
$ | 48,151 | $ | 477 | $ | (632 | ) | $ | 47,996 | |||||||||||||||
|
|
||||||||||||||||||||||||
| OTTI | ||||||||||||||||||||
| Recognized | ||||||||||||||||||||
| in Other | Gross | Gross | ||||||||||||||||||
| Amortized | Comprehensive | Unrealized | Unrealized | Fair | ||||||||||||||||
| Securities available-for-sale | Cost | Loss | Gains | (Losses) | Value | |||||||||||||||
| (in thousands) | ||||||||||||||||||||
|
US Government-sponsored agency securities
|
$ | 280,299 | $ | - | $ | 622 | $ | (3,329 | ) | $ | 277,592 | |||||||||
|
Municipal obligations
|
312 | - | 1 | (11 | ) | 302 | ||||||||||||||
|
Adjustable-rate preferred stock
|
66,255 | - | 1,410 | (422 | ) | 67,243 | ||||||||||||||
|
Corporate securities
|
5,000 | - | - | (93 | ) | 4,907 | ||||||||||||||
|
Direct obligation and GSE residential
mortgage-backed securities
|
772,217 | - | 5,804 | (8,632 | ) | 769,389 | ||||||||||||||
|
Private label residential mortgage-backed
securities
|
9,203 | (1,811 | ) | 1,811 | (1,092 | ) | 8,111 | |||||||||||||
|
Trust preferred securities
|
32,057 | - | - | (8,931 | ) | 23,126 | ||||||||||||||
|
Other
|
22,265 | - | 99 | (121 | ) | 22,243 | ||||||||||||||
|
|
||||||||||||||||||||
|
|
$ | 1,187,608 | $ | (1,811 | ) | $ | 9,747 | $ | (22,631 | ) | $ | 1,172,913 | ||||||||
|
|
||||||||||||||||||||
Securities measured at fair value
|
U.S. Government-sponsored agency securities
|
$ | 2,511 | ||
|
Direct obligation and GSE residential mortgage-backed securities
|
11,790 | |||
|
|
||||
|
|
$ | 14,301 | ||
|
|
||||
For additional information on the fair value changes of the securities measured at fair value, see
the trading securities table on page 115.
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| December 31, 2009 | ||||||||||||||||||||||||
| OTTI | ||||||||||||||||||||||||
| Recognized | ||||||||||||||||||||||||
| in Other | Net | Gross | Gross | |||||||||||||||||||||
| Amortized | Comprehensive | Carrying | Unrealized | Unrealized | Fair | |||||||||||||||||||
| Securities held-to-maturity | Cost | Loss | Amount | Gains | (Losses) | Value | ||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||
|
Collateralized debt obligations
|
$ | 1,462 | $ | (544 | ) | $ | 918 | $ | 340 | $ | (340 | ) | $ | 918 | ||||||||||
|
Municipal obligations
|
5,064 | - | 5,064 | - | - | 5,064 | ||||||||||||||||||
|
Other
|
1,500 | - | 1,500 | - | - | 1,500 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
$ | 8,026 | $ | (544 | ) | $ | 7,482 | $ | 340 | $ | (340 | ) | $ | 7,482 | ||||||||||
|
|
||||||||||||||||||||||||
| OTTI | ||||||||||||||||||||
| Recognized | ||||||||||||||||||||
| in Other | Gross | Gross | ||||||||||||||||||
| Amortized | Comprehensive | Unrealized | Unrealized | Fair | ||||||||||||||||
| Securities available-for-sale | Cost | Loss | Gains | (Losses) | Value | |||||||||||||||
| (in thousands) | ||||||||||||||||||||
|
Municipal obligations
|
$ | 324 | $ | - | $ | 2 | $ | (10 | ) | $ | 316 | |||||||||
|
Adjustable-rate preferred stock
|
7,825 | - | 10,471 | - | 18,296 | |||||||||||||||
|
Direct obligation and GSE residential mortgage-backed securities
|
600,307 | - | 9,699 | (4,250 | ) | 605,756 | ||||||||||||||
|
Private label residential mortgage-backed securities
|
12,829 | (1,811 | ) | 1,045 | (762 | ) | 11,301 | |||||||||||||
|
Trust preferred securities
|
32,098 | - | - | (10,048 | ) | 22,050 | ||||||||||||||
|
FDIC guarantee corporate bonds
|
71,680 | - | 104 | (594 | ) | 71,190 | ||||||||||||||
|
Other
|
15,720 | - | 21 | (52 | ) | 15,689 | ||||||||||||||
|
|
||||||||||||||||||||
|
|
$ | 740,783 | $ | (1,811 | ) | $ | 21,342 | $ | (15,716 | ) | $ | 744,598 | ||||||||
|
|
||||||||||||||||||||
Securities measured at fair value
|
U.S. Government-sponsored agency securities
|
$ | 2,479 | ||
|
Direct obligation and GSE residential mortgage-backed securities
|
49,317 | |||
|
Private label residential mortgage-backed securities
|
6,874 | |||
|
|
||||
|
|
$ | 58,670 | ||
|
|
||||
The Company conducts an other-than-temporary impairment (“OTTI”) analysis on a quarterly basis.
The initial indication of OTTI for both debt and equity securities is a decline in the market value
below the amount recorded for an investment, and the severity and duration of the decline. In
determining whether an impairment is OTTI, the Company considers the
length of time and the extent to which the market value has been below cost, recent events specific
to the issuer, including investment downgrades by rating agencies and economic conditions of its
industry, and the Company’s ability and intent to hold the investment for a period of time
sufficient to allow for any anticipated recovery. For marketable equity securities, the Company
also considers the issuer’s financial condition, capital strength, and near-term prospects.
For debt securities and for ARPS that are treated as debt securities for the purpose of OTTI
analysis, the Company also considers the cause of the price decline (general level of interest
rates and industry- and issuer-specific factors), the issuer’s financial condition, near-term
prospects and current ability to make future payments in a timely manner, the issuer’s ability to
service debt, and any change in agencies’ ratings at evaluation date from acquisition date and any
likely imminent action. For ARPS with a fair value below cost that is not attributable to the
credit deterioration of the issuer, such as a decline in cash flows from the security or a
downgrade in the security’s rating below investment grade, the Company may avoid recognizing an
OTTI charge by asserting that it has the intent and ability to retain its investment for a period
of time sufficient to allow for any anticipated recovery in fair value.
Gross unrealized losses at December 31, 2010 are primarily caused by interest rate fluctuations,
credit spread widening and reduced liquidity in applicable markets. The Company has reviewed
securities on which there is an unrealized loss in accordance with its accounting policy for OTTI
described above and recorded impairment charges totaling $1.2 million, $43.8 million, and $156.8
million for the twelve months ended December 31, 2010, 2009 and 2008, respectively. For
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2010, the
impairment charges related to unrealized losses in the Company’s CDO portfolio. For 2009, this
includes $36.4 million related to impairment losses in the Company’s ARPS, $3.4 million related to
impairment losses to the Company’s CDO portfolio and $4.0 million related to the Company’s
collateralized mortgage obligation (“CMO”) portfolio.
The Company does not consider any other securities to be other-than-temporarily impaired as of
December 31, 2010 and 2009. However, without recovery in the near term such that liquidity returns
to the applicable markets and spreads return to levels that reflect underlying credit
characteristics, additional OTTI may occur in future periods.
Information pertaining to securities with gross unrealized losses at December 31, 2010 and 2009,
aggregated by investment category and length of time that individual securities have been in a
continuous loss position follows:
| December 31, 2010 | ||||||||||||||||
| Less Than Twelve Months | Over Twelve Months | |||||||||||||||
| Gross | Gross | |||||||||||||||
| Unrealized | Fair | Unrealized | Fair | |||||||||||||
| Losses | Value | Losses | Value | |||||||||||||
|
(in thousands)
|
||||||||||||||||
| Securities held-to-maturity |
|
|||||||||||||||
|
Corporate bonds
|
$ | 632 | $ | 39,368 | $ | - | $ | - | ||||||||
|
|
||||||||||||||||
|
|
$ | 632 | $ | 39,368 | $ | - | $ | - | ||||||||
|
|
||||||||||||||||
| December 31, 2010 | ||||||||||||||||
| Less Than Twelve Months | Over Twelve Months | |||||||||||||||
| Gross | Gross | |||||||||||||||
| Unrealized | Fair | Unrealized | Fair | |||||||||||||
| Losses | Value | Losses | Value | |||||||||||||
|
(in thousands)
|
||||||||||||||||
| Securities available-for-sale |
|
|||||||||||||||
|
US Government-sponsored agency securities
|
$ | 3,329 | $ | 173,561 | $ | - | $ | - | ||||||||
|
Adjustable-rate preferred stock
|
422 | 21,549 | - | - | ||||||||||||
|
Corporate securities
|
93 | 4,907 | ||||||||||||||
|
Direct obligation and GSE residential
mortgage-backed securities
|
8,562 | 425,248 | 69 | 8,798 | ||||||||||||
|
Municipal obligations
|
11 | 206 | - | - | ||||||||||||
|
Private label residential
mortgage-backed securities
|
2 | 1,990 | 1,091 | 6,121 | ||||||||||||
|
Trust preferred securities
|
- | - | 8,931 | 23,126 | ||||||||||||
|
Other
|
121 | 6,129 | - | - | ||||||||||||
|
|
||||||||||||||||
|
|
$ | 12,540 | $ | 633,590 | $ | 10,091 | $ | 38,045 | ||||||||
|
|
||||||||||||||||
| December 31, 2009 | ||||||||||||||||
| Less Than Twelve Months | Over Twelve Months | |||||||||||||||
| Gross | Gross | |||||||||||||||
| Unrealized | Fair | Unrealized | Fair | |||||||||||||
| Losses | Value | Losses | Value | |||||||||||||
|
(in thousands)
|
||||||||||||||||
| Securities held-to-maturity |
|
|||||||||||||||
|
Collateralized debt obligations
|
$ | 663 | $ | 724 | $ | 221 | $ | - | ||||||||
|
|
||||||||||||||||
|
|
$ | 663 | $ | 724 | $ | 221 | $ | - | ||||||||
|
|
||||||||||||||||
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Table of Contents
| December 31, 2009 | ||||||||||||||||
| Less Than Twelve Months | Over Twelve Months | |||||||||||||||
| Gross | Gross | |||||||||||||||
| Unrealized | Fair | Unrealized | Fair | |||||||||||||
| Losses | Value | Losses | Value | |||||||||||||
|
(in thousands)
|
||||||||||||||||
| Securities available-for-sale |
|
|||||||||||||||
|
Direct obligation and GSE residential
mortgage-backed securities
|
$ | 3,946 | $ | 285,044 | $ | 303 | $ | 23,847 | ||||||||
|
Municipal obligations
|
10 | 207 | - | - | ||||||||||||
|
Private label residential
mortgage-backed securities
|
- | - | 2,573 | 11,301 | ||||||||||||
|
Trust preferred securities
|
594 | 51,110 | 10,048 | 22,050 | ||||||||||||
|
Other
|
53 | 13,197 | - | - | ||||||||||||
|
|
||||||||||||||||
|
|
$ | 4,603 | $ | 349,558 | $ | 12,924 | $ | 57,198 | ||||||||
|
|
||||||||||||||||
At December 31, 2010 and 2009, 84 and 64 debt securities (excluding adjustable rate preferred
stock, debt obligations and other structured securities), respectively, have unrealized losses with
aggregate depreciation of approximately 1.2%, from the Company’s amortized cost basis. These
unrealized losses relate primarily to fluctuations in the current interest rate environment. In
analyzing an issuer’s financial condition, management considers whether the securities are issued
by the federal government or its agencies, whether downgrades by bond rating agencies have
occurred, and industry analysis reports. Since material downgrades have not occurred and
management does not have the intent to sell the debt securities for the foreseeable future, none of
the securities described in the above table or in this paragraph were deemed to be other than
temporarily impaired.
At December 31, 2010 and 2009, two investments in trust preferred securities have unrealized losses
with aggregate depreciation of approximately 27.9% and 31.3%, respectively, from the Company’s
amortized cost basis. These unrealized losses relate primarily to fluctuations in the current
interest rate environment, and specifically to the widening of credit spreads on virtually all
corporate and structured debt, which began in 2007. The Company has the intent and ability to hold
trust preferred securities for the foreseeable future, none were deemed to be other than
temporarily impaired.
At December 31, 2010, the net unrealized loss on trust preferred securities classified as AFS was
$8.9 million, compared with $10.6 million at December 31, 2009. The Company is actively monitoring
its debt and other structured securities portfolios classified as AFS for declines in fair value.
The amortized cost and fair value of securities as of December 31, 2010 and 2009, by contractual
maturities, are shown below. The actual maturities of the mortgage-backed securities may differ
from their contractual maturities because the loans underlying the securities may be repaid without
any penalties. Therefore, these securities are listed separately in the maturity summary.
Expected maturities may differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
94
Table of Contents
| December 31, 2010 | December 31, 2009 | |||||||||||||||
| Amortized | Estimated | Amortized | Estimated | |||||||||||||
| Cost | Fair Value | Cost | Fair Value | |||||||||||||
|
(in thousands)
|
||||||||||||||||
| Securities held to maturity |
|
|||||||||||||||
|
Due in one year or less
|
$ | - | $ | - | $ | 2,029 | $ | 2,029 | ||||||||
|
After one year through five years
|
999 | 1,011 | 648 | 648 | ||||||||||||
|
After five years through ten years
|
40,376 | 39,843 | 1,387 | 1,387 | ||||||||||||
|
After ten years
|
5,276 | 5,642 | 2,462 | 1,918 | ||||||||||||
|
Other
|
1,500 | 1,500 | 1,500 | 1,500 | ||||||||||||
|
|
||||||||||||||||
|
|
$ | 48,151 | $ | 47,996 | $ | 8,026 | $ | 7,482 | ||||||||
|
|
||||||||||||||||
|
Securities available for sale
|
||||||||||||||||
|
Due in one year or less
|
$ | 13,005 | $ | 13,632 | $ | - | $ | - | ||||||||
|
After one year through five years
|
8,434 | 8,663 | 71,695 | 71,206 | ||||||||||||
|
After five years through ten years
|
294,027 | 291,243 | 56 | 57 | ||||||||||||
|
After ten years
|
77,660 | 67,743 | 40,176 | 40,589 | ||||||||||||
|
Mortgage backed securities
|
772,217 | 769,389 | 613,136 | 617,057 | ||||||||||||
|
Other
|
22,265 | 22,243 | 15,720 | 15,689 | ||||||||||||
|
|
||||||||||||||||
|
|
$ | 1,187,608 | $ | 1,172,913 | $ | 740,783 | $ | 744,598 | ||||||||
|
|
||||||||||||||||
The following table summarizes the Company’s investment ratings position as of December 31, 2010.
| Securities ratings profile | ||||||||||||||||||||||||
| As of December 31, 2010 | ||||||||||||||||||||||||
| Investment- grade (1) | Noninvestment-grade (1) | |||||||||||||||||||||||
| AAA | AA+ to AA- | A+ to A- | BBB+ to BBB- | BB+ and below | Totals | |||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||
|
Municipal obligations
|
$ | 40 | $ | 1,375 | $ | - | $ | - | $ | 262 | $ | 1,677 | ||||||||||||
|
Direct & GSE residential mortgage-backed securities
|
781,179 | - | - | - | - | 781,179 | ||||||||||||||||||
|
Private label residential mortgage-backed securities
|
5,796 | - | - | - | 2,315 | 8,111 | ||||||||||||||||||
|
U.S. Government-sponsered
agency securities
|
280,103 | - | - | - | - | 280,103 | ||||||||||||||||||
|
Adjustable-rate preferred stock
|
- | - | 60,263 | 6,980 | - | 67,243 | ||||||||||||||||||
|
CDOs & trust preferred securities
|
- | - | 21,681 | 1,445 | 276 | 23,402 | ||||||||||||||||||
|
Corporate bonds
|
- | 5,000 | 44,907 | - | - | 49,907 | ||||||||||||||||||
|
Total (2)
|
$ | 1,067,118 | $ | 6,375 | $ | 126,851 | $ | 8,425 | $ | 2,853 | $ | 1,211,622 | ||||||||||||
| (1) |
The Company used the average credit rating of the combination of S&P,
Moody’s and Fitch in the above table where ratings differed.
|
|
| (2) |
Securities values are shown at carrying value as of December 31, 2010. Unrated securities
consist of CRA investments with a carrying value of $22.2 million and an other investment of $1.5
million.
|
95
Table of Contents
| Securities ratings profile | ||||||||||||||||||||||||
| As of December 31, 2009 | ||||||||||||||||||||||||
| Investment- grade (1) | Noninvestment-grade (1) | |||||||||||||||||||||||
| AAA | AA+ to AA- | A+ to A- | BBB+ to BBB- | BB+ and below | Totals | |||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||
|
Municipal obligations
|
$ | 1,047 | $ | 2,392 | $ | - | $ | - | $ | - | $ | 3,439 | ||||||||||||
|
Direct & GSE residential mortgage-backed securities
|
657,552 | - | - | - | - | 657,552 | ||||||||||||||||||
|
Private label residential mortgage-backed securities
|
10,355 | - | - | - | 7,820 | 18,175 | ||||||||||||||||||
|
Adjustable-rate preferred stock
|
- | - | - | - | 18,296 | 18,296 | ||||||||||||||||||
|
CDOs & trust preferred securities
|
- | - | 20,700 | 1,350 | 919 | 22,969 | ||||||||||||||||||
|
FDIC guaranteed corporate bonds
|
71,190 | - | - | - | - | 71,190 | ||||||||||||||||||
|
Total (2)
|
$ | 740,144 | $ | 2,392 | $ | 20,700 | $ | 1,350 | $ | 27,035 | $ | 791,621 | ||||||||||||
| (1) |
The Company used the average credit rating of the combination of S&P,
Moody’s and Fitch in the above table where ratings differed.
|
|
| (2) |
Securities values are shown at carrying value as of December 31, 2009. Unrated securities consist of CRA
investments with a carrying value of $15.7 million, municipals of $1.9 million and an other investment of $1.5 million.
|
Securities with carrying amounts of approximately $427.2 million and $491.9 million at December 31,
2010 and 2009, respectively, were pledged for various purposes as required or permitted by law.
As of December 31, 2010 the Company recorded gross gains and losses on sales of investment
securities of $21.1 million and $4,400 respectively, compared to gross gains and losses on sales of
securities for the year ended December 31, 2009 of $19.0 million and $2.9 million, respectively.
4. LOANS, LEASES AND ALLOWANCE FOR CREDIT LOSSES
The composition of the Company’s loans held for investment portfolio is as follows:
| December 31, | ||||||||
| 2010 | 2009 | |||||||
| (in thousands) | ||||||||
|
Commercial real estate — owner occupied
|
$ | 1,223,150 | $ | 1,091,363 | ||||
|
Commercial real estate — non-owner occupied
|
1,038,488 | 933,261 | ||||||
|
Commercial and industrial
|
744,659 | 685,089 | ||||||
|
Residential real estate
|
527,302 | 568,319 | ||||||
|
Construction and land development
|
451,470 | 623,198 | ||||||
|
Commercial leases
|
189,968 | 117,104 | ||||||
|
Consumer
|
71,545 | 80,300 | ||||||
|
Deferred fees and unearned income,net
|
(6,040 | ) | (18,995 | ) | ||||
|
|
||||||||
|
|
4,240,542 | 4,079,639 | ||||||
|
Allowance for credit losses
|
(110,699 | ) | (108,623 | ) | ||||
|
|
||||||||
|
Total
|
$ | 4,129,843 | $ | 3,971,016 | ||||
|
|
||||||||
96
Table of Contents
The following table presents the contractual aging of the recorded investment in past due loans by
class of loans excluding deferred fees:
| December 31, 2010 | ||||||||||||||||||||||||
| 30-59 Days | 60-89 Days | Over 90 days | Total | |||||||||||||||||||||
| Current | Past Due | Past Due | Past Due | Past Due | Total | |||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||
|
Commercial real estate
|
||||||||||||||||||||||||
|
Owner occupied
|
$ | 1,195,219 | $ | 2,512 | $ | 10,314 | $ | 15,105 | $ | 27,931 | $ | 1,223,150 | ||||||||||||
|
Non-owner occupied
|
947,784 | 1,111 | 1,022 | 5,543 | 7,676 | 955,460 | ||||||||||||||||||
|
Multi-family
|
80,857 | - | - | 2,407 | 2,407 | 83,264 | ||||||||||||||||||
|
Commercial and industrial
|
||||||||||||||||||||||||
|
Commercial
|
741,337 | 1,644 | 135 | 1,543 | 3,322 | 744,659 | ||||||||||||||||||
|
Leases
|
189,968 | - | - | - | - | 189,968 | ||||||||||||||||||
|
Construction and land development
|
||||||||||||||||||||||||
|
Construction
|
219,382 | - | - | 22,300 | 22,300 | 241,682 | ||||||||||||||||||
|
Land
|
199,773 | 338 | - | 9,678 | 10,016 | 209,789 | ||||||||||||||||||
|
Residential real estate
|
491,275 | 8,574 | 3,208 | 24,008 | 35,790 | 527,065 | ||||||||||||||||||
|
Consumer
|
69,027 | 655 | 460 | 1,403 | 2,518 | 71,545 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total loans
|
$ | 4,134,622 | $ | 14,834 | $ | 15,139 | $ | 81,987 | $ | 111,960 | $ | 4,246,582 | ||||||||||||
|
|
||||||||||||||||||||||||
The following table presents the recorded investment in nonaccrual loans and loans past due ninety
days or more and still accruing interest by class of loans:
| December 31, 2010 | ||||||||
| Loans past | ||||||||
| due 90 days | ||||||||
| or more and | ||||||||
| Non-accrual | still accruing | |||||||
| (in thousands) | ||||||||
|
Commercial real estate
|
||||||||
|
Owner occupied
|
$ | 25,316 | $ | - | ||||
|
Non-owner occupied
|
12,189 | - | ||||||
|
Multi-family
|
2,752 | - | ||||||
|
Commercial and industrial
|
||||||||
|
Commercial
|
7,349 | 151 | ||||||
|
Leases
|
- | - | ||||||
|
Construction and land development
|
||||||||
|
Construction
|
22,300 | - | ||||||
|
Land
|
14,223 | - | ||||||
|
Residential real estate
|
32,638 | - | ||||||
|
Consumer
|
232 | 1,307 | ||||||
|
|
||||||||
|
Total
|
$ | 116,999 | $ | 1,458 | ||||
|
|
||||||||
Nonaccrual loans and loans past due 90 days or more and still accruing interest were $159.2 million
at December 31, 2009. The reduction in interest income associated with loans on nonaccrual status
was approximately $6.0 million, $8.7 million and $1.8 million for the years ended December 31,
2010, 2009 and 2008, respectively.
The Company utilizes an internal asset classification system as a means of reporting problem and
potential problem loans. Under the Company’s risk rating system, the Company classifies problem
and potential problem loans as “Watch,” “Substandard,” “Doubtful”, and “Loss” which correspond to
risk ratings six, seven, eight, and nine, respectively. Substandard loans include those
characterized by well defined weaknesses and carry the distinct possibility that the Company will
sustain some loss if the deficiencies are not corrected. Loans classified as Doubtful, or risk
rated eight, have all the weaknesses inherent in those classified Substandard with the added
characteristic that the weaknesses present make collection or liquidation in full, on the basis of
currently existing facts, conditions and values, highly questionable and improbable. The final
rating of Loss covers loans considered uncollectible and having such little
97
Table of Contents
recoverable value that
it is not practical to defer writing off the asset. Loans that do not currently expose the
Company to sufficient risk to warrant classification in one of the aforementioned categories, but
possess weaknesses that deserve management’s close attention are deemed to be Watch, or risk rated
six. Risk ratings are updated, at a minimum, quarterly. The following tables present loans by
risk rating:
| December 31, 2010 | ||||||||||||||||||||||||
| Pass | Watch | Substandard | Doubtful | Loss | Total | |||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||
|
Commercial real estate
|
||||||||||||||||||||||||
|
Owner occupied
|
$ | 1,075,051 | $ | 89,731 | $ | 58,368 | $ | - | $ | - | $ | 1,223,150 | ||||||||||||
|
Non-owner occupied
|
883,867 | 27,785 | 43,807 | - | - | 955,460 | ||||||||||||||||||
|
Multi-family
|
78,442 | - | 4,823 | - | - | 83,264 | ||||||||||||||||||
|
Commercial and industrial
|
||||||||||||||||||||||||
|
Commercial
|
699,177 | 27,252 | 17,426 | 804 | - | 744,659 | ||||||||||||||||||
|
Leases
|
186,262 | 51 | 3,655 | - | - | 189,968 | ||||||||||||||||||
|
Construction and land development
|
||||||||||||||||||||||||
|
Construction
|
200,375 | 12,086 | 29,220 | - | - | 241,682 | ||||||||||||||||||
|
Land
|
141,916 | 19,070 | 48,803 | - | - | 209,789 | ||||||||||||||||||
|
Residential real estate
|
460,591 | 17,647 | 48,828 | - | - | 527,065 | ||||||||||||||||||
|
Consumer
|
69,339 | 1,284 | 921 | - | - | 71,545 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total
|
$ | 3,795,020 | $ | 194,905 | $ | 255,853 | $ | 804 | $ | - | $ | 4,246,582 | ||||||||||||
|
|
||||||||||||||||||||||||
| December 31, 2010 | ||||||||||||||||||||||||
| Pass | Watch | Substandard | Doubtful | Loss | Total | |||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||
|
Current
|
$ | 3,785,145 | $ | 188,555 | $ | 160,318 | $ | 607 | $ | - | $ | 4,134,622 | ||||||||||||
|
Past due 30 - 59 days
|
6,000 | 1,875 | 6,959 | - | - | 14,834 | ||||||||||||||||||
|
Past due 60 - 89 days
|
2,459 | 4,474 | 8,158 | 49 | - | 15,139 | ||||||||||||||||||
|
Past due 90 days or more
|
1,418 | 1 | 80,418 | 148 | - | 81,987 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total
|
$ | 3,795,022 | $ | 194,905 | $ | 255,853 | $ | 804 | $ | - | $ | 4,246,582 | ||||||||||||
|
|
||||||||||||||||||||||||
The table below reflects recorded investment in loans classified as impaired:
| December 31, | ||||||||
| 2010 | 2009 | |||||||
| (in thousands) | ||||||||
|
Impaired loans with a specific valuation allowance under ASC 310
|
$ | 45,316 | $ | 51,718 | ||||
|
Impaired loans without a specific valuation allowance under ASC 310
|
193,019 | 181,754 | ||||||
|
|
||||||||
|
Total impaired loans
|
$ | 238,335 | $ | 233,472 | ||||
|
|
||||||||
|
|
||||||||
|
Valuation allowance related to impaired loans
|
$ | (13,440 | ) | $ | (13,383 | ) | ||
|
|
||||||||
Net impaired loans were $238.3 million at December 31, 2010, a net increase of $4.9 million from
December 31, 2009. This increase is primarily attributable to the increase in commercial real
estate impaired loans, which were $85.4 million at December 31, 2009 compared to $123.9 million at
December 31, 2010, an increase of $38.6 million. In addition, impaired residential real estate
loans and impaired consumer and credit card loans also increased by $2.8 million and $0.5 million,
respectively from $39.6 million and $0.2 million at December 31, 2009, $42.4 million and $0.8
million at December 31, 2010. Impaired construction and land and commercial and industrial loans
declined from $89.3 million and $18.9 million, respectively, at December 31, 2009, to $58.4 million
and $12.8 million at December 31, 2010.
The following table presents the impaired loans by class:
98
Table of Contents
| December 31, | ||||
| 2010 | ||||
|
|
(in thousands) | |||
|
Commercial real estate
|
||||
|
Owner occupied
|
$ | 51,157 | ||
|
Non-owner occupied
|
67,959 | |||
|
Multi-family
|
4,823 | |||
|
Commercial and industrial
|
||||
|
Commercial
|
9,148 | |||
|
Leases
|
3,655 | |||
|
Construction and land development
|
||||
|
Construction
|
31,707 | |||
|
Land
|
26,708 | |||
|
Residential real estate
|
42,423 | |||
|
Consumer
|
755 | |||
|
|
||||
|
Total
|
$ | 238,335 | ||
|
|
||||
A valuation allowance is established for an impaired loan when the fair value of the loan is
less than the recorded investment. In certain cases, portions of impaired loans are charged-off to
realizable value instead of establishing a valuation allowance and are included, when applicable in
the table above as “Impaired loans without specific valuation allowance under ASC 310.” The
valuation allowance disclosed above is included in the allowance for credit losses reported in the
consolidated balance sheets as of December 31, 2010 and 2009.
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (in thousands) | ||||||||||||
|
Average balance during the year on impaired loans
|
$ | 230,026 | $ | 263,765 | $ | 192,561 | ||||||
|
Interest income recognized on impaired loans
|
$ | 7,636 | $ | 10,459 | $ | 10,504 | ||||||
|
Interest recognized on impaired loans, cash basis
|
$ | 2,501 | $ | 10,459 | $ | 9,046 | ||||||
The following table is average investment in impaired loans by loan class:
| Year Ended | ||||
| December 31, | ||||
| 2010 | ||||
|
Commercial real estate – owner occupied
|
$ | 54,633 | ||
|
Commercial real estate – non-owner occupied
|
43,718 | |||
|
Multi-family
|
4,977 | |||
|
Commercial and industrial
|
11,715 | |||
|
Leases
|
2,076 | |||
|
Construction
|
28,930 | |||
|
Land
|
38,928 | |||
|
Residential real estate
|
44,286 | |||
|
Consumer
|
763 | |||
|
|
||||
|
Total
|
$ | 230,026 | ||
|
|
||||
The Company is not committed to lend significant additional funds on these impaired loans.
The following table summarizes nonperforming assets:
99
Table of Contents
| December 31, | ||||||||
| 2010 | 2009 | |||||||
| (in thousands) | ||||||||
|
Nonaccrual loans
|
$ | 116,999 | $ | 153,702 | ||||
|
Loans past due 90 days or more on accrual status
|
1,458 | 5,538 | ||||||
|
Troubled debt restructured loans
|
116,696 | 46,480 | ||||||
|
|
||||||||
|
Total nonperforming loans
|
235,153 | 205,719 | ||||||
|
Foreclosed collateral
|
107,655 | 83,347 | ||||||
|
|
||||||||
|
Total nonperforming assets
|
$ | 342,808 | $ | 289,066 | ||||
|
|
||||||||
Allowance for Credit Losses
The following table summarizes the allowance for credit losses:
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| Allowance for credit losses: | (dollars in thousands) | |||||||||||
|
Balance at beginning of period
|
$ | 108,623 | $ | 74,827 | $ | 49,305 | ||||||
|
Provisions charged to operating expenses
|
93,211 | 149,099 | 68,189 | |||||||||
|
Acquisitions
|
- | - | - | |||||||||
|
Recoveries of loans previously charged-off:
|
||||||||||||
|
Construction and land development
|
3,197 | 1,708 | 32 | |||||||||
|
Commercial real estate
|
1,003 | 230 | 3 | |||||||||
|
Residential real estate
|
2,039 | 545 | 43 | |||||||||
|
Commercial and industrial
|
3,000 | 1,529 | 533 | |||||||||
|
Consumer
|
164 | 173 | 37 | |||||||||
|
Total recoveries
|
9,403 | 4,185 | 648 | |||||||||
|
Loans charged-off:
|
||||||||||||
|
Construction and land development
|
23,623 | 35,807 | 16,715 | |||||||||
|
Commercial real estate
|
33,821 | 16,756 | 2,912 | |||||||||
|
Residential real estate
|
20,663 | 24,082 | 6,643 | |||||||||
|
Commercial and industrial
|
17,218 | 38,573 | 15,937 | |||||||||
|
Consumer
|
5,213 | 4,270 | 1,108 | |||||||||
|
|
||||||||||||
|
Total charged-off
|
100,538 | 119,488 | 43,315 | |||||||||
|
Net charge-offs
|
91,135 | 115,303 | 42,667 | |||||||||
|
|
||||||||||||
|
Balance at end of period
|
$ | 110,699 | $ | 108,623 | $ | 74,827 | ||||||
|
|
||||||||||||
The following table presents loans individually evaluated for impairment by class of loans:
100
Table of Contents
| December 31, 2010 | ||||||||||||||||
| Unpaid | Allowance | |||||||||||||||
| Principal | Recorded | Partial | for Credit | |||||||||||||
| Balance | Investment | Charge-offs | Losses Allocated | |||||||||||||
|
(in thousands)
|
||||||||||||||||
| With no related allowance recorded: | ||||||||||||||||
|
Commercial real estate
|
||||||||||||||||
|
Owner occupied
|
$ | 38,893 | $ | 36,811 | $ | 2,082 | $ | - | ||||||||
|
Non-owner occupied
|
72,705 | 66,156 | 6,549 | - | ||||||||||||
|
Multi-family
|
7,087 | 4,478 | 2,609 | - | ||||||||||||
|
Commercial and industrial
|
||||||||||||||||
|
Commercial
|
9,155 | 4,780 | 4,375 | - | ||||||||||||
|
Leases
|
3,655 | 3,655 | - | - | ||||||||||||
|
Construction and land development
|
||||||||||||||||
|
Construction
|
23,214 | 19,217 | 3,997 | - | ||||||||||||
|
Land
|
31,237 | 24,807 | 6,430 | - | ||||||||||||
|
Residential real estate
|
38,936 | 32,593 | 6,343 | - | ||||||||||||
|
Consumer
|
548 | 522 | 26 | - | ||||||||||||
|
With an allowance recorded:
|
||||||||||||||||
|
Commercial real estate
|
||||||||||||||||
|
Owner occupied
|
15,684 | 14,346 | 1,338 | 3,873 | ||||||||||||
|
Non-owner occupied
|
1,961 | 1,804 | 157 | 530 | ||||||||||||
|
Multi-family
|
358 | 346 | 12 | 179 | ||||||||||||
|
Commercial and industrial
|
||||||||||||||||
|
Commercial
|
4,520 | 4,367 | 153 | 3,170 | ||||||||||||
|
Leases
|
- | - | - | - | ||||||||||||
|
Construction and land development
|
||||||||||||||||
|
Construction
|
12,490 | 12,490 | - | 1,722 | ||||||||||||
|
Land
|
5,018 | 1,901 | 3,117 | 1,124 | ||||||||||||
|
Residential real estate
|
11,598 | 9,830 | 1,768 | 2,716 | ||||||||||||
|
Consumer
|
232 | 232 | - | 126 | ||||||||||||
|
|
||||||||||||||||
|
Total
|
$ | 277,291 | $ | 238,335 | $ | 38,956 | $ | 13,440 | ||||||||
|
|
||||||||||||||||
The following table presents the balance in the allowance for credit losses and the recorded
investment in loans by portfolio segment and based on impairment method:
| December 31, 2010 | ||||||||||||||||||||||||||||||||
| Commercial | Commercial | |||||||||||||||||||||||||||||||
| Real Estate - | Real Estate - | Commercial | Residential | Construction | ||||||||||||||||||||||||||||
| Owner | Non-Owner | and | Real | and Land | Commercial | |||||||||||||||||||||||||||
| Occupied | Occupied | Industrial | Estate | Development | Leases | Consumer | Total | |||||||||||||||||||||||||
|
(in thousands)
|
||||||||||||||||||||||||||||||||
| Allowance for credit losses | ||||||||||||||||||||||||||||||||
|
Ending balance attributable to
loans individually evaluated
for impairment
|
$ | 3,873 | $ | 709 | $ | 3,170 | $ | 2,716 | $ | 2,846 | $ | - | $ | 126 | $ | 13,440 | ||||||||||||||||
|
Collectively evaluated for
impairment
|
11,108 | 17,353 | 23,981 | 18,173 | 17,741 | 3,631 | 5,272 | 97,259 | ||||||||||||||||||||||||
|
Acquired with deteriorated
credit quality
|
- | - | - | - | - | - | - | - | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Total ending allowance
|
$ | 14,981 | $ | 18,062 | $ | 27,151 | $ | 20,889 | $ | 20,587 | $ | 3,631 | $ | 5,398 | $ | 110,699 | ||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
101
Table of Contents
Related Parties
Principal stockholders of the Company and officers and directors, including companies they control,
are considered to be related parties. In the ordinary course of business, the Company has extended
credit to these related parties. Federal banking regulations require that any such extensions of
credit not be offered on terms more favorable than would be offered to non-related party borrowers
of similar creditworthiness. The following table summarizes the aggregate activity in such loans:
| Year Ended December 31, | ||||||||
| 2010 | 2009 | |||||||
| (in thousands) | ||||||||
|
Balance, beginning
|
$ | 45,513 | $ | 87,941 | ||||
|
New loans
|
12,465 | 15,419 | ||||||
|
Repayments and other
|
(21,169 | ) | (57,847 | ) | ||||
|
|
||||||||
|
Balance, ending
|
$ | 36,809 | $ | 45,513 | ||||
|
|
||||||||
Included in repayments and other at December 31, 2010 and 2009, were reductions of $4.1 million and
$35.6 million, respectively, related to resignations of directors or other related party
relationship changes. None of these loans are past due, on nonaccrual status or have been
restructured to provide a reduction or deferral of interest or principal because of deterioration
in the financial position of the borrower. There were no loans to a related party that were
considered classified loans at December 31, 2010 or 2009.
Loan commitments outstanding with related parties total approximately $39.8 million and $41.0
million at December 31, 2010 and 2009, respectively.
Loan Purchases and Sales
In 2010, the Company purchased $123.6 million of loans. The purchased loans consisted of $78.4
million commercial leases, $30.4 million commercial and industrial, $9.6 million of construction
and $5.1 million of commercial real estate loans. In 2009, the Company purchased $27.0 million of
loans. The purchased loans consisted of $22.2 million commercial real estate, $4.7 million
commercial and industrial and $79,000 of residential real estate. In the fourth quarter 2009, the
Company sold approximately $13.2 million of impaired loans to unrelated third parties. The Company
had no significant loan sales in 2010. The Company held no loans for sale at December 31, 2010 and
2009, respectively.
5. PREMISES AND EQUIPMENT
| December 31, | ||||||||
| 2010 | 2009 | |||||||
| (in thousands) | ||||||||
|
Land and improvements
|
$ | 30,580 | $ | 31,585 | ||||
|
Bank premises
|
73,474 | 72,710 | ||||||
|
Furniture, fixtures and equipment
|
57,423 | 60,374 | ||||||
|
Leasehold improvements
|
13,243 | 13,726 | ||||||
|
Construction in progress
|
360 | 1,655 | ||||||
|
|
||||||||
|
|
175,080 | 180,050 | ||||||
|
Less: accumulated depreciation and amortization
|
(60,708 | ) | (54,167 | ) | ||||
|
|
||||||||
|
Premises and equipment, net
|
$ | 114,372 | $ | 125,883 | ||||
|
|
||||||||
Lease Obligations
The Company leases certain premises and equipment under non-cancelable operating leases expiring
through 2025. The following is a schedule of future minimum rental payments under these leases at
December 31, 2010:
102
Table of Contents
| (in thousands) | ||||
|
2011
|
$ | 4,917 | ||
|
2012
|
4,626 | |||
|
2013
|
4,098 | |||
|
2014
|
2,557 | |||
|
2015
|
2,159 | |||
|
Thereafter
|
6,474 | |||
|
|
||||
|
|
$ | 24,831 | ||
|
|
||||
The Company leases the majority of its office locations and many of these leases contain multiple
renewal options and provisions for increased rents. Total rent expense of $5.1 million, $5.4
million and $4.8 million is included in occupancy expenses for the years ended December 31, 2010,
2009 and 2008, respectively.
6. OTHER ASSETS ACQUIRED THROUGH FORECLOSURE
The following table represents the changes in other assets acquired through foreclosure:
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (in thousands) | ||||||||||||
|
Balance, beginning of period
|
$ | 83,347 | $ | 14,545 | $ | 3,412 | ||||||
|
Additions
|
93,656 | 104,610 | 24,060 | |||||||||
|
Dispositions
|
(40,674 | ) | (17,858 | ) | (12,002 | ) | ||||||
|
Valuation adjustments in the period, net
|
(28,674 | ) | (17,950 | ) | (925 | ) | ||||||
|
|
||||||||||||
|
Balance, end of period
|
$ | 107,655 | $ | 83,347 | $ | 14,545 | ||||||
|
|
||||||||||||
At December 31, 2010, 2009 and 2008, the majority of the Company’s repossessed assets
consisted of properties located in Nevada.
7. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill is created when a Company acquires a business. When a business is acquired, the purchased
assets and liabilities are recorded at fair value and intangible assets are identified. Excess
consideration paid to acquire a business over the fair value of the net assets is recorded as
goodwill. During the fourth quarter 2010, the Company reviewed its goodwill for impairment in
accordance with FASB ASC 350-20-35,
Intangibles – Goodwill and Other.
The Company’s annual
goodwill impairment testing is October 1. As a result of this process, the Company determined that
there was no goodwill impairment. Total goodwill impairment for the years ended December 31, 2009
and 2008 was $49.7 million and $138.8 million, respectively. There was no goodwill impairment in
2010.
During the third quarter 2009, the Company determined that it was necessary to perform an interim
test for goodwill impairment on its former subsidiary Miller/Russell and Associates, Inc. As a
result of this goodwill impairment test, the Company determined that the Miller/Russell reporting
unit was impaired by $0.6 million.
During the first quarter 2009, as a result of the significant decline in the Company’s stock price
and depressed economic conditions among financial institutions in general, the Company determined
that it was necessary to perform an interim test for goodwill impairment. As a result of the March
31 goodwill impairment test, the Company determined that the Bank of Nevada reporting unit was
impaired by $45.0 million.
The goodwill impairment charges had no effect on the Company’s cash balances or liquidity. In
addition, because goodwill is not included in the calculation of regulatory capital, the Company’s
regulatory ratios were not affected by these non-cash expenses. No assurance can be given that
goodwill will not be further impaired in future periods.
The following table presents the changes in goodwill:
103
Table of Contents
| Year Ended December 31, | ||||||||
| 2010 | 2009 | |||||||
| (in thousands) | ||||||||
|
Beginning balance
|
$ | 25,925 | $ | 78,966 | ||||
|
Goodwill impairment charges
|
- | (49,671 | ) | |||||
|
Divestiture of Miller/Russell and Associates
|
- | (3,370 | ) | |||||
|
|
||||||||
|
Ending Balance
|
$ | 25,925 | $ | 25,925 | ||||
|
|
||||||||
Intangible Assets
The following is a summary of acquired intangible assets:
| Year Ended December 31, 2010 | ||||||||||||||||
| Gross Carrying | Accumulated | Sale of | Net Carrying | |||||||||||||
| Subject to amortization: | Amount | Amortization | Premier Trust | Amount | ||||||||||||
| (in thousands) | ||||||||||||||||
|
Core deposit intangibles
|
$ | 24,579 | $ | 13,029 | $ | - | $ | 11,550 | ||||||||
|
Other
|
3,779 | 1,737 | 226 | 1,816 | ||||||||||||
|
|
||||||||||||||||
|
|
$ | 28,358 | $ | 14,766 | $ | 226 | $ | 13,366 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
| Year Ended December 31, 2009 | ||||||||||||
| Gross Carrying | Accumulated | Net Carrying | ||||||||||
| Subject to amortization: | Amount | Amortization | Amount | |||||||||
| (in thousands) | ||||||||||||
|
Core deposit intangibles
|
$ | 24,579 | $ | 9,591 | $ | 14,988 | ||||||
|
Other
|
3,779 | 1,571 | 2,208 | |||||||||
|
|
||||||||||||
|
|
$ | 28,358 | $ | 11,162 | $ | 17,196 | ||||||
|
|
||||||||||||
|
|
||||||||||||
Amortization expense recognized on all amortizable intangibles totaled $3.6 million, $3.8
million and $3.6 million for the years ended December 31, 2010, 2009 and 2008, respectively.
Below is a summary of estimated aggregate amortization expense over the next five years and
thereafter:
| Year Ended December 31: | ||||
| (in thousands) | ||||
|
2011
|
$ | 3,627 | ||
|
2012
|
3,276 | |||
|
2013
|
2,262 | |||
|
2014
|
1,331 | |||
|
2015
|
924 | |||
|
Thereafter
|
1,946 |
8. INCOME TAXES
The cumulative tax effects of the primary temporary differences as of December 31 are shown in the
following table:
104
Table of Contents
| December 31, | ||||||||
| 2010 | 2009 | |||||||
|
(in thousands)
|
||||||||
| Deferred tax assets: |
|
|||||||
|
Allowance for credit losses
|
$ | 40,732 | $ | 40,866 | ||||
|
Securities impairment losses
|
- | 12,172 | ||||||
|
OREO writedowns
|
8,070 | 7,252 | ||||||
|
Net operating loss carryforwards
|
34,291 | 27,186 | ||||||
|
Stock based compensation
|
5,102 | 4,940 | ||||||
|
Nonaccrual interest
|
3,126 | 3,153 | ||||||
|
Credit carryforwards
|
2,509 | 2,509 | ||||||
|
Unrealized loss on available for sale securities
|
5,281 | 1,970 | ||||||
|
Capital loss carryforwards
|
9,117 | 4,051 | ||||||
|
Other
|
1,804 | 1,445 | ||||||
|
|
||||||||
|
Total gross deferred tax assets
|
110,032 | 105,544 | ||||||
|
Deferred tax asset valuation allowance
|
(7,596 | ) | (9,629 | ) | ||||
|
|
||||||||
|
Total deferred tax assets
|
102,436 | 95,915 | ||||||
|
Deferred tax liabilities:
|
||||||||
|
Core deposit intangible
|
(4,043 | ) | (5,246 | ) | ||||
|
Premises and equipment
|
(5,495 | ) | (7,665 | ) | ||||
|
Deferred loan costs
|
(2,091 | ) | (2,092 | ) | ||||
|
FHLB dividend
|
(1,877 | ) | (1,872 | ) | ||||
|
Unrealized gains on financial instruments measured at fair value
|
(8,445 | ) | (9,361 | ) | ||||
|
Other
|
(625 | ) | (722 | ) | ||||
|
|
||||||||
|
Total deferred tax liabilities
|
(22,576 | ) | (26,958 | ) | ||||
|
|
||||||||
|
Net deferred tax asset
|
$ | 79,860 | $ | 68,957 | ||||
|
|
||||||||
Deferred tax assets and liabilities are included in the financial statements at currently
enacted income tax rates applicable to the period in which the deferred tax assets or liabilities
are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax
assets and liabilities are adjusted through the provision for income taxes.
For the year ended December 31, 2010, the net deferred tax assets increased $10.9 million to $79.9
million. This increase was primarily the result of taxable losses in the current year.
For the year ended December 31, 2010, the valuation allowance decreased by $2.0 million for certain
deferred tax assets related to gains on the sale of previously impaired ARPS securities. The $7.6
million deferred tax valuation allowance at December 31, 2010 relates to net capital losses on ARPS
securities sales.
The
deferred tax asset related to federal and state net operating loss
carryforwards outstanding at December 31, 2010, available to
reduce taxable income in future years total $34.3 million. This
is comprised of $30.6 million of tax benefits from federal and
California state net operating loss carryforwards that will begin to
expire in 2028, and $3.7 million of tax benefits from Arizona
state net operating loss carryforwards that will begin to expire in
2013. In Management’s opinion, it is more likely than not that
the results of future operations will generate sufficient taxable
income to realize the deferred taxes related to these net operating
loss carryforwards.
The provision for income taxes charged to operations consists of the following:
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (in thousands) | ||||||||||||
|
Current
|
$ | 1,182 | $ | 7,847 | $ | (38,496 | ) | |||||
|
Deferred
|
(7,592 | ) | (46,300 | ) | (11,000 | ) | ||||||
|
|
||||||||||||
|
Total tax provision
|
$ | (6,410 | ) | $ | (38,453 | ) | $ | (49,496 | ) | |||
|
|
||||||||||||
The reconciliation between the statutory federal income tax rate and the Company’s effective tax
rate are summarized as follows:
105
Table of Contents
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (in thousands) | ||||||||||||
|
Income tax at statutory rate
|
$ | (3,703 | ) | $ | (64,873 | ) | $ | (97,827 | ) | |||
|
Increase (decrease) resulting from:
|
||||||||||||
|
State income taxes, net of federal benefits
|
(739 | ) | (1,641 | ) | (4,001 | ) | ||||||
|
Dividends received deductions
|
(476 | ) | (442 | ) | (752 | ) | ||||||
|
Bank-owned life insurance
|
(1,155 | ) | (767 | ) | (924 | ) | ||||||
|
Tax-exempt income
|
(280 | ) | (338 | ) | (444 | ) | ||||||
|
Nondeductible expenses
|
340 | 445 | 299 | |||||||||
|
Nondeductible goodwill impairment
|
- | 17,385 | 48,596 | |||||||||
|
Deferred tax asset valuation allowance
|
(2,033 | ) | 6,200 | 3,400 | ||||||||
|
Restricted stock write off
|
1,259 | 2,057 | 573 | |||||||||
|
Other, net
|
377 | 3,521 | 1,584 | |||||||||
|
|
||||||||||||
|
|
$ | (6,410 | ) | $ | (38,453 | ) | $ | (49,496 | ) | |||
|
|
||||||||||||
Uncertain Tax Position
The Company files income tax returns in the U.S. federal jurisdiction and in various states. With
few exceptions, the Company is no longer subject to U.S. federal, state or local tax examinations
by tax authorities for years before 2006. The Internal Revenue Service is currently examining the
Company’s 2008 net operating loss carryback claim.
When tax returns are filed, it is highly certain that some positions taken would be sustained upon
examination by the taxing authorities, while others are subject to uncertainty about the merits of
the position taken or the amount of the position that would be ultimately sustained. The benefit
of a tax position is recognized in the financial statements in the period in which, based on all
available evidence, management believes it is more likely than not that the position will be
sustained upon examination, including the resolution of appeals or litigation processes, if any.
Tax positions taken are not offset or aggregated with other positions. Tax positions that meet
the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit
that is more than 50 percent likely of being realized upon settlement with the applicable taxing
authority. The portion of the benefits associated with tax positions taken that exceeds the
amount measured as described above would be reflected as a liability for unrecognized tax benefits
in the accompanying consolidated balance sheet along with any associated interest and penalties
that would be payable to the taxing authorities upon examination.
The Company would recognize interest accrued related to unrecognized tax benefits in tax expense.
The Company has not recognized or accrued any interest or penalties for the periods ended December
31, 2010, 2009 or 2008, respectively.
The Company adopted the provisions of FASB Interpretation No. 48,
Accounting for Uncertainty in
Income Taxes
, on January 1, 2007, which were incorporated into ASC 740, Income Taxes. Management
believes that the Company has appropriate support for the income tax positions taken and to be
taken on its tax returns and that its accruals for tax liabilities are adequate for all open years
based on an assessment of many factors, including past experience and interpretation of tax law
applied to the facts of each matter.
The Internal Revenue Service’s Examination Division issued a notice of proposed deficiency, on
January 10, 2011, proposing a taxable income adjustment of $136.7 million related to deductions
taken on our 2008 tax return in connection with the partial worthlessness of collateralized debt
obligations, or CDOs. The use of these deductions on our 2008 tax return resulted in an
approximately $40-million tax refund for the 2006 and 2007 taxable periods. The Company filed a
protest of the proposed deficiency, which is expected to cause the matter to be referred to the
Internal Revenue Service’s Appeals Division. Although the Company believes that the CDO-related
deductions will be respected for U.S. federal income tax purposes, there can be no assurance that
the Internal Revenue Service will not successfully challenge some or all of such deductions. The
Company has not accrued a reserve for this potential exposure.
9. DEPOSITS
The table below summarizes deposits by type:
106
Table of Contents
| December 31, | ||||||||
| 2010 | 2009 | |||||||
| (in thousands) | ||||||||
|
Non-interest-bearing demand
|
$ | 1,443,251 | $ | 1,157,013 | ||||
|
Interest-bearing demand
|
523,827 | 362,682 | ||||||
|
Savings and money market
|
1,926,060 | 1,752,450 | ||||||
|
Certificate of deposit ($100,000 or more)
|
1,276,369 | 1,205,162 | ||||||
|
Other time deposits
|
168,934 | 244,795 | ||||||
|
Total deposits
|
$ | 5,338,441 | $ | 4,722,102 | ||||
Certificates of deposit are the only deposits which have a specified maturity. The balances
of other deposit accounts are primarily assigned to the less than one-year time range. The summary
of the scheduled maturities for all time deposits at December 31, is as follows:
| 2010 | ||||
| (in thousands) | ||||
|
2011
|
$ | 1,363,424 | ||
|
2012
|
74,041 | |||
|
2013
|
6,022 | |||
|
2014
|
1,620 | |||
|
2015
|
196 | |||
|
|
||||
|
|
$ | 1,445,303 | ||
|
|
||||
As of December 31, 2010 and 2009, the Company had $20.0 million of wholesale-brokered deposits
outstanding. In addition, the Company’s banks are members of Certificate Deposit Account Registry
Service (“CDARS”), which provides FDIC insurance for large deposits. Federal banking law and
regulation places restrictions on depository institutions regarding brokered deposits because of
the general concern that these deposits are at a greater risk of being withdrawn, thus posing
liquidity risk for institutions that gather brokered deposits in significant amounts.
10. OTHER BORROWED FUNDS
The following table summarizes the Company’s borrowings as of December 31, 2010 and 2009:
| December 31, | ||||||||
| 2010 | 2009 | |||||||
| (in thousands) | ||||||||
|
Short Term
|
||||||||
|
Other short term debt
|
$ | - | $ | 20,000 | ||||
|
|
||||||||
|
Long Term
|
||||||||
|
Other long term debt
|
$ | 75,000 | $ | 9,352 | ||||
The Company maintains lines of credit with the Federal Home Loan Bank (“FHLB”) and Federal Reserve
Bank (“FRB”). The Company’s borrowing capacity is determined based on collateral pledged,
generally consisting of investment securities and loans, at the time of the borrowing. The Company
also maintains credit lines with other sources secured by pledged securities. Short-term FHLB and
FRB advances had weighted average interest rates of 0.24% and 0.25% for the year ending December
31, 2010 and 2009, respectively. Other short-term debt consisted of a non-customer repurchase
agreement, which matured in August 2010. The weighted average interest rate paid for other
short-term debt was 4.60% at December 31, 2009.
On August 25, 2010, the Company completed a public offering of $75 million in principal Senior
Notes due in 2015 bearing interest of 10%. The net proceeds of the offering were $72.8 million.
The weighted average rate on all long term debt was 9.89% and 8.79% in 2010 and 2009, respectively.
107
Table of Contents
The Banks have entered into agreements with other financial institutions under which they can
borrow up to $43.0 million on an unsecured basis. The lending institutions will determine the
interest rate charged on borrowings at the time of the borrowing.
As of December 31, 2010, the Company had additional available credit with the FHLB and FRB of
approximately $676.3 million and $547.0 million, respectively.
11. JUNIOR SUBORDINATED AND SUBORDINATED DEBT
The Company has formed or acquired through mergers six statutory business trusts, which exist for
the exclusive purpose of issuing Cumulative Trust Preferred Securities. All of the funds raised
from the issuance of these securities were passed to the Company and are reflected in the
accompanying balance sheet as junior subordinated debt in the amount of $43.0 million. The junior
subordinated debt has contractual balances and maturity dates as follows:
| December 31, | ||||||||||||
| Name of Trust | Maturity | 2010 | 2009 | |||||||||
|
|
||||||||||||
|
BankWest Nevada Capital Trust II
|
2033 | 15,464 | 15,464 | |||||||||
|
First Independent Capital Trust I
|
2034 | 7,217 | 7,217 | |||||||||
|
Intermountain First Statutory Trust I
|
2034 | 10,310 | 10,310 | |||||||||
|
WAL Trust No. 1
|
2036 | 20,619 | 20,619 | |||||||||
|
WAL Statutory Trust No. 2
|
2037 | 5,155 | 5,155 | |||||||||
|
WAL Statutory Trust No. 3
|
2037 | 7,732 | 7,732 | |||||||||
|
|
||||||||||||
|
|
$ | 66,497 | $ | 66,497 | ||||||||
|
Unrealized gains on trust preferred securities
measured at fair value, net |
(23,463 | ) | (24,059 | ) | ||||||||
|
|
||||||||||||
|
|
$ | 43,034 | $ | 42,438 | ||||||||
|
|
||||||||||||
The weighted average contractual rate of the junior subordinated debt was 4.34% and 4.37% as
of December 31, 2010 and 2009, respectively.
In the event of certain changes or amendments to regulatory requirements or Federal tax rules, the
debt is redeemable in whole. The obligations under these instruments are fully and unconditionally
guaranteed by the Company and rank subordinate and junior in right of payment to all other
liabilities of the Company. The trust preferred securities qualify as Tier 1 Capital for the
Company, subject to certain limitations, with the excess being included in total capital for
regulatory purposes. As of December 31, 2009, the Company had $60 million of subordinated debt
with a weighted average contractual rate of 3.09%. The Company paid this debt in 2010 and recorded
a gain on extinguishment of debt of $3.0 million.
12. COMMITMENTS AND CONTINGENCIES
Unfunded Commitments and Letters of Credit
The Company is party to financial instruments with off-balance sheet risk in the normal course of
business to meet the financing needs of its customers. These financial instruments include
commitments to extend credit and standby letters of credit. They involve, to varying degrees,
elements of credit risk in excess of amounts recognized in the consolidated balance sheets.
Lines of credit are obligations to lend money to a borrower. Credit risk arises when the
borrowers’ current financial condition may indicate less ability to pay than when the commitment
was originally made. In the case of standby letters of credit, the risk arises from the
possibility of the failure of the customer to perform according to the terms of a contract. In
such a situation, the third party might draw on the standby letter of credit to pay for completion
of the contract and the Company would look to its customer to repay these funds with interest. To
minimize the risk, the Company uses the same credit policies in making commitments and conditional
obligations as it would for a loan to that customer.
Standby letters of credit and financial guarantees are conditional commitments issued by the
Company to guarantee the performance of a customer to a third party in borrowing arrangements. The
Company generally has recourse to recover from the customer any amounts paid under the guarantees.
Typically letters of credit issued have expiration dates within one year.
A summary of the contractual amounts for unfunded commitments and letters of credit are as follows:
108
Table of Contents
| December 31, | ||||||||
| 2010 | 2009 | |||||||
|
(in thousands)
|
||||||||
|
Commitments to extend credit, including unsecured loan
commitments of $156,517 at December 31, 2010 and $110,491 at December 31, 2009 |
$ | 702,336 | $ | 682,870 | ||||
|
Credit card commitments and financial guarantees
|
322,798 | 305,903 | ||||||
|
Standby letters of credit, including unsecured letters of credit of
$3,076 at December 31, 2010 and $3,826 at December 31, 2009 |
28,013 | 38,891 | ||||||
|
|
||||||||
|
|
$ | 1,053,147 | $ | 1,027,664 | ||||
|
|
||||||||
The following table represents the contractual commitments for lines and letters of credit by
maturity at December 31, 2010:
| Total | Amount of Commitment Expiration Per Period | |||||||||||||||||||
| Amounts | Less Than | 1-3 | 3-5 | After | ||||||||||||||||
| Committed | 1 Year | Years | Years | 5 Years | ||||||||||||||||
| (in thousands) | ||||||||||||||||||||
|
Commitments to extend credit
|
$ | 702,336 | $ | 482,320 | $ | 85,638 | $ | 43,154 | $ | 91,224 | ||||||||||
|
Credit card commitments and guarantees
|
322,798 | 322,798 | - | - | - | |||||||||||||||
|
Standby letters of credit
|
28,013 | - | 27,858 | 155 | - | |||||||||||||||
|
|
||||||||||||||||||||
|
Total
|
$ | 1,053,147 | $ | 805,118 | $ | 113,496 | $ | 43,309 | $ | 91,224 | ||||||||||
|
|
||||||||||||||||||||
Commitments to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Company evaluates each customer’s
creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary
by the Company upon extension of credit, is based on management’s credit evaluation of the party.
The commitments are collateralized by the same types of assets used as loan collateral.
The Company has exposure to credit losses from unfunded commitments and letters of credit. As
funds have not been disbursed on these commitments, they are not reported as loans outstanding.
Credit losses related to these commitments are not included in the allowance for credit losses
reported in Note 4, “Loans, Leases and Allowance for Credit Losses” of these Consolidated Financial
Statements and are accounted for as a separate loss contingency as a liability. This loss
contingency for unfunded loan commitments and letters of credit was $0.3 million as of December 31,
2010 and 2009. Changes to this liability are adjusted through other non-interest expense.
Concentrations of Lending Activities
The Company’s lending activities are primarily driven by the customers served in the market areas
where the Company has branch offices in the States of Nevada, California and Arizona. The Company
monitors concentrations within five broad categories: geography, industry, product, call code, and
collateral. The Company grants commercial, construction, real estate and consumer loans to
customers through branch offices located in the Company’s primary markets. The Company’s business
is concentrated in these areas and the loan portfolio includes significant credit exposure to the
commercial real estate market of these areas. As of December 31, 2010 and 2009, commercial real
estate related loans accounted for approximately 64% and 65% of total loans, respectively, and
approximately 2% and 5% of commercial real estate loans, respectively, are secured by undeveloped
land. Substantially all of these loans are secured by first liens with an initial loan to value
ratio of generally not more than 75%. Approximately 54% of these commercial real estate loans were
owner occupied at December 31, 2010 and 2009. In addition, approximately 3% and 4% of total loans
were unsecured as of December 31, 2010 and 2009, respectively.
Contingencies
The Company is involved in various lawsuits of a routine nature that are being handled and defended
in the ordinary course of the Company’s business. Expenses are being incurred in connection with
defending the Company, but in the opinion of Management, based in part on consultation with legal
counsel, the resolution of these lawsuits will not have a material impact on the Company’s
financial position, results of operations, or cash flows.
13. STOCKHOLDER’S EQUITY
Stock Issuance
109
Table of Contents
On August 24, 2010, the Company completed a public offering of 8,050,000 shares of common stock,
including 1,050,000 shares pursuant to the underwriter’s over-allotment option, at a public
offering price of $6.25 per share, for an aggregate offering price of $50.3 million. The net
proceeds of the offering were approximately $47.6 million
On May 20, 2009, the Company closed a public offering of 33,440,700 shares of common stock,
including 4,240,700 shares pursuant to the underwriters’ over-allotment option, at a public
offering price of $6.00 per share, for an aggregate offering price of $200.6 million. The net
proceeds of the offering were approximately $191.1 million.
Stock Repurchases
There were no stock repurchases in 2010 or 2009.
Stock Options and Restricted Stock
The 2005 Stock Incentive Plan (the “Incentive Plan”), as amended, gives the Board of Directors the
authority to grant up to 6.5 million stock awards consisting of unrestricted stock, stock units,
dividend equivalent rights, stock options (incentive and non-qualified), stock appreciation rights,
restricted stock, and performance and annual incentive awards. Stock awards available for grant at
December 31, 2010 are 1.8 million.
The Incentive Plan contains certain individual limits on the maximum amount that can be paid in
cash under the Incentive Plan and on the maximum number of shares of common stock that may be
issued pursuant to the Incentive Plan in a calendar year. The maximum number of shares subject to
options or stock appreciation rights that can be issued under the Incentive Plan to any person is
150,000 shares in any calendar year. The maximum number of shares that can be issued under the
Incentive Plan to any person, other than pursuant to an option or stock appreciation right, is
150,000 in any calendar year. The maximum amount that may be earned as an annual incentive award
or other cash award in any fiscal year by any one person is $5.0 million and the maximum amount
that may be earned as a performance award or other cash award by any one person is $15.0 million.
The fair value of each option award is estimated on the date of grant using the Black-Scholes
option valuation model that uses the assumptions noted in the following table. The expected
volatility is based on the historical volatility of the stock of the Company over the expected life
of the Company’s options. The Company estimates the life of the options by calculating the average
of the vesting period and the contractual life. The expected life of replacement options was
estimated based on the simplified method. The risk-free rate for periods within the contractual
life of the option is based on the U.S. Treasury yield curve in effect at the time of the grant.
The dividends rate assumption of zero is based on management’s intention not to pay dividends for
the foreseeable future. A summary of the assumptions used in calculating the fair value of option
awards during the years ended December 31, 2010, 2009 and 2008 are as follows:
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Expected life in years
|
5 | 5 | 5 | |||||||||
|
Risk-free interest rate
|
2.5% | 1.5% | 3.5% | |||||||||
|
Dividends rate
|
None | None | None | |||||||||
|
Fair value per optional share
|
$ | 3.22 | $ | 3.73 | $ | 5.07 | ||||||
|
Volatility
|
76% | 58% | 30% | |||||||||
Stock options granted in 2010 generally have a vesting period of 4 years and a contractual life of
7 years. Restricted stock awards granted in 2010 generally have a vesting period of 3 years. The
Company recognizes compensation cost for options with a graded vesting on a straight-line basis
over the requisite service period for the entire award.
A summary of option activity under the Incentive Plan is presented below:
110
Table of Contents
| December 31, 2010 | ||||||||||||||||
| Weighted | Weighted | |||||||||||||||
| Average | Average | Aggregate | ||||||||||||||
| Exercise | Remaining | Intrinsic | ||||||||||||||
| Shares | Price | Contractual Term | Value | |||||||||||||
| (dollars in thousands) | ||||||||||||||||
|
Outstanding options, beginning of period
|
2,858 | $ | 14.71 | |||||||||||||
|
Granted
|
111 | 5.21 | ||||||||||||||
|
Exercised
|
(30 | ) | 5.53 | |||||||||||||
|
Forfeited or expired
|
(407 | ) | 12.00 | |||||||||||||
|
|
||||||||||||||||
|
Outstanding options, end of period
|
2,532 | $ | 14.82 | 3.1 | $ | 352 | ||||||||||
|
|
||||||||||||||||
|
Options exercisable, end of period
|
2,027 | $ | 15.56 | 2.7 | $ | 262 | ||||||||||
|
|
||||||||||||||||
|
Options expected to vest, end of period
|
434 | $ | 12.04 | 4.7 | $ | 90 | ||||||||||
|
|
||||||||||||||||
A summary of the status of the Company’s non-vested shares of restricted stock as of December
31, 2010 and changes during the year then ended is presented below:
| Nonvested Restricted Stock | Weighted | |||||||
| Shares | Average Grant | |||||||
| (in thousands) | Date Fair Value | |||||||
|
Balance at January 1, 2010
|
609 | $ | 14.29 | |||||
|
Granted
|
668 | 5.55 | ||||||
|
Vested
|
(210 | ) | 24.61 | |||||
|
Forfeited
|
(67 | ) | 9.17 | |||||
|
Balance at December 31, 2010
|
1,000 | $ | 6.61 | |||||
As of December 31, 2010, 2009 and 2008, there was $6.1 million, $7.9 million, and $12.0
million, respectively, of total unrecognized compensation cost related to non-vested share-based
compensation arrangements granted under the Incentive Plan. That cost is expected to be recognized
over a weighted average period of 1.8 years, 1.7 years and 1.8 years, respectively. The total
intrinsic value of options exercised during the years ended December 31, 2010, 2009, and 2008 were
$50,000, $0 and $1.4 million, respectively. The total fair value of restricted stock that vested
during the years ended December 31, 2010, 2009 and 2008 was $1.3 million, $1.7 million and $1.2
million, respectively. The weighted average grant-date fair value of restricted stock granted
during the years ended December 31, 2010, 2009 and 2008 was $3.6 million, $2.7 million and $1.5
million, respectively.
Stock Warrants
At December 31, 2010, there were 131,684 warrants outstanding with an exercise price of $34.56 and
expire August 2013.
Details of the warrants issued to the federal government as part of the Capital Purchase Program
preferred stock offering are contained in Note 1,
“Summary of
Significant Accounting Policies –
Preferred Stock”
on page 84
.
Salary Shares
In 2010, the Company issued salary shares to certain individuals. Total shares issued at December
31, 2010 were 88,851 for compensation expense of $0.6 million. There were no salary shares issued
in 2009 and 2008. Salary Shares are issued as Common Stock which vests immediately but are restricted until
TARP is repaid.
14. REGULATORY CAPITAL REQUIREMENTS
The Company and the Banks are subject to various regulatory capital requirements administered by
the Federal banking agencies. Failure to meet minimum capital requirements could trigger certain
mandatory or discretionary actions that, if undertaken, could have a direct material effect on the
Company’s business and financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company and the Banks must meet specific capital
guidelines that involve qualitative measures of their assets, liabilities, and certain off-balance
sheet items
111
Table of Contents
as calculated under regulatory accounting practices. The capital amounts and classification are
also subject to qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and
the Banks to maintain minimum amounts and ratios of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I leverage (as defined) to average
assets (as defined). As of December 31, 2010, the Company and the Banks met all capital adequacy
requirements to which they are subject.
As of December 31, 2010, the Company and each of its subsidiaries met the minimum capital ratio
requirements necessary to be classified as well-capitalized, as defined by the banking agencies.
To be categorized as well-capitalized, the Banks must maintain minimum total risk-based, Tier I
risk-based and Tier I leverage ratios as set forth in the table below. In addition, memoranda of
understanding to which the Company’s bank subsidiaries are subject require them to maintain higher
Tier 1 leverage ratios than otherwise required to be considered well-capitalized. At December 31,
2010, the capital levels at each of the banks exceeded these elevated requirements.
The actual capital amounts and ratios for the Banks and Company as of December 31 are presented in
the following table:
| Risk- | Tangible | Total | Tier 1 | Tier 1 | |||||||||||||||||||||||||
| Total | Tier 1 | Weighted | Average | Capital | Capital | Leverage | |||||||||||||||||||||||
| Capital | Capital | Assets | Assets | Ratio | Ratio | Ratio | |||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||||||||
|
December 31, 2010
|
|||||||||||||||||||||||||||||
|
WAL (Consolidated)
|
$ | 654,011 | $ | 591,633 | $ | 4,941,057 | $ | 6,198,903 | 13.2 | % | 12.0 | % | 9.5 | % | |||||||||||||||
|
Bank of Nevada
|
278,697 | 250,907 | 2,177,357 | 2,705,631 | 12.8 | % | 11.5 | % | 9.3 | % | |||||||||||||||||||
|
Western Alliance Bank
|
204,650 | 162,964 | 1,492,491 | 1,955,696 | 13.7 | % | 10.9 | % | 8.3 | % | |||||||||||||||||||
|
Torrey Pines Bank
|
170,342 | 135,126 | 1,215,825 | 1,453,686 | 14.0 | % | 11.1 | % | 9.3 | % | |||||||||||||||||||
|
|
|||||||||||||||||||||||||||||
|
Well-capitalized ratios
|
10.0 | % | 6.0 | % | 5.0 | % | |||||||||||||||||||||||
|
Minimum capital ratios
|
8.0 | % | 4.0 | % | 4.0 | % | |||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||
|
December 31, 2009
|
|||||||||||||||||||||||||||||
|
WAL (Consolidated)
|
$ | 666,287 | $ | 547,746 | $ | 4,632,891 | $ | 5,756,917 | 14.4 | % | 11.8 | % | 9.5 | % | |||||||||||||||
|
Bank of Nevada
|
272,703 | 183,639 | 2,286,178 | 2,755,559 | 11.9 | % | 8.0 | % | 6.7 | % | |||||||||||||||||||
|
Alliance Bank of Arizona
|
97,141 | 68,801 | 820,572 | 1,107,836 | 11.8 | % | 8.4 | % | 6.2 | % | |||||||||||||||||||
|
Torrey Pines Bank
|
125,870 | 94,073 | 948,241 | 1,116,767 | 13.3 | % | 9.9 | % | 8.4 | % | |||||||||||||||||||
|
First Independent Bank
|
54,669 | 44,058 | 444,981 | 526,746 | 12.3 | % | 9.9 | % | 8.4 | % | |||||||||||||||||||
|
Alta Alliance Bank
|
23,552 | 22,105 | 114,528 | 174,588 | 20.6 | % | 19.3 | % | 12.7 | % | |||||||||||||||||||
|
|
|||||||||||||||||||||||||||||
|
Well-capitalized ratios
|
10.0 | % | 6.0 | % | 5.0 | % | |||||||||||||||||||||||
|
Minimum capital ratios
|
8.0 | % | 4.0 | % | 4.0 | % | |||||||||||||||||||||||
Additionally, State of Nevada banking regulations restrict distribution of the net assets of
Bank of Nevada because such regulations require the sum of the bank’s stockholders’ equity and
reserve for loan losses to be at least 6% of the average of the bank’s total daily deposit
liabilities for the preceding 60 days. As a result of these regulations, approximately $145.2
million and $133.9 million of Bank of Nevada’s stockholders’ equity was restricted at December 31,
2010 and 2009, respectively.
15. EMPLOYEE BENEFIT PLANS
The Company has a qualified 401(k) employee benefit plan for all eligible employees. Participants
are able to defer between 1% and 15% (up to a maximum of $16,500 for those under 50 years of age in
2010) of their annual compensation. The Company may elect to match a discretionary amount each
year, which was 50% of the first 6% of the participant’s compensation deferred into the plan. The
Company’s total contribution was $1.2 million, $1.4 million and $1.1 million for the years ended
December 31, 2010, 2009 and 2008, respectively.
In addition, the Company maintains a non-qualified 401(k) restoration plan for the benefit of
executives of the Company and certain affiliates. Participants are able to defer a portion of
their annual salary and receive a matching contribution based primarily on the contribution
structure in effect under the Company’s 401(k) plan, but without regard to certain
112
Table of Contents
statutory
limitations applicable under the 401(k) plan. The Company’s total contribution to the restoration
plan was approximately $14,000, $11,000, and $16,000 for the years ended December 31, 2010, 2009
and 2008, respectively.
16. FAIR VALUE ACCOUNTING
The Company adopted SFAS 159,
The Fair Value Option for Financial Assets and Financial Liabilities
(“SFAS 159”), effective January 1, 2007. This standard was subsequently codified under FASB ASC
825,
Financial Instruments
(“ASC 825”). At the time of adoption, the Company elected to apply this
fair value option (“FVO”) treatment to the following instruments:
| • |
Junior subordinated debt;
|
||
| • |
All investment securities previously classified as held to maturity, with the exception
of tax-advantaged municipal bonds; and
|
||
| • |
All fixed-rate securities previously classified as available for sale.
|
The Company continues to account for these items under the fair value option. There were no
financial instruments purchased by the Company in 2010 and 2009 which were elected to be accounted
under the ASC 825 fair value election criteria, and therefore, no additional instruments have been
added under the fair value option election.
All securities for which the fair value measurement option had been elected are included in a
separate line item on the balance sheet entitled “securities measured at fair value.”
ASC 825 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used
to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in
active markets for identical assets or liabilities (level 1 measurements) and the lowest priority
to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy under
ASC 825 are described below:
Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date
for identical, unrestricted assets or liabilities;
Level 2 – Quoted prices for similar instruments in active markets, quoted prices for identical or
similar instruments in markets that are not active, or model-based valuation techniques where all
significant assumptions are observable, either directly or indirectly, in the market;
Level 3 – Valuation is generated from model-based techniques where all significant assumptions are
not observable, either directly or indirectly, in the market. These unobservable assumptions
reflect our own estimates of assumptions that market participants would use in pricing the asset or
liability. Valuation techniques may include use of matrix pricing, discounted cash flow models and
similar techniques.
In general, fair value is based upon quoted market prices, where available. If such quoted market
prices are not available, fair value is based upon internally developed models that primarily use,
as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that
financial instruments are recorded at fair value. These adjustments may include amounts to reflect
counterparty credit quality and the Company’s creditworthiness, among other things, as well as
unobservable parameters. Any such valuation adjustments are applied consistently over time. The
Company’s valuation methodologies may produce a fair value calculation that may not be indicative
of net realizable value or reflective of future fair values. While management believes the
Company’s valuation methodologies are appropriate and consistent with other market participants,
the use of different methodologies or assumptions to determine the fair value of certain financial
instruments could result in a different estimate of fair value at the reporting date. Furthermore,
the reported fair value amounts have not been comprehensively revalued since the presentation
dates, and therefore, estimates of fair value after the balance sheet date may differ significantly
from the amounts presented herein.
For the twelve months ended December 31, 2010 and 2009, gains and losses from fair value changes
included in the Consolidated Statement of Operations were as follows:
113
Table of Contents
| Changes in Fair Values for the Year Ended | ||||||||||||||||
| December 31, 2010 for Items Measured at Fair | ||||||||||||||||
| Value Pursuant to Election of the Fair Value Option | ||||||||||||||||
| Unrealized | Total | |||||||||||||||
| Gain/(Loss) on | Interest | Changes | ||||||||||||||
| Assets and | Expense on | Included in | ||||||||||||||
| Liabilities | Interest | Junior | Current- | |||||||||||||
| Measured at | Income on | Subordinated | Period | |||||||||||||
| Description | Fair Value, Net | Securities | Debt | Earnings | ||||||||||||
| (in thousands) | ||||||||||||||||
|
Securities measured at fair value
|
$ | 227 | $ | 366 | $ | $ | 593 | |||||||||
|
Junior subordinated debt
|
(596 | ) | - | (1,101 | ) | (1,697 | ) | |||||||||
|
|
||||||||||||||||
|
|
$ | (369 | ) | $ | 366 | $ | (1,101 | ) | $ | (1,104 | ) | |||||
|
|
||||||||||||||||
| Changes in Fair Values for the Year Ended | ||||||||||||||||
| December 31, 2009 for Items Measured at Fair | ||||||||||||||||
| Value Pursuant to Election of the Fair Value Option | ||||||||||||||||
| (in thousands) | ||||||||||||||||
| Unrealized | Interest | Total | ||||||||||||||
| Gain(/Loss) on | Expense on | Changes | ||||||||||||||
| Assets and | Junior | Included in | ||||||||||||||
| Liabilities | Interest | Subordinated | Current- | |||||||||||||
| Measured at | Income on | Debt and | Period | |||||||||||||
| Description | Fair Value, Net | Securities | Borrowings | Earnings | ||||||||||||
| (in thousands) | ||||||||||||||||
|
Securities measured at fair value
|
$ | 1,516 | $ | 989 | $ | - | $ | 2,505 | ||||||||
|
Junior subordinated debt
|
600 | - | (941 | ) | (341 | ) | ||||||||||
|
Fixed-rate term borrowings
|
1,515 | - | - | 1,515 | ||||||||||||
|
|
||||||||||||||||
|
|
$ | 3,631 | $ | 989 | $ | (941 | ) | $ | 3,679 | |||||||
|
|
||||||||||||||||
The following table presents the portion of trading securities losses related to trading
securities still held at the reporting date:
| December 31, | ||||
| 2010 | ||||
| (in thousands) | ||||
|
Net gains and (losses) recognized during the period on trading securities
|
$ | 227 | ||
|
Less: net gains and (losses) recognized during the period on trading
securities sold during the period |
1,344 | |||
|
|
||||
|
Unrealized gains and (losses) recognized during the reporting period on trading
securities still held at the reporting date |
$ | (1,117 | ) | |
|
|
||||
The difference between the aggregate fair value of junior subordinated debt ($43.0 million)
and the aggregate unpaid principal balance thereof ($66.5 million) was $23.5 million at December
31, 2010.
Interest income on securities measured at fair value is accounted for similarly to those classified
as available-for-sale and held-to-maturity. As of January 1, 2007, a discount or premium was
calculated for each security based upon the difference between the par value and the fair value at
that date. These premiums and discounts are recognized in interest income over the term of the
securities. For mortgage-backed securities, estimates of prepayments are considered in the constant
yield calculations. Interest expense on junior subordinated debt is also determined under a
constant yield calculation.
Fair value on a recurring basis
114
Table of Contents
Financial assets and financial liabilities measured at fair value on a recurring basis include the
following:
AFS Securities:
Adjustable-rate preferred securities are reported at fair value utilizing Level 1
inputs. Other securities classified as AFS are reported at fair value utilizing Level 2 inputs.
For these securities, the Company obtains fair value measurements from an independent pricing
service. The fair value measurements consider observable data that may
include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading
levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s
terms and conditions, among other things.
Securities measured at fair value:
All of the Company’s securities measured at fair value, the
majority of which are mortgage-backed securities, are reported at fair value utilizing Level 2
inputs in the same manner as described above for securities available for sale.
Interest rate swap:
Interest rate swaps are reported at fair value utilizing Level 2 inputs. The
Company obtains dealer quotations to value its interest rate swaps.
Junior subordinated debt:
The Company estimates the fair value of its junior subordinated debt
using a discounted cash flow model which incorporates the effect of the Company’s own credit risk
in the fair value of the liabilities (Level 3). The Company’s cash flow assumptions were based on
the contractual cash flows based as the Company anticipates that it will pay the debt according to
its contractual terms. The Company evaluated priced offerings on individual issuances of trust
preferred securities and estimated the discount rate based, in part, on that information. The
Company estimated the discount rate at 5.873%, which is a 557 basis point spread over 3 month LIBOR
(0.303% as of December 31, 2010). As of December 31, 2009, the Company estimated the discount rate
at 6.0%, which is a 575 basis point spread over 3 month LIBOR (0.25%).
The fair value of these assets and liabilities were determined using the following inputs at
December 31, 2010 and 2009:
| Fair Value Measurements at Reporting Date Using: | ||||||||||||||||
| Quoted Prices | ||||||||||||||||
| in Active | Active | |||||||||||||||
| Markets for | Markets for | |||||||||||||||
| As of | Identical | Similar | Unobservable | |||||||||||||
| December 31, | Assets | Assets | Inputs | |||||||||||||
| Description | 2010 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
|
(in thousands)
|
||||||||||||||||
| Assets: | ||||||||||||||||
|
Securities available for sale
|
$ | 1,172,913 | $ | 117,519 | $ | 1,055,394 | $ | - | ||||||||
|
Securities measured at fair value
|
14,301 | - | 14,301 | - | ||||||||||||
|
Interest rate swaps
|
1,396 | - | 1,396 | - | ||||||||||||
|
Total
|
$ | 1,188,610 | $ | 117,519 | $ | 1,071,091 | $ | - | ||||||||
|
|
||||||||||||||||
|
Liabilities:
|
||||||||||||||||
|
Junior subordinated debt
|
$ | 43,034 | $ | - | $ | - | $ | 43,034 | ||||||||
|
Interest rate swaps
|
1,396 | - | 1,396 | - | ||||||||||||
|
Total
|
$ | 44,430 | $ | - | $ | 1,396 | $ | 43,034 | ||||||||
115
Table of Contents
| Quoted Prices | ||||||||||||||||
| in Active | Active | |||||||||||||||
| Markets for | Markets for | |||||||||||||||
| As of | Identical | Similar | Unobservable | |||||||||||||
| December 31, | Assets | Assets | Inputs | |||||||||||||
| Description | 2009 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
|
(in thousands)
|
||||||||||||||||
| Assets: | ||||||||||||||||
|
Securities available for sale
|
$ | 744,598 | $ | 111,536 | $ | 633,062 | $ | - | ||||||||
|
Securities measured at fair value
|
58,670 | - | 58,670 | - | ||||||||||||
|
Interest rate swaps
|
1,139 | - | 1,139 | - | ||||||||||||
|
|
||||||||||||||||
|
Total
|
$ | 804,407 | $ | 111,536 | $ | 692,871 | $ | - | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Liabilities:
|
||||||||||||||||
|
Junior subordinated debt
|
$ | 42,438 | $ | - | $ | - | $ | 42,438 | ||||||||
|
Interest rate swaps
|
1,139 | - | 1,139 | - | ||||||||||||
|
|
||||||||||||||||
|
Total
|
$ | 43,577 | $ | - | $ | 1,139 | $ | 42,438 | ||||||||
|
|
||||||||||||||||
Fair Value Measurements Using
Significant Unobservable Inputs
(Level 3)
Significant Unobservable Inputs
(Level 3)
| Junior | ||||||||
| Subordinated | Fixed-Rate | |||||||
| Debt | Term Borrowings | |||||||
| (in thousands) | ||||||||
|
Beginning balance January 1, 2009
|
$ | (43,038 | ) | $ | (31,515 | ) | ||
|
Total gains or losses (realized/unrealized)
|
||||||||
|
Included in earnings
|
600 | 1,515 | ||||||
|
Included in other comprehensive income
|
- | - | ||||||
|
Purchases, issuances, and settlements, net
|
- | 30,000 | ||||||
|
Transfers to held-to-maturity
|
- | - | ||||||
|
Transfers in and/or out of Level 3
|
- | - | ||||||
|
Ending balance December 31, 2009
|
(42,438 | ) | - | |||||
|
Total gains or losses (realized/unrealized)
|
||||||||
|
Included in earnings
|
(596 | ) | - | |||||
|
Included in other comprehensive income
|
- | - | ||||||
|
Purchases, issuances, and settlements, net
|
- | - | ||||||
|
Transfers to held-to-maturity
|
- | - | ||||||
|
Transfers in and/or out of Level 3
|
- | - | ||||||
|
|
||||||||
|
Ending balance December 31, 2010
|
$ | (43,034 | ) | $ | - | |||
|
|
||||||||
|
|
||||||||
|
The amount of total 2010 gains (losses) for the
period included in earnings attributable to
the change in unrealized gains (losses)
relating to assets still held at the reporting date
|
$ | (596 | ) | $ | - | |||
|
|
||||||||
|
|
||||||||
|
The amount of total 2009 gains (losses) for the
period included in earnings attributable to
the change in unrealized gains (losses)
relating to assets still held at the reporting date
|
$ | 600 | $ | 1,515 | ||||
|
|
||||||||
Fair value on a nonrecurring basis
116
Table of Contents
Certain assets are measured at fair value on a nonrecurring basis; that is, the instruments
are not measured at fair value on an ongoing basis, but are subject to fair value adjustments in
certain circumstances (for example, when there is evidence of impairment). The following table
presents such assets carried on the balance sheet by caption and by level within the ASC 825
hierarchy as of December 31, 2010:
| Fair Value Measurements Using | ||||||||||||||||
| Quoted Prices | ||||||||||||||||
| in Active | Active | |||||||||||||||
| Markets for | Markets for | Unobservable | ||||||||||||||
| Identical Assets | Similar Assets | Inputs | ||||||||||||||
| Total | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
| (in thousands) | ||||||||||||||||
|
Impaired loans with specific valuation allowance
|
$ | 31,876 | $ | - | $ | - | $ | 31,876 | ||||||||
|
Impaired loans without specific valuation allowance
|
66,355 | - | - | 66,355 | ||||||||||||
|
Goodwill valuation of reporting units
|
25,925 | - | - | 25,925 | ||||||||||||
|
Other assets acquired through foreclosure
|
107,655 | - | - | 107,655 | ||||||||||||
|
Collateralized debt obligations
|
735 | - | - | 735 | ||||||||||||
|
The following table presents such assets carried on the balance sheet by caption and by level
within the ASC 825 hierarchy as of December 31, 2009:
|
||||||||||||||||
| Fair Value Measurements Using | ||||||||||||||||
| Quoted Prices | ||||||||||||||||
| in Active | Active | |||||||||||||||
| Markets for | Markets for | Unobservable | ||||||||||||||
| Identical Assets | Similar Assets | Inputs | ||||||||||||||
| Total | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
| (in thousands) | ||||||||||||||||
|
As of December 31, 2009:
|
||||||||||||||||
|
Impaired loans with specific valuation allowance
|
$ | 38,335 | $ | - | $ | - | $ | 38,335 | ||||||||
|
Impaired loans without specific valuation allowance
|
80,594 | - | - | 80,594 | ||||||||||||
|
Goodwill valuation of reporting units
|
25,925 | - | - | 25,925 | ||||||||||||
|
Other assets acquired through foreclosure
|
83,347 | - | - | 83,347 | ||||||||||||
|
Collateralized debt obligations
|
918 | - | - | 918 | ||||||||||||
Impaired loans:
The specific reserves for collateral dependent impaired loans are based on
the fair value of the collateral. The fair value of collateral is determined based on third-party
appraisals. In some cases, adjustments are made to the appraised values due to various factors,
including age of the appraisal (which are generally obtained every six months), age of comparables
included in the appraisal, and known changes in the market and in the collateral. When significant
adjustments are based on unobservable inputs, such as when a current appraised value is not
available or management determines the fair value of the collateral is further impaired below
appraised value and there is no observable market price, the resulting fair value measurement has
been categorized as a Level 3 measurement. These Level 3 impaired loans had an aggregate carrying
amount of $45.3 million and specific reserves in the allowance for loan losses of $13.4 million as
December 31, 2010.
Goodwill:
In accordance with FASB ASC 350,
Intangibles - Goodwill and Other
(“ASC 350”), goodwill
has been written down to its implied fair value of $25.9 million by charges to earnings in prior
periods. Some of the inputs used to determine the implied fair value of the Company and the
corresponding amount of the impairment included the quoted market price of our common stock, market
prices of common stocks of other banking organizations, common stock trading multiples, discounted
cash flows, and inputs from comparable transactions. The Company’s adjustments were primarily
based on the Company’s assumptions, therefore the resulting fair value measurement was determined
to be level 3.
Other assets acquired through foreclosure:
Other assets acquired through foreclosure consist of
properties acquired as a result of, or in-lieu-of, foreclosure. Properties or other assets
classified as other assets acquired through foreclosure and other repossessed property and are
initially reported at the fair value determined by independent appraisals using appraised value,
less cost to sell. Such properties are generally re-appraised every six months. There is risk for
subsequent volatility. Costs relating to the development or improvement of the assets are
capitalized and costs relating to
117
Table of Contents
holding the assets are charged to expense. The Company had $107.7 million of such assets at
December 31, 2010. When significant adjustments were based on unobservable inputs, such as when a
current appraised value is not available or management determines the fair value of the collateral
is further impaired below appraised value and there is no observable market price, the resulting
fair value measurement has been categorized as a Level 3 measurement.
Collateralized debt obligations:
The Company previously wrote down its trust-preferred CDO
portfolio to $0.3 million when it determined these CDOs were other-than-temporarily impaired under
generally accepted accounting principles due primarily to credit rating downgrades and the increase
in deferrals and defaults by the issuers of the underlying CDOs. These CDOs represent interests in
various trusts, each of which is collateralized with trust preferred debt issued by other financial
institutions.
Credit vs. non-credit losses
The Company has elected to apply provisions of FASB ASC 320,
Investments Debt and Equity Securities
(ASC 320) as of January 1, 2009 to its AFS and HTM investment securities portfolios. The OTTI is
separated into (a) the amount of total impairment related to the credit loss and (b) the amount of
the total impairment related to all other factors. The amount of the total OTTI related to the
credit loss is recognized in earnings. The amount of the total impairment related to all other
factors is recognized in other comprehensive income. The OTTI is presented in the statement of
operations with an offset for the amount of the total OTTI that is recognized in other
comprehensive income.
As part of this adoption, the Company applied the criteria of ASC 320 in the determination of the
amount of credit and other losses applicable to debt instruments held in its available-for-sale and
held-to-maturity investment portfolios. The Company utilized a valuation specialist to evaluate
and assist the Company in the determination of the amount and class of losses in its collateralized
mortgage and collateralized debt obligation portfolios. In connection with this valuation, the
Company evaluated significant inputs such as default rates, delinquency rates, collateral value
ratios, subordination levels, vintage, geographic concentration and credit ratings of the
securities in question.
If the Company does not intend to sell and it is not more likely than not that the Company will be
required to sell the impaired securities before recovery of the amortized cost basis, the Company
recognizes the cumulative effect of initially applying this ASC 320 as an adjustment to the opening
balance of retained earnings with a corresponding adjustment to accumulated other comprehensive
income, including related tax effects. The Company elected to early adopt ASC 320,
Investments
Debt and Equity Securities
on its impaired securities portfolio since it provides more transparency
in the consolidated financial statements related to the bifurcation of the credit and non-credit
losses.
The following table provides the impact of adoption of ASC 320 on the Company’s balance sheet as of
January 1, 2009:
| Unrealized | Unrealized | |||||||||||
| Non-Credit | Cumulative | Non-Credit | ||||||||||
| Losses Prior to | Effect | Losses After | ||||||||||
| Adoption | Adjustment | Adoption | ||||||||||
| (in thousands) | ||||||||||||
|
Unrealized non-credit impairment losses on held-to-maturity securities
|
$ | - | $ | 4,705 | $ | 4,705 | ||||||
|
Unrealized non-credit impairment losses on
available-for-sale securities
|
- | 2,831 | 2,831 | |||||||||
|
|
||||||||||||
|
Pre-tax cumulative effect adjustment
|
7,536 | |||||||||||
|
Reversal of tax effect
|
(2,688 | ) | ||||||||||
|
|
||||||||||||
|
Cumulative effect adjustment, net
|
$ | 4,848 | ||||||||||
|
|
||||||||||||
For the year ended December 31, 2010, the Company determined that certain collateralized
mortgage debt securities contained credit losses. The impairment credit loss related to these debt
securities was $1.2 million.
For the year ended December 31, 2009, the Company determined that certain collateralized mortgage
debt securities met the applicable criteria for bifurcation of the credit losses and other market
losses. The impairment credit loss related to these debt securities for the year ended December
31, 2009 was $1.2 million. The remaining loss due to other market factors was $1.8 million.
The following table presents a rollforward of the amount related to impairment credit losses
recognized in earnings for the year ended December 31, 2010 and 2009:
118
Table of Contents
Debt Security Credit Losses
Recognized in Other Comprehensive Income/Earnings For the Year
Ended December 31, 2010
Recognized in Other Comprehensive Income/Earnings For the Year
Ended December 31, 2010
| Debt Obligations and | Private Label Mortgage- | |||||||
| Structured Securities | Backed Securities | |||||||
| (in thousands) | ||||||||
|
Beginning balance of impairment losses held in other
comprehensive income
|
$ | (544 | ) | $ | (1,811 | ) | ||
|
Current period other-then temporary impairment credit
recognized through earnings
|
544 | - | ||||||
|
Reductions for securities sold during the period
|
- | - | ||||||
|
Additions or reductions in credit losses due to change of
intent to sell
|
- | - | ||||||
|
Reductions for increases in cash flows to be collected on
impaired securities
|
- | - | ||||||
|
|
||||||||
|
|
||||||||
|
Ending balance of net unrealized gains and (losses) held in
other comprehensive income
|
$ | - | $ | (1,811 | ) | |||
|
|
||||||||
Debt Security Credit Losses
Recognized in Other Comprehensive Income/Earnings For the Year
Ended December 31, 2009
Recognized in Other Comprehensive Income/Earnings For the Year
Ended December 31, 2009
| Debt Obligations and | Private Label Mortgage- | |||||||
| Structured Securities | Backed Securities | |||||||
| (in thousands) | ||||||||
|
Beginning balance of impairment losses held in other
comprehensive income
|
$ | (4,705 | ) | $ | (2,831 | ) | ||
|
Current period other-then temporary impairment credit
recognized through earnings
|
4,161 | 1,219 | ||||||
|
Reductions for securities sold during the period
|
- | - | ||||||
|
Additions or reductions in credit losses due to change of
intent to sell
|
- | - | ||||||
|
Reductions for increases in cash flows to be collected on
impaired securities
|
- | (199 | ) | |||||
|
|
||||||||
|
|
||||||||
|
Ending balance of net unrealized gains and (losses) held in
other comprehensive income
|
$ | (544 | ) | $ | (1,811 | ) | ||
|
|
||||||||
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of the Company’s financial instruments is as follows:
119
Table of Contents
| December 31, | ||||||||||||||||
| 2010 | 2009 | |||||||||||||||
| Carrying | Fair | Carrying | Fair | |||||||||||||
| Amount | Value | Amount | Value | |||||||||||||
|
(in thousands)
|
||||||||||||||||
| Financial assets: | ||||||||||||||||
|
Cash and due from banks
|
$ | 87,984 | $ | 87,984 | $ | 116,841 | $ | 116,841 | ||||||||
|
Federal funds sold
|
918 | 918 | 3,473 | 3,473 | ||||||||||||
|
Money market investments
|
37,733 | 37,733 | 54,029 | 54,029 | ||||||||||||
|
Investment securities - measured at fair value
|
14,301 | 14,301 | 58,670 | 58,670 | ||||||||||||
|
Investment securities - available for sale
|
1,172,913 | 1,172,913 | 744,598 | 744,598 | ||||||||||||
|
Investment securities - held to maturity
|
48,151 | 47,996 | 7,482 | 7,482 | ||||||||||||
|
|
||||||||||||||||
|
Derivatives
|
1,396 | 1,396 | 1,139 | 1,139 | ||||||||||||
|
Restricted stock
|
36,877 | 36,877 | 41,378 | 41,378 | ||||||||||||
|
Loans, net
|
4,129,843 | 3,868,852 | 3,971,015 | 3,654,227 | ||||||||||||
|
Accrued interest receivable
|
19,433 | 19,433 | 18,742 | 18,742 | ||||||||||||
|
|
||||||||||||||||
|
Financial liabilities:
|
||||||||||||||||
|
Deposits
|
5,338,441 | 5,341,701 | 4,722,102 | 4,731,827 | ||||||||||||
|
Accrued interest payable
|
6,085 | 6,085 | 4,179 | 4,179 | ||||||||||||
|
Customer repurchases
|
109,409 | 109,409 | 223,269 | 223,269 | ||||||||||||
|
Other borrowed funds
|
72,964 | 85,454 | 29,352 | 29,352 | ||||||||||||
|
Junior subordinated debt
|
43,034 | 43,034 | 42,438 | 42,438 | ||||||||||||
|
Subordinated debt
|
- | - | 60,000 | 60,000 | ||||||||||||
|
Derivatives
|
1,396 | 1,396 | 1,139 | 1,139 | ||||||||||||
Interest rate risk
The Company assumes interest rate risk (the risk to the Company’s earnings and capital from changes
in interest rate levels) as a result of its normal operations. As a result, the fair values of
the Company’s financial instruments as well as its future net interest income will change when
interest rate levels change and that change may be either favorable or unfavorable to the Company.
Interest rate risk exposure is measured using interest rate sensitivity analysis to determine our
change in net portfolio value and net interest income resulting from hypothetical changes in
interest rates. If potential changes to net portfolio value and net interest income resulting
from hypothetical interest rate changes are not within the limits established by the Board of
Directors, the Board of Directors may direct management to adjust the asset and liability mix to
bring interest rate risk within board-approved limits. As of December 31, 2010, the Company’s
interest rate risk profile was within Board-approved limits.
Each of the Company’s subsidiary banks has an Asset and Liability Management Committee charged with
managing interest rate risk within Board approved limits. Such limits may vary by bank based on
local strategy and other considerations, but in all cases, are structured to prohibit an interest
rate risk profile that is significantly asset or liability sensitive. There exists an Asset and
Liability Management Committee at the holding company levels that reviews the interest rate risk of
each subsidiary bank, as well as, an aggregated position for the entire Company.
Fair value of commitments
The estimated fair value of standby letters of credit outstanding at December 31, 2010 and 2009 is
insignificant. Loan commitments on which the committed interest rate is less than the current
market rate are also insignificant at December 31, 2010 and 2009.
18. PARENT COMPANY FINANCIAL INFORMATION
The condensed financial statements of the holding company are presented in the following pages.
120
Table of Contents
WESTERN ALLIANCE BANCORPORATION
Condensed Balance Sheets
Condensed Balance Sheets
| December 31, | ||||||||
| 2010 | 2009 | |||||||
|
(in thousands)
|
||||||||
| ASSETS: | ||||||||
|
Cash and cash equivalents
|
$ | 2,552 | $ | 21,848 | ||||
|
Securities available for sale
|
62,383 | 92,246 | ||||||
|
Trading assets
|
- | 5,052 | ||||||
|
Investment in subsidiaries
|
612,879 | 500,616 | ||||||
|
Other assets
|
45,793 | 1,351 | ||||||
|
|
||||||||
|
|
$ | 723,607 | $ | 621,113 | ||||
|
|
||||||||
|
LIABILITIES AND STOCKHOLDERS’ EQUITY:
|
||||||||
|
Borrowings
|
$ | 72,964 | $ | - | ||||
|
Accrued interest and other liabilities
|
5,435 | 2,950 | ||||||
|
Junior subordinated debt
|
43,034 | 42,438 | ||||||
|
|
||||||||
|
Total liabilities
|
121,433 | 45,388 | ||||||
|
|
||||||||
|
Stockholders’ equity:
|
||||||||
|
Preferred stock
|
130,827 | 127,945 | ||||||
|
Common stock
|
8 | 7 | ||||||
|
Additional paid-in capital
|
739,561 | 684,092 | ||||||
|
Retained deficit
|
(258,800 | ) | (241,724 | ) | ||||
|
Accumulated other comprehensive loss
|
(9,422 | ) | 5,405 | |||||
|
|
||||||||
|
Total stockholders’ equity
|
602,174 | 575,725 | ||||||
|
|
||||||||
|
|
$ | 723,607 | $ | 621,113 | ||||
|
|
||||||||
WESTERN ALLIANCE BANCORPORATION
Condensed Statements of Operations
Condensed Statements of Operations
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (in thousands) | ||||||||||||
|
Interest and dividend income
|
$ | 1,716 | $ | 1,605 | $ | 8 | ||||||
|
Interest expense on borrowings
|
5,642 | 3,113 | 4,750 | |||||||||
|
|
||||||||||||
|
Net interest expense
|
(3,926 | ) | (1,508 | ) | (4,742 | ) | ||||||
|
|
||||||||||||
|
Other income (loss):
|
||||||||||||
|
(Loss) from consolidated subsidiaries
|
(5,843 | ) | (123,859 | ) | (233,779 | ) | ||||||
|
Fair value (losses) gains
|
(540 | ) | (17,938 | ) | 19,202 | |||||||
|
Other income
|
15,263 | 1,565 | 1,262 | |||||||||
|
|
||||||||||||
|
Total other income
|
8,880 | (140,232 | ) | (213,315 | ) | |||||||
|
|
||||||||||||
|
Expenses:
|
||||||||||||
|
Salaries and employee benefits
|
10,256 | 7,325 | 7,425 | |||||||||
|
Other
|
9,662 | 4,224 | 7,203 | |||||||||
|
|
||||||||||||
|
|
19,918 | 11,549 | 14,628 | |||||||||
|
|
||||||||||||
|
Loss before income tax benefit
|
(14,964 | ) | (153,289 | ) | (232,685 | ) | ||||||
|
Income tax benefit (expense)
|
7,769 | 1,883 | (3,775 | ) | ||||||||
|
|
||||||||||||
|
Net loss
|
(7,195 | ) | (151,406 | ) | (236,460 | ) | ||||||
|
Preferred stock dividends
|
7,000 | 7,000 | 778 | |||||||||
|
Accretion on preferred stock discount
|
2,882 | 2,742 | 303 | |||||||||
|
|
||||||||||||
|
Net loss available to common stockholders
|
$ | (17,077 | ) | $ | (161,148 | ) | $ | (237,541 | ) | |||
|
|
||||||||||||
121
Table of Contents
Western Alliance Bancorporation
Condensed Statements of Cash Flows
Condensed Statements of Cash Flows
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (in thousands) | ||||||||||||
| Cash Flows from Operating Activities: | ||||||||||||
|
Net income (loss)
|
$ | (7,195 | ) | $ | (151,406 | ) | $ | (236,460 | ) | |||
|
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
|
||||||||||||
|
Equity in net undistributed (earnings) losses of
consolidated subsidiaries
|
5,843 | 123,859 | 233,779 | |||||||||
|
Dividends received from subsidiaries
|
517 | 4,370 | 11,200 | |||||||||
|
Stock-based compensation expense
|
1,268 | 1,296 | 1,037 | |||||||||
|
Trust preferred securities fair value (gains) losses
|
596 | 600 | (19,202 | ) | ||||||||
|
Net amortization of premiums on investment securities
|
112 | 478 | - | |||||||||
|
Securities impairment
|
- | 1,463 | - | |||||||||
|
Gain on sale of securities
|
(11,681 | ) | (4,415 | ) | - | |||||||
|
(Increase) decrease in other assets
|
(31,914 | ) | (4,332 | ) | (1,154 | ) | ||||||
|
Deferred taxes
|
(4,096 | ) | (15,261 | ) | 6,912 | |||||||
|
Increase (decrease) in other liabilities
|
2,483 | 17,852 | 717 | |||||||||
|
Other, net
|
- | 5,380 | 4,528 | |||||||||
|
|
||||||||||||
|
Net cash (used in) provided by operating activities
|
(44,067 | ) | (20,116 | ) | 1,357 | |||||||
|
|
||||||||||||
|
Cash Flows from Investing Activities:
|
||||||||||||
|
Purchases of securities
|
(23,568 | ) | (304,790 | ) | (5,325 | ) | ||||||
|
Proceeds from sales and maturities of securities
|
52,815 | 226,495 | - | |||||||||
|
Purchase of premises and equipment
|
(37 | ) | - | (1,516 | ) | |||||||
|
Proceeds from business divestitures
|
2,284 | 2,700 | - | |||||||||
|
Investment in subsidiaries
|
(120,500 | ) | (124,792 | ) | (138,000 | ) | ||||||
|
Other,net
|
- | (78 | ) | - | ||||||||
|
|
||||||||||||
|
Net cash used in investing activities
|
(89,006 | ) | (200,465 | ) | (144,841 | ) | ||||||
|
|
||||||||||||
|
Cash Flows from Financing Activities:
|
||||||||||||
|
Net (repayments) proceeds from borrowings
|
72,844 | - | (21,730 | ) | ||||||||
|
Proceeds from exercise of stock options and
stock warrants
|
359 | 78 | 1,381 | |||||||||
|
Excess tax benefits on share-based payment
arrangements
|
- | - | 23 | |||||||||
|
Cost of issuing stock in acquisition or offering
|
- | - | (189 | ) | ||||||||
|
Share repurchases
|
- | - | (356 | ) | ||||||||
|
Dividends paid
|
(7,000 | ) | (6,833 | ) | - | |||||||
|
Proceeds from stock issuances, net
|
47,574 | 191,268 | 220,215 | |||||||||
|
|
||||||||||||
|
Net cash provided by financing activities
|
113,777 | 184,513 | 199,344 | |||||||||
|
|
||||||||||||
|
Increase (decrease) in cash and cash equivalents
|
(19,296 | ) | (36,068 | ) | 55,860 | |||||||
|
Cash and Cash Equivalents, beginning of year
|
21,848 | 57,916 | 2,056 | |||||||||
|
|
||||||||||||
|
Cash and Cash Equivalents, end of year
|
$ | 2,552 | $ | 21,848 | $ | 57,916 | ||||||
|
|
||||||||||||
19. SEGMENTS
The Company provides a full range of banking services and investment advisory services through its
consolidated subsidiaries. Applicable guidance provides that the identification of reportable
segments be on the basis of discreet business units and their financial information to the extent
such units are reviewed by the entity’s chief decision maker.
The Company adjusted segment reporting composition during, 2010 to more accurately reflect the way
the Company manages and assesses the performance of the business. During 2010, the Company sold
its wholly owned trust subsidiary, discontinued a portion of its credit card services, and merged
from five bank subsidiaries to three.
The re-defined structure at December 31, 2010 consists of the following segments: “Bank of Nevada”,
“Western Alliance Bank”, “Torrey Pines Bank” and “Other” (Western Alliance Bancorporation holding
company, Western Alliance Equipment Finance, Shine Investment Advisory Services, Inc, Premier Trust
until September 1, 2010, and the discontinued
122
Table of Contents
operations portion of the credit card services). All prior period balances were reclassified to
reflect the change in structure.
The accounting policies of the reported segments are the same as those of the Company as described
in Note 1,
“Summary of Significant Accounting Policies.”
Transactions between segments consist
primarily of borrowed funds and loan participations. Federal funds purchased and sold and other
borrowed funding transactions that resulted in inter-segment profits were eliminated for reporting
consolidated results of operations. Loan participations were recorded at par value with no
resulting gain or loss. The Company allocated centrally provided services to the operating
segments based upon estimated usage of those services.
The Company does not have a single external customer from which it derives 10 percent or more of
its revenues.
The following is a summary of selected operating segment information as of and for the years ended
December 31, 2010, 2009 and 2008:
| Inter- | ||||||||||||||||||||||||
| segment | Consoli- | |||||||||||||||||||||||
| Bank | Western | Torrey | elimi- | dated | ||||||||||||||||||||
| of Nevada | Alliance Bank | Pines Bank | Other | nations | Company | |||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||
| At December 31, 2010 | ||||||||||||||||||||||||
|
Assets
|
$ | 2,771.4 | $ | 1,927.5 | $ | 1,452.2 | $ | 731.0 | $ | (714.2 | ) | $ | 6,167.9 | |||||||||||
|
Gross loans and deferred fees, net
|
1,914.1 | 1,305.4 | 1,063.8 | - | (42.8 | ) | 4,240.5 | |||||||||||||||||
|
Less: Allowance for credit losses
|
(73.5 | ) | (20.4 | ) | (16.8 | ) | - | - | (110.7 | ) | ||||||||||||||
|
Net loans
|
1,840.6 | 1,285.0 | 1,047.0 | - | (42.8 | ) | 4,129.8 | |||||||||||||||||
|
Goodwill
|
23.2 | - | - | 2.7 | - | 25.9 | ||||||||||||||||||
|
Deposits
|
2,388.3 | 1,671.1 | 1,281.6 | - | (2.6 | ) | 5,338.4 | |||||||||||||||||
|
Stockholders’ equity
|
310.6 | 163.3 | 135.5 | 609.6 | (616.8 | ) | 602.2 | |||||||||||||||||
|
No. of branches
|
12 | 16 | 11 | - | - | 39 | ||||||||||||||||||
|
No. of FTE
|
421 | 225 | 203 | 59.0 | - | 908 | ||||||||||||||||||
| Inter- | ||||||||||||||||||||||||
| segment | Consoli- | |||||||||||||||||||||||
| Bank | Western | Torrey | elimi- | dated | ||||||||||||||||||||
| of Nevada | Alliance Bank | Pines Bank | Other | nations | Company | |||||||||||||||||||
|
(in thousands)
|
||||||||||||||||||||||||
|
As of December 31, 2010:
|
||||||||||||||||||||||||
|
Net interest income
|
$ | 104,536 | $ | 69,223 | $ | 62,714 | $ | (3,920 | ) | $ | - | $ | 232,553 | |||||||||||
|
Provision for credit losses
|
76,669 | 6,374 | 10,168 | - | - | 93,211 | ||||||||||||||||||
|
Net interest income (loss) after
provision for credit losses
|
27,867 | 62,849 | 52,546 | (3,920 | ) | - | 139,342 | |||||||||||||||||
|
Non-interest income
|
21,053 | 9,369 | 4,489 | 13,598 | (1,673 | ) | 46,836 | |||||||||||||||||
|
Non-interest expense
|
(90,336 | ) | (51,270 | ) | (38,893 | ) | (17,932 | ) | 1,673 | (196,758 | ) | |||||||||||||
|
Income (loss) from continuing
operations before income taxes
|
(41,416 | ) | 20,948 | 18,142 | (8,254 | ) | - | (10,580 | ) | |||||||||||||||
|
Income tax expense (benefit)
|
(15,010 | ) | 8,147 | 7,825 | (7,372 | ) | - | (6,410 | ) | |||||||||||||||
|
Income(loss) from continuing
operations
|
(26,406 | ) | 12,801 | 10,317 | (882 | ) | - | (4,170 | ) | |||||||||||||||
|
Loss from discontinued operations, net
|
- | - | - | (3,025 | ) | - | (3,025 | ) | ||||||||||||||||
|
Net income (loss)
|
$ | (26,406 | ) | $ | 12,801 | $ | 10,317 | $ | (3,907 | ) | $ | - | $ | (7,195 | ) | |||||||||
123
Table of Contents
| Inter- | ||||||||||||||||||||||||
| segment | Consoli- | |||||||||||||||||||||||
| Bank | Western | Torrey | elimi- | dated | ||||||||||||||||||||
| of Nevada | Alliance Bank | Pines Bank | Other | nations | Company | |||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||
| At December 31, 2009: | ||||||||||||||||||||||||
|
Assets
|
$ | 2,779.1 | $ | 1,640.8 | $ | 1,338.1 | $ | 132.8 | $ | (137.5 | ) | $ | 5,753.2 | |||||||||||
|
Gross loans and deferred fees, net
|
2,072.4 | 1,125.4 | 924.8 | - | (43.0 | ) | 4,079.6 | |||||||||||||||||
|
Less: Allowance for credit losses
|
(67.8 | ) | (26.3 | ) | (14.5 | ) | - | - | (108.6 | ) | ||||||||||||||
|
Net loans
|
2,004.6 | 1,099.1 | 910.3 | - | (43.0 | ) | 3,971.0 | |||||||||||||||||
|
Goodwill
|
23.2 | - | - | 2.7 | - | 25.9 | ||||||||||||||||||
|
Customer deposits
|
2,203.8 | 1,439.8 | 1,081.9 | - | (3.4 | ) | 4,722.1 | |||||||||||||||||
|
Stockholders’ equity
|
251.7 | 121.9 | 122.0 | 85.7 | (5.6 | ) | 575.7 | |||||||||||||||||
|
No. of branches
|
12 | 16 | 9 | - | - | 37 | ||||||||||||||||||
|
No. of FTE
|
438 | 224 | 205 | 63 | - | 930 | ||||||||||||||||||
| Inter- | ||||||||||||||||||||||||
| segment | Consoli- | |||||||||||||||||||||||
| Bank | Western | Torrey | elimi- | dated | ||||||||||||||||||||
| of Nevada | Alliance Bank | Pines Bank | Other | nations | Company | |||||||||||||||||||
|
(in thousands)
|
||||||||||||||||||||||||
| As of December 31, 2009 | ||||||||||||||||||||||||
|
Net interest income
|
$ | 106,014 | $ | 52,521 | $ | 45,205 | $ | (1,451 | ) | $ | - | $ | 202,289 | |||||||||||
|
Provision for credit losses
|
104,859 | 30,450 | 13,790 | 0 | - | 149,099 | ||||||||||||||||||
|
Net interest income after provision
for credit losses
|
1,155 | 22,071 | 31,415 | (1,451 | ) | - | 53,190 | |||||||||||||||||
|
Non-interest income
|
6,093 | 5,617 | 4,319 | (7,009 | ) | (4,585 | ) | 4,435 | ||||||||||||||||
|
Goodwill impairment charge
|
(45,000 | ) | - | - | (4,670 | ) | - | (49,670 | ) | |||||||||||||||
|
Non-interest expense
|
(87,977 | ) | (51,832 | ) | (40,383 | ) | (17,700 | ) | 4,585 | (193,307 | ) | |||||||||||||
|
Income (loss) from continuing
operations before income taxes
|
(125,729 | ) | (24,144 | ) | (4,649 | ) | (30,830 | ) | - | (185,352 | ) | |||||||||||||
|
Income tax expense (benefit)
|
(28,074 | ) | (8,542 | ) | (1,386 | ) | (451 | ) | - | (38,453 | ) | |||||||||||||
|
Income(loss) from continuing
operations
|
(97,655 | ) | (15,602 | ) | (3,263 | ) | (30,379 | ) | - | (146,899 | ) | |||||||||||||
|
Loss from discontinued operations, net
|
- | - | - | (4,507 | ) | - | (4,507 | ) | ||||||||||||||||
|
Net income (loss)
|
$ | (97,655 | ) | $ | (15,602 | ) | $ | (3,263 | ) | $ | (34,886 | ) | $ | - | $ | (151,406 | ) | |||||||
| Inter- | ||||||||||||||||||||||||
| Western | Torrey | segment | Consoli- | |||||||||||||||||||||
| Bank | Alliance | Pines | Elimi- | dated | ||||||||||||||||||||
| of Nevada | Bank | Bank | Other | nations | Company | |||||||||||||||||||
|
(in thousands)
|
||||||||||||||||||||||||
| As of December 31, 2008: | ||||||||||||||||||||||||
|
Net interest income
|
$ | 111,984 | $ | 48,688 | $ | 38,904 | $ | (4,668 | ) | $ | - | $ | 194,908 | |||||||||||
|
Provision for loan losses
|
47,437 | 12,392 | 8,360 | - | - | 68,189 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net interest income (loss) after
provision for credit losses
|
64,547 | 36,296 | 30,544 | (4,668 | ) | - | 126,719 | |||||||||||||||||
|
Noninterest income
|
(102,226 | ) | (22,755 | ) | (26,999 | ) | 37,882 | (3,160 | ) | (117,258 | ) | |||||||||||||
|
Goodwill impairment charge
|
(59,515 | ) | (79,329 | ) | - | - | - | (138,844 | ) | |||||||||||||||
|
Other non-interest expense
|
(64,085 | ) | (39,870 | ) | (28,493 | ) | (20,835 | ) | 3,160 | (150,123 | ) | |||||||||||||
|
|
||||||||||||||||||||||||
|
Income (loss) before income taxes
|
(161,279 | ) | (105,658 | ) | (24,948 | ) | 12,379 | - | (279,506 | ) | ||||||||||||||
|
Income tax expense (benefit)
|
(36,949 | ) | (10,259 | ) | (10,164 | ) | 7,876 | - | (49,496 | ) | ||||||||||||||
|
|
||||||||||||||||||||||||
|
Net loss from continuing operations
|
(124,330 | ) | (95,399 | ) | (14,784 | ) | 4,503 | - | (230,010 | ) | ||||||||||||||
|
Loss from discontinued operations, net
|
- | (6,450 | ) | (6,450 | ) | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net income (loss)
|
$ | (124,330 | ) | $ | (95,399 | ) | $ | (14,784 | ) | $ | (1,947 | ) | $ | - | $ | (236,460 | ) | |||||||
|
|
||||||||||||||||||||||||
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Table of Contents
20.
QUARTERLY FINANCIAL DATA (UNAUDITED)
| December 31, | ||||||||||||||||
| 2010 | ||||||||||||||||
| Fourth | Third | Second | First | |||||||||||||
| Quarter | Quarter | Quarter | Quarter | |||||||||||||
| (in thousands, except per share amounts) | ||||||||||||||||
|
Interest and dividend income
|
$ | 72,374 | $ | 70,705 | $ | 70,000 | $ | 68,734 | ||||||||
|
Interest expense
|
11,463 | 11,237 | 12,544 | 14,016 | ||||||||||||
|
|
||||||||||||||||
|
Net interest income
|
60,911 | 59,468 | 57,456 | 54,718 | ||||||||||||
|
Provision for loan losses
|
18,384 | 22,965 | 23,115 | 28,747 | ||||||||||||
|
|
||||||||||||||||
|
Net interest income (loss), after
provision for credit losses
|
42,527 | 36,503 | 34,341 | 25,971 | ||||||||||||
|
Non-interest income (loss)
|
(720 | ) | 12,167 | 20,760 | 14,629 | |||||||||||
|
Non-interest expenses
|
(56,545 | ) | (46,109 | ) | (53,262 | ) | (40,843 | ) | ||||||||
|
|
||||||||||||||||
|
Income (loss) from continuing operations
before income taxes
|
(14,738 | ) | 2,561 | 1,839 | (243 | ) | ||||||||||
|
Income tax (benefit) expense
|
(4,580 | ) | (79 | ) | (190 | ) | (1,562 | ) | ||||||||
|
|
||||||||||||||||
|
Loss from continuing operations
|
(10,158 | ) | 2,640 | 2,029 | 1,319 | |||||||||||
|
Loss from discontinued operations net of tax benefit
|
(657 | ) | (631 | ) | (802 | ) | (935 | ) | ||||||||
|
|
||||||||||||||||
|
Net (loss) income
|
$ | (10,815 | ) | $ | 2,009 | $ | 1,227 | $ | 384 | |||||||
|
|
||||||||||||||||
|
Earnings (loss) per share:
|
||||||||||||||||
|
Basic
|
$ | (0.17 | ) | $ | (0.01 | ) | $ | (0.02 | ) | $ | (0.03 | ) | ||||
|
|
||||||||||||||||
|
Diluted
|
$ | (0.17 | ) | $ | (0.01 | ) | $ | (0.02 | ) | $ | (0.03 | ) | ||||
|
|
||||||||||||||||
| December 31, | ||||||||||||||||
| 2009 | ||||||||||||||||
| Fourth | Third | Second | First | |||||||||||||
| Quarter | Quarter | Quarter | Quarter | |||||||||||||
| (in thousands, except per share amounts) | ||||||||||||||||
|
Interest and dividend income
|
$ | 67,813 | $ | 67,746 | $ | 70,296 | $ | 70,168 | ||||||||
|
Interest expense
|
16,025 | 18,776 | 19,495 | 19,438 | ||||||||||||
|
|
||||||||||||||||
|
Net interest income
|
51,788 | 48,970 | 50,801 | 50,730 | ||||||||||||
|
Provision for loan losses
|
40,792 | 50,750 | 37,573 | 19,984 | ||||||||||||
|
|
||||||||||||||||
|
Net interest income (loss), after
provision for credit losses
|
10,996 | (1,780 | ) | 13,228 | 30,746 | |||||||||||
|
Non-interest income (loss)
|
4,269 | 12,547 | 15,447 | (27,828 | ) | |||||||||||
|
Non-interest expenses
|
(51,320 | ) | (50,448 | ) | (50,173 | ) | (91,036 | ) | ||||||||
|
|
||||||||||||||||
|
Income (loss) from continuing operations
before income taxes
|
(36,055 | ) | (39,681 | ) | (21,498 | ) | (88,118 | ) | ||||||||
|
Income tax (benefit) expense
|
(10,258 | ) | (16,724 | ) | (8,427 | ) | (3,044 | ) | ||||||||
|
|
||||||||||||||||
|
Loss from continuing operations
|
(25,797 | ) | (22,957 | ) | (13,071 | ) | (85,074 | ) | ||||||||
|
Loss from discontinued operations net of tax benefit
|
(1,115 | ) | (958 | ) | (1,066 | ) | (1,368 | ) | ||||||||
|
|
||||||||||||||||
|
Net (loss) income
|
$ | (26,912 | ) | $ | (23,915 | ) | $ | (14,137 | ) | $ | (86,442 | ) | ||||
|
|
||||||||||||||||
|
Earnings (loss) per share:
|
||||||||||||||||
|
Basic
|
$ | (0.41 | ) | $ | (0.37 | ) | $ | (0.31 | ) | $ | (2.33 | ) | ||||
|
|
||||||||||||||||
|
Diluted
|
$ | (0.41 | ) | $ | (0.37 | ) | $ | (0.31 | ) | $ | (2.33 | ) | ||||
|
|
||||||||||||||||
125
Table of Contents
| ITEM 9. |
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
|
None.
| ITEM 9A. |
CONTROLS AND PROCEDURES
|
As of the end of the period covered by this Annual Report on Form 10-K, an evaluation was carried
out by the Company’s management, with the participation of its Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as
defined in Rule 13a-15(e), under the Securities Exchange Act of 1934. Based upon that evaluation,
the Company’s Chief Executive Officer and Chief Financial Officer concluded that the disclosure
controls and procedures were effective as of the end of the period covered by this report. No
changes were made to the Company’s internal control over financial reporting (as defined in Rule
13a-15(f) under the Securities Exchange Act of 1934) during the last fiscal quarter that materially
affected, or are reasonably likely to affect, the Company’s internal control over financial
reporting.
MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Western Alliance Bancorporation (“the Company”) is responsible for
establishing and maintaining adequate internal control over financial reporting. The Company’s
internal control over financial reporting is a process designed under the supervision of the
Company’s Chief Executive Officer and Chief Financial Officer to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of the Company’s financial
statements for external purposes in accordance with U.S. generally accepted accounting principles.
As of December 31, 2010, management assessed the effectiveness of the Company’s internal control
over financial reporting based on the criteria for effective internal control over financial
reporting established in “
Internal Control-Integrated Framework”
issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) of the Treadway Commission. Based on
this assessment, management determined that the Company maintained effective internal control over
financial reporting as of December 31, 2010, based on those criteria.
McGladrey & Pullen, LLP, the independent registered public accounting firm that audited the
consolidated financial statements of the Company included in this Annual Report on Form 10-K has
issued an attestation report on the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2010. The report, which expresses an unqualified opinion on the
effectiveness of the Company’s internal control over financial reporting as of December 31, 2010,
is included herein.
126
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Western Alliance Bancorporation
Western Alliance Bancorporation
We have audited Western Alliance Bancorporation’s (the Company) internal control over financial
reporting as of December 31, 2010, based on criteria established
in
Internal Control – Integrated
Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission. Western
Alliance Bancorporation’s management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal control over financial
reporting included in the accompanying Management’s Report on Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on the Company’s internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that
(a)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company;
(b)
provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and
(c)
provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Western Alliance Bancorporation maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2010, based on criteria established in
Internal Control – Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated financial statements of Western Alliance Bancorporation and
our report dated March 4, 2011 expressed an unqualified opinion.
/s/ McGLADREY & PULLEN, LLP
Las Vegas, Nevada
March 4, 2011
March 4, 2011
127
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| ITEM 9B. |
OTHER INFORMATION
|
Not applicable.
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is incorporated by reference from the Company’s Definitive
Proxy Statement for the 2011 Annual Meeting of Stockholders to be held on April 26, 2011.
The Company has adopted a Code of Conduct applicable to all of our directors and employees,
including the principal executive officer, principal financial officer and principal accounting
officer. A copy of the Code of Conduct is available on the Company’s website at
www.westernalliancebancorp.com.
ITEM 11.
EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the Company’s Definitive
Proxy Statement for the 2011 Annual Meeting of Stockholders to be held on April 26, 2011.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The information required by this item is incorporated by reference from the Company’s Definitive
Proxy Statement for the 2011 Annual Meeting of Stockholders to be held on April 26, 2011.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated by reference from the Company’s Definitive
Proxy Statement for the 2011 Annual Meeting of Stockholders to be held on April 26, 2011.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated by reference from the Company’s Definitive
Proxy Statement for the 2011 Annual Meeting of Stockholders to be held on April 26, 2011.
128
Table of Contents
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(1) The following financial statements are incorporated by reference from Item 8 hereto:
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(2)
Financial Statement Schedules
Not applicable.
On the Exhibit Index, a “±” identifies each management contract or compensatory plan or arrangement
required to be filed as an exhibit to this Annual Report.
EXHIBITS
|
3.1
|
Amended and Restated Articles of Incorporation (incorporated by
reference to Exhibit 3.1 to Amendment No. 1 to Western Alliance’s
Registration Statement on Form S-1 filed with the SEC on June 7,
2005).
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3.2
|
Amended and Restated By-Laws (incorporated by reference to Exhibit
3.1 to Western Alliance’s Form 8-K filed with the SEC on January 25,
2008).
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3.3
|
Certificate of Designations for the Fixed Rate Cumulative Perpetual
Preferred Stock, Series A, of Western Alliance Bancorporation
(incorporated by reference to Exhibit 3.1 to Western Alliance’s Form
8-K filed with the SEC on November 25, 2008).
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3.4
|
Amended and Restated By-Laws (incorporated by reference to Exhibit
3.1 to Western Alliance’s Form 8-K filed with the SEC on January 25,
2008).
|
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|
3.5
|
Amendment to Amended and Restated By-Laws (incorporated by reference
to Exhibit 3.1 to Western Alliance’s Form 8-K filed with the SEC on
September 20, 2010).
|
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|
3.6
|
Certificate of Amendment to Amended and Restated Articles of
Incorporation of Western Alliance Bancorporation (incorporated by
reference to Exhibit 3.1 to Western Alliance’s Form 8-K filed with
the SEC on May 3, 2010).
|
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3.7
|
Certificate of Amendment to Amended and Restated Articles of
Incorporation of Western Alliance Bancorporation (incorporated by
reference to Exhibit 3.1 to Western Alliance’s Form 8-K filed with
the SEC on November 30, 2010).
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4.1
|
Form of common stock certificate (incorporated by reference to
Exhibit 4.1 to Amendment No. 3 to Western Alliance’s Registration
Statement on Form S-1 filed with the SEC on June 27,
2005).
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|
4.2
|
Form of Fixed Rate Cumulative Perpetual Preferred Stock, Series A,
stock certificate (incorporated by reference to Exhibit 4.1 to
Western Alliance’s Form 8-K filed with the SEC on November 25,
2008).
|
129
Table of Contents
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4.3
|
Form of Warrant to purchase shares of Western Alliance
Bancorporation common stock, dated December 12, 2003, together with
a schedule of warrant holders (incorporated by reference to Exhibit
10.9 to Western Alliance’s Registration Statement on Form S-1 filed
with the SEC on April 28, 2005). ±
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4.4
|
Warrant, dated November 21, 2008, by and between Western Alliance
Bancorporation and the United States Department of the Treasury
(incorporated by reference to Exhibit 4.2 to Western Alliance’s Form
8-K filed with the SEC on November 25, 2008).
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4.5
|
Senior Debt Indenture, dated August 25, 2010, between Western
Alliance Bancorporation and Wells Fargo Bank, National Association,
as trustee. (incorporated by reference to Exhibit 4.1 to Western
Alliance’s Form 8-K filed with the SEC on August 25, 2010).
|
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4.6
|
First Supplemental Indenture, dated August 25, 2010, between Western
Alliance Bancorporation and Wells Fargo Bank, National Association,
as trustee. (incorporated by reference to Exhibit 4.2 to Western
Alliance’s Form 8-K filed with the SEC on August 25, 2010).
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4.7
|
Form of 10.00% Senior Notes due 2015 (incorporated by reference to
Exhibit 4.3 to Western Alliance’s Form 8-K filed with the SEC on
August 25, 2010).
|
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10.1
|
Employment Agreement by and between Western Alliance Bancorporation
and Mr. Markham (incorporated by reference to Exhibit 5.1 to Western
Alliance’s Registration Statement on Form 8-K filed with the SEC on
April 23, 2007).±
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10.2
|
Employment Agreement by and between Western Alliance Bancorporation
and Mr. Grisham (incorporated by reference to Exhibit 10.1 to
Western Alliance’s Registration Statement on Form 8-K filed with the
SEC on April 2, 2007). ±
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|
10.3
|
Employment Agreement by and between Western Alliance Bancorporation
and Mr. Woodrum (incorporated by reference to Exhibit 10.2 to
Western Alliance’s Registration Statement on Form 8-K filed with the
SEC on April 2, 2007). ±
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|
10.4
|
Agreement and Plan of Merger By and Between Western Alliance
Bancorporation and First Independent Capital of Nevada (incorporated
by reference to Appendix A to Western Alliance’s Form S-4 filed with
the SEC on February 1, 2007). ±
|
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|
10.5
|
Western Alliance Bancorporation 2005 Stock Incentive Plan, as
amended (incorporated by reference to Appendix A to Western
Alliance’s Proxy Statement on Schedule 14A filed with the SEC on
March 17, 2009). ±
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|
10.6
|
Form of BankWest Nevada Corporation Incentive Stock Option Plan
Agreement (incorporated by reference to Exhibit 10.3 to Western
Alliance’s Registration Statement on Form S-1 filed with the SEC on
April 28, 2005). ±
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10.7
|
Form of Western Alliance Incentive Stock Option Plan Agreement
(incorporated by reference to Exhibit 10.4 to Western Alliance’s
Registration Statement on Form S-1 filed with the SEC on April 28,
2005). ±
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10.8
|
Form of Western Alliance 2002 Stock Option Plan Agreement
(incorporated by reference to Exhibit 10.5 to Western Alliance’s
Registration Statement on Form S-1 filed with the SEC on April 28,
2005). ±
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10.9
|
Form of Western Alliance 2002 Stock Option Plan Agreement (with
double trigger acceleration clause) (incorporated by reference to
Exhibit 10.6 to Western Alliance’s Registration Statement on Form
S-1 filed with the SEC on April 28, 2005). ±
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10.10
|
Form of Indemnification Agreement (incorporated by reference to
Exhibit 10.7 to Western Alliance’s Registration Statement on Form
S-1 filed with the SEC on April 28, 2005). ±
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10.11
|
Form of Non-Competition Agreement (incorporated by reference to
Exhibit 10.8 to Western Alliance’s Registration Statement on Form
S-1 filed with the SEC on April 28, 2005). ±
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10.12
|
Real Estate Purchase Agreement between GRS Sahara Ave. Corp. and
BankWest of Nevada (incorporated by reference to Exhibit 10.1 to
Western Alliance’s Form 8-K filed with the SEC on September 26,
2005).
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10.13
|
Securities Purchase Agreement, dated September 29, 2008, by and
among Western Alliance Bancorporation and
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Table of Contents
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certain other parties
thereto (incorporated by reference to Exhibit 10.1 to Western
Alliance’s Form 8-K filed with the SEC on October 2, 2008).
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10.14
|
Registration Rights Agreement, dated September 29, 2008, by and
among Western Alliance Bancorporation and certain other parties
thereto (incorporated by reference to Exhibit 10.2 to Western
Alliance’s Form 8-K filed with the SEC on October 2, 2008).
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10.15
|
Letter Agreement, dated November 21, 2008, between Western Alliance
Bancorporation and the United States Department of the Treasury, and
the Securities Purchase Agreement – Standard Terms attached thereto
(incorporated by reference to Exhibit 10.1 to Western Alliance’s
Form 8-K filed with the SEC on November 25, 2008).
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10.16
|
Western Alliance Bancorporation 2008 Annual Bonus Plan (incorporated
by reference to Exhibit 10.1 to Western Alliance’s Form 10-Q filed
with the SEC on August 10, 2009). ±
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10.17
|
Western Alliance Bancorporation 2009 Annual Bonus Plan (incorporated
by reference to Exhibit 10.2 to Western Alliance’s Form 10-Q filed
with the SEC on August 10, 2009). ±
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10.18
|
Western Alliance Bancorporation 2010 Annual Bonus Plan (incorporated
by reference to Exhibit 10.18 to Western Alliance’s Form 10-k filed
with the SED on March 16, 2010). ±
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10.19
|
Western Alliance Bancorporation 2011 Annual Bonus Plan. ±
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10.20
|
Bank of Nevada 2008 Annual Bonus Plan (incorporated by reference to
Exhibit 10.3 to Western Alliance’s Form 10-Q filed with the SEC on
August 10. 2009). ±
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10.21
|
Bank of Nevada 2009 Annual Bonus Plan (incorporated by reference to
Exhibit 10.4 to Western Alliance’s Form 10-Q filed with the SEC on
August 10. 2009). ±
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10.22
|
Bank of Nevada 2010 Annual Bonus Plan (incorporated by reference to
Exhibit 10.21 to Western Alliance’s Form 10-K filed with the SEC on
March 16, 2010). ±
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10.23
|
Torrey Pines Bank 2008 Annual Bonus Plan (incorporated by reference
to Exhibit 10.5 to Western Alliance’s Form 10-Q filed with the SEC
on August 10. 2009). ±
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10.24
|
Torrey Pines Bank 2009 Annual Bonus Plan (incorporated by reference
to Exhibit 10.6 to Western Alliance’s Form 10-Q filed with the SEC
on August 10. 2009). ±
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10.25
|
Torrey Pines Bank 2010 Annual Bonus Plan (incorporated by reference
to Exhibit 10.21 to Western Alliance’s Form 10-K filed with the SEC
on March 16, 2010). ±
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10.26
|
First Independent Bank of Nevada 2009 Annual Bonus Plan
(incorporated by reference to Exhibit 10.7 to Western Alliance’s
Form 10-Q filed with the SEC on August 10, 2009). ±
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10.27
|
First Independent Bank of Nevada 2010 Annual Bonus Plan
(incorporated by reference to Exhibit 10.21 to Western Alliance’s
Form 10-K filed with the SEC on March 16, 2010). ±
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10.28
|
Alliance Bank of Arizona 2009 Annual Bonus Plan (incorporated by
reference to Exhibit 10.8 to Western Alliance’s Form 10-Q filed with
the SEC on August 10, 2009). ±
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10.29
|
Alliance Bank of Arizona 2010 Annual Bonus Plan (incorporated by
reference to Exhibit 10.21 to Western Alliance’s Form 10-K filed
with the SEC on March 16, 2010). ±
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10.30
|
Alta Alliance Bank 2009 Annual Bonus Plan (incorporated by reference
to Exhibit 10.9 to Western Alliance’s Form 10-Q filed with the SEC
on August 10, 2009). ±
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10.31
|
Alta Alliance Bank 2010 Annual Bonus Plan. ±(incorporated by
reference to Exhibit 10.21 to Western Alliance’s Form 10-K filed
with the SEC on March 16, 2010)
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10.32
|
Underwriting Agreement, dated May 14, 2009, by and between Western
Alliance Bancorporation and Keefe, Bruyette & Woods, Inc.
(incorporated by reference to Exhibit 1.1 to Western Alliance’s Form
8-K/A filed with the SEC
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131
Table of Contents
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on August 10, 2009).
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10.33
|
Employment letter dated April 2, 2010, between Western Alliance
Bancorporation and Kenneth Vecchione (incorporated by reference to
Exhibit 10 to Western Alliance’s Form 10-Q/A filed with the SEC on
August 18, 2010).
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10.34
|
Underwriting Agreement, dated August 19, 2010, by and between
Western Alliance Bancorporation and Keefe, Bruyette & Woods, Inc.
(incorporated by reference to Exhibit 1.1 to Western Alliance’s Form
8-K filed with the SEC on August 24, 2010).
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10.35
|
Underwriting Agreement, dated August 20, 2010, by and among Western
Alliance Bancorporation and Keefe, Bruyette & Woods, Inc. and
Goldman, Sachs & Co. (incorporated by reference to Exhibit 1.1 to
Western Alliance’s Form 8-K filed with the SEC on August 25, 2010).
|
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21.1
|
List of Subsidiaries of Western Alliance Bancorporation.
|
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23.1
|
Consent of McGladrey & Pullen, LLP.
|
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24.1
|
Power of Attorney (see signature page).
|
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|
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|
31.1
|
CEO Certification Pursuant Rule 13a-14(a)/15d-a4(a).
|
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|
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|
31.2
|
CFO Certification Pursuant Rule 13a-14(a)/15d-14(a).
|
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|
||
|
32
|
CEO and CFO Certification Pursuant 18 U.S.C. Section 1350, as
adopted pursuant to section 906 of the Sarbanes Oxley Act of
2002.
|
99.1 Certification of Chief Executive Officer Pursuant to Section 111(b)(4) of the Emergency
Economic Stabilization Act of 2008.
99.2 Certification of Chief Financial Officer Pursuant to Section 111(b)(4) of the Emergency
Economic Stabilization Act of 2008.
Stockholders may obtain copies of exhibits by writing to: Dale Gibbons, Western Alliance
Bancorporation, One East Washington Street Suite 1400, Phoenix, AZ 85004.
132
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
| WESTERN ALLIANCE BANCORPORATION | ||||||
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|
March 4, 2011
|
By: | /s/Robert Sarver | ||||
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|
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Robert Sarver | |||||
|
|
Chairman of the Board and | |||||
|
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Chief Executive Officer | |||||
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and
appoints Robert Sarver and Dale Gibbons, and each of them, his or her true and lawful
attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her
and in his or her name, place and stead, in any and all capacities, to sign any and all amendments
to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and other
documents in connection therewith the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the premises, as fully and to
all intents and purposes as he or she might or could do in person hereby ratifying and confirming
all that said attorneys-in-fact and agents, or his or her substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by
the following persons on behalf of the registrant in their listed capacities on March 4, 2011:
133
Table of Contents
| Name | Title | |
|
|
||
|
/S/ Robert Sarver
|
Chairman of the Board and Chief Executive Officer | |
|
Robert Sarver
|
(Principal Executive Officer) | |
|
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|
/S/ Dale Gibbons
|
Executive Vice President and Chief Financial | |
|
Dale Gibbons
|
Officer (Principal Financial Officer) | |
|
|
||
|
/S/ Susan C. Thompson
|
Senior Vice President and Controller | |
|
Susan C. Thompson
|
(Principal Accounting Officer) | |
|
|
||
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/S/ Kenneth A. Vecchione
|
President and Chief Operating Officer | |
|
Kenneth A Vecchione
|
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/S/ Bruce D. Beach
|
Director | |
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/S/ William S. Boyd
|
Director | |
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William S. Boyd
|
||
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/S/ Steven J. Hilton
|
Director | |
|
Steven J. Hilton
|
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/S/ Marianne Boyd Johnson
|
Director | |
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Marianne Boyd Johnson
|
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Director | |
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Cary Mack
|
||
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/S/ Todd Marshall
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Director | |
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Todd Marshall
|
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/S/ M. Nafees Nagy
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Director | |
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M. Nafees Nagy
|
||
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/S/ James Nave
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Director | |
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James Nave
|
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/S/ John Peter Sande III
|
Director | |
|
John Peter Sande III
|
||
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||
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/S/ Donald D. Snyder
|
Director | |
|
Donald D. Snyder
|
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|
Director | |
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Sung Won Sohn
|
134
TABLE OF CONTENTS
Part IprintItem 1. BusinessprintItem Ia. Risk FactorsprintItem 1B. Unresolved Staff CommentsprintItem 2. PropertiesprintItem 3. Legal ProceedingsprintItem 4. ReservedprintPart IIprintItem 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesprintItem 6. Selected Financial DataprintItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsprintItem 7A. Quantitative and Qualitative Disclosures About Market RiskprintItem 8. Financial Statements and Supplementary DataprintItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureprintItem 9A. Controls and ProceduresprintItem 9B. Other InformationprintPart IIIprintItem 10. Directors, Executive Officers and Corporate GovernanceprintItem 11. Executive CompensationprintItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersprintItem 13. Certain Relationships and Related Transactions and Director IndependenceprintItem 14. Principal Accountant Fees and ServicesprintPart IVprintItem 15. Exhibits and Financial Statement Schedulesprint