e10vk
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
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Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the fiscal year ended December 31, 2007
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Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For
the Transition period
from to
Commission
File Number: 001-32550
WESTERN ALLIANCE BANCORPORATION
(Exact Name of Registrant as Specified in Its Charter)
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Nevada
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88-0365922 |
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(State or Other Jurisdiction of
Incorporation or Organization)
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(I.R.S. Employer I.D. Number) |
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2700 W. Sahara Avenue, Las Vegas, NV
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89102 |
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(Address of Principal Executive Offices)
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(Zip Code) |
Registrants telephone number, including area code
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Common Stock, $0.0001 Par Value
(Title of Class)
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
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
Note Checking the box above will not relieve any registrant required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.
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 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 registrants 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,
a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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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 registrants voting stock held by non-affiliates is approximately
$552,110,000 based on the June 30, 2007 closing price of said stock on the New York Stock Exchange
($29.85 per share).
As of February 1, 2007, 30,157,627 shares of the registrants common stock were outstanding.
Portions of the registrants definitive Proxy Statement for its 2008 Annual Meeting of Stockholders
are incorporated by reference into Part III of this report.
PART I
ITEM 1. BUSINESS
WHERE YOU CAN FIND MORE INFORMATION
Under the Securities Exchange Act of 1934 Sections 13 and 15(d), periodic and current
reports must be filed with the SEC. We electronically file the following reports with the SEC:
Form 10-K (Annual Report), Form 10-Q (Quarterly Report), Form 8-K (Current Report), and Form DEF
14A (Proxy Statement). We may file additional forms. The SEC maintains an Internet site,
www.sec.gov, in which all forms filed electronically may be accessed. Additionally, all
forms filed with the SEC and additional shareholder information is available free of charge on our
website: www.westernalliancebancorp.com. We post these reports to our website as soon as
reasonably practicable after filing them with the SEC. None of the information on or hyperlinked
from our website is incorporated into this Report.
Western Alliance Bancorporation
We are a bank holding company headquartered in Las Vegas, Nevada. We provide a full range of
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 our subsidiary banks and financial services companies located in Nevada, Arizona,
California and Colorado. On a consolidated basis, as of December 31, 2007, we had approximately
$5.0 billion in assets, $3.6 billion in total loans, $3.5 billion in deposits and $501.5 million in
stockholders equity. We have focused our lending activities primarily on commercial loans, which
comprised 85.2% of our total loan portfolio at December 31, 2007. In addition to traditional
lending and deposit gathering capabilities, we also offer a broad array of financial products and
services aimed at satisfying the needs of small to mid-sized businesses and their proprietors,
including cash management, trust administration and estate planning, custody and investments,
equipment leasing and affinity credit card services nationwide.
Bank of Nevada (formerly BankWest of Nevada) was founded in 1994 by a group of individuals
with extensive community banking experience in the Las Vegas market. We believe our success has
been built on the strength of our management team, our conservative credit culture, the attractive
long-term growth characteristics of the markets in which we operate and our ability to expand our franchise
by attracting seasoned bankers with long-standing relationships in their communities.
In 2003, with the support of local banking veterans, we opened Alliance Bank of Arizona in
Phoenix, Arizona and Torrey Pines Bank in San Diego, California. Over the past four and a half
years we have successfully leveraged the expertise and strengths of Western Alliance and Bank of
Nevada to build and expand these new banks in a rapid and efficient manner.
In 2006, we opened Alta Alliance Bank in Oakland, California. In addition, we acquired both
Nevada First Bank and Bank of Nevada as part of mergers completed in 2006. Both of these banks were
merged into BankWest of Nevada (whose name was subsequently changed to Bank of Nevada).
In March 2007, we expanded our presence in Northern Nevada through the acquisition of First
Independent Bank of Nevada headquartered in Reno, Nevada. First Independent Bank of Nevada is a
successful community bank with a management team, credit culture and an attractive growth market
similar to our other existing banks.
Through our wholly owned, non-bank subsidiaries, Miller/Russell & Associates, Inc., Shine
Investment Advisory Services, Inc. and Premier Trust, Inc., we provide investment advisory and
wealth management services, including trust administration and estate planning. We acquired
Miller/Russell and Premier Trust in May 2004 and December 2003, respectively. We acquired Shine in
July 2007. As of December 31, 2007, Miller/Russell had $1.6 billion in assets under management,
Shine had $428 million in assets under management and Premier Trust had $325 million in assets
under management and $520 million in total trust assets.
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The Company provides a full range of banking services, as well as trust and investment
advisory services through its eight consolidated subsidiaries. The company manages its business
with a primary focus on each subsidiary. Thus, the Company has identified eight operating
segments. However, the trust and investment advisory segments do not meet the quantitative
thresholds for disclosure and have therefore been included in the other column. Parent company
information is also included in the other category because it represents an overhead function
rather than an operating segment. PartnersFirst, a division of Torrey Pines Bank, is currently
included in the Torrey Pines Bank segment. Western Alliance Leasing, a subsidiary of the parent
company, is also included in the other column. The Company has not aggregated any operating
segments.
The Company reported four segments in the financial statements issued prior to December 31,
2007. In October 2006, the Company opened a new bank subsidiary, Alta Alliance Bank, which is
located in Northern California. Although Alta Alliance Bank does not meet the quantitative
thresholds for disclosure at December 31, 2007, this segment is reported because it is expected to
meet the quantitative thresholds for disclosure in the future. The addition of First Independent
Bank of Nevada in 2007 resulted in an additional operating segment this year.
The five reported segments derive a majority of their revenues from interest income and the
chief executive officer relies primarily on net interest income to assess the performance of the
segments and make decisions about resources to be allocated to the segments. The accounting
policies of the reported segments are the same as those of the Company as described in Note 1 to
the Consolidated Financial Statements. Transactions between segments consist primarily of
borrowings and loan participations. Federal funds purchases and sales and other borrowed funds
transactions result in profits that are eliminated for reporting consolidated results of
operations. Loan participations are recorded at par value with no resulting gain or loss. The
Company allocates centrally provided services to the operating segments based upon estimated usage
of those services.
Recent Developments
Acquisition of Shine Investment Advisory Services, Inc. Effective July 31, 2007, the Company
acquired 80% of the outstanding common stock of Shine Investment Advisory Services, Inc. (Shine),
headquartered in Lone Tree, Colorado. Since the merger closed on July 31, 2007, Shines results of
operations were not included prior to the closing date. Shines assets under management at the date
of merger were $409.9 million. The fair value of tangible assets acquired through this merger was
$0.4 million. As provided in the purchase agreement and based on valuation amounts as of the merger
date, approximately 314,000 shares of the Companys stock at a price of approximately $25.48 were
issued in connection with the Shine acquisition.
On July 12, 2007, the Company announced the formation of PartnersFirst Affinity Services, a
division of its Torrey Pines Bank affiliate. PartnersFirst focuses on affinity credit card
marketing using an innovative model and approach.
Our Strategy
Since 1994, we believe that we have been successful in building and developing our operations
by adhering to a business strategy focused on understanding and serving the needs of our local
clients and pursuing growth markets and opportunities while emphasizing a strong credit culture.
Our objective is to provide our shareholders with superior returns. The critical components of our
strategy include:
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Leveraging our knowledge and expertise. Over the past decade we have assembled an
experienced management team and built a culture committed to credit quality and operational
efficiency. We have also successfully centralized a significant portion of our operations,
processing, compliance, Community Reinvestment Act administration and specialty functions.
We intend to grow our franchise and improve our operating efficiencies by continuing to
leverage our managerial expertise and the functions we have centralized at Western
Alliance. |
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Maintaining a strong credit culture. We adhere to a specific set of credit standards
across our bank subsidiaries that ensure the proper management of credit risk. Western
Alliances management team plays an active role in monitoring compliance with our Banks
credit standards. Western Alliance also continually monitors each of our subsidiary banks
loan portfolios, which enables us to identify and take prompt corrective action on
potentially problematic loans. |
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Attracting seasoned relationship bankers and leveraging our local market knowledge. We
believe our success has been the result, in part, of our ability to attract and retain
experienced relationship bankers that have strong relationships in their communities. These
professionals bring with them valuable customer relationships, and have been an integral
part of our ability to expand rapidly in our market areas. These professionals allow us to
be responsive to the needs of our customers and provide a high level of service to local
businesses. We intend to continue to hire experienced relationship bankers as we expand our
franchise. |
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Offering a broader array of personal financial products and services. Part of our
growth strategy is to offer a broader array of personal financial products and services to
high net worth individuals and to senior managers at commercial enterprises with which we
have established relationships. To this end, we acquired Premier Trust, Inc. in December 2003, Miller/Russell & Associates, Inc.
in May 2004, and a majority interest in Shine
Investment Advisory Services, Inc. in July 2007. |
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Focusing on markets with attractive growth prospects. We operate in what we believe to
be highly attractive markets with superior long-term growth prospects. Our metropolitan areas have a
high per capita income and are expected to experience some of the fastest population growth
in the country. We continuously evaluate new markets in the Western United States with
similar growth characteristics as targets for expansion. Our long term strategy is to
operate in six to twelve high growth markets. We intend to implement this strategy in the
long term through the formation of additional de novo banks or acquiring other commercial
banks in new market areas with attractive growth prospects. As of December 31, 2007, we
maintained 39 bank branch offices located throughout our market areas. To accommodate our
growth and enhance efficiency, we opened a service center facility in Las Vegas, Nevada
that provides centralized back-office services and call center support for all our banking
subsidiaries. We are currently focused on growing our business with existing branches. |
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Attracting low cost deposits. We believe we have been able to attract a stable base of
low-cost deposits from customers who are attracted to our personalized level of service and
local knowledge. As of December 31, 2007, our deposit base was comprised of 28.4%
non-interest bearing deposits, of which 14.3% consisted of title company deposits, 79.6%
consisted of other business deposits and 6.1% consisted of consumer deposits. |
Our Market Areas
We believe that there is a significant market segment of small to mid-sized businesses that
are looking for a locally based commercial bank capable of providing a high degree of flexibility
and responsiveness, in addition to offering a broad range of financial products and services. We
believe that the local community banks that compete in our markets do not offer the same breadth of
products and services that our customers require to meet their growing needs, while the large,
national banks lack the flexibility and personalized service that our customers desire in their
banking relationships. By offering flexibility and responsiveness to our customers and providing a
full range of financial products and services, we believe that we can better serve our markets.
Through our banking and non-banking subsidiaries, we serve customers in Nevada, Arizona,
California and Colorado.
Nevada. In Southern Nevada, we operate in the cities of Las Vegas, Henderson, Mesquite and
North Las Vegas, all of which are in the Las Vegas metropolitan area. In Northern Nevada, we
operate in the cities of Reno, Sparks and Fallon which are located in or around the Reno
metropolitan area. The economy of the Las Vegas and Reno metropolitan areas are primarily driven by
services and industries related to gaming, entertainment and tourism.
Arizona. In Arizona, we operate in Phoenix, Scottsdale and Mesa, which are located in the
Phoenix metropolitan area, Tucson, which is located in the Tucson metropolitan area, and Flagstaff
and Sedona, which are located in the Flagstaff metropolitan area. These metropolitan areas contain
companies in the following industries: aerospace, high-tech manufacturing, construction, energy,
transportation, minerals and mining and financial services.
California. In California, we operate in the cities of San Diego, La Mesa and Carlsbad, which
are in the San Diego metropolitan area, and Oakland and Piedmont, which are in the Bay Area
metropolitan area. The
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business communities in the San Diego and Bay Area metropolitan areas include numerous small
to medium-sized businesses and service and professional firms that operate in a diverse number of
industries, including the entertainment, defense and aerospace, construction, health care and
pharmaceutical, technology and computer, financial and telecommunications industries.
Colorado. In Colorado, we operate investment management services though our subsidiary, Shine.
Operations
Our operations are conducted through the following subsidiaries:
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Bank of Nevada. Bank of Nevada is a Nevada-chartered commercial bank headquartered in
Las Vegas, Nevada. As of December 31, 2007, the bank had $3.0 billion in assets, $2.2
billion in loans and $2.0 billion in deposits. Bank of Nevada has 15 full-service offices
in the Las Vegas metropolitan area. |
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Alliance Bank of Arizona. Alliance Bank of Arizona is an Arizona-chartered commercial
bank headquartered in Phoenix, Arizona. As of December 31, 2007, the bank had $822.6
million in assets, $584.2 million in loans and $613.1 million in deposits. Alliance Bank
has four full-service offices in Phoenix, three in Tucson, one in Scottsdale, one in
Sedona, one in Mesa and one in Flagstaff. |
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Torrey Pines Bank. Torrey Pines Bank is a California-chartered commercial bank
headquartered in San Diego, California. As of December 31, 2007, the bank had $759.5
million in assets, $515.4 million in loans and $470.4 million in deposits. Torrey Pines has
five full-service offices in San Diego, one in La Mesa and one in Carlsbad. |
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Alta Alliance Bank. Alta Alliance Bank opened in October 2006 and is a
California-chartered commercial bank headquartered in Oakland, California. As of December
31, 2007, the bank had $91.0 million in assets, $38.5 million in loans and $68.7 million in
deposits. Alta Alliance has one full-service office in Oakland and one in Piedmont. |
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First Independent Bank of Nevada. First Independent Bank of Nevada was acquired in
March 2007 and is a Nevada-chartered commercial bank headquartered in Reno, Nevada. As of
December 31, 2007, the bank had $549.9 million in assets, $322.2 million in loans and
$420.1 million in deposits. First Independent has two full-service offices in Reno, one in
Sparks and one in Fallon. |
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Miller/Russell & Associates, Inc. Miller/Russell offers investment advisory services
to businesses, individuals and non-profit entities. As of December 31, 2007, Miller/Russell
had $1.6 billion in assets under management. Miller/Russell has offices in Phoenix, Tucson,
San Diego and Las Vegas. |
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Premier Trust, Inc. Premier Trust offers clients wealth management services, including
trust administration of personal and retirement accounts, estate and financial planning,
custody services and investments. As of December 31, 2007, Premier Trust had $520 million
in total trust assets and $325 million in assets under management. Premier Trust has
offices in Las Vegas and Phoenix. |
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Shine Investment Advisory
Services, Inc. We acquired a majority interest in Shine in
July 2007. Shine offers investment advisory services to businesses, individuals and
non-profit entities. As of December 31, 2007, Shine had $428 million in assets under
management. Shine has one office in Lone Tree, Colorado. |
Lending Activities
We provide a variety of loans to our customers, including commercial and residential real
estate loans, construction and land development loans, commercial loans, and to a lesser extent,
consumer loans. Our lending efforts have focused on meeting the needs of our business customers,
who have typically required funding for commercial and commercial real estate enterprises.
Commercial loans comprised 85.2% of our total loan portfolio at December 31, 2007.
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Commercial Real Estate Loans. The majority of our lending activity consists of loans to
finance the purchase of commercial real estate and loans to finance inventory and working capital
that are secured by commercial real estate. We have a commercial real estate portfolio comprised of
loans on apartment buildings, professional offices, industrial facilities, retail centers and other
commercial properties. As of December 31, 2007, 50.7% of our commercial real estate and
construction loans were owner occupied.
Construction and Land Development Loans. The principal types of our construction loans
include industrial/warehouse properties, office buildings, retail centers, medical facilities,
restaurants and single-family homes. Construction and land development loans are primarily made
only to experienced local developers with whom we have a sufficient 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.
We extend raw commercial land loans primarily to borrowers who plan to initiate active development
of the property within two years.
Commercial and Industrial Loans. In addition to real estate related loan products, we also
originate commercial and industrial loans, including working capital lines of credit, inventory and
accounts receivable lines, equipment loans and other commercial loans. We focus on making
commercial loans to small and medium-sized businesses in a wide variety of industries. We also are
a Preferred Lender in Arizona with the SBA.
Residential Loans. We originate residential mortgage loans secured by one to four-family
properties, most of which serve as the primary residence of the owner. Most of our loan
originations result from relationships with existing or past customers, members of our local
community, and referrals from realtors, attorneys and builders.
Consumer Loans. We offer a variety of consumer loans to meet customer demand and to increase
the yield on our loan portfolio. Consumer loans are generally offered at a higher rate and shorter
term than residential mortgages. Examples of our consumer loans include:
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home equity loans and lines of credit; |
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home improvement loans; |
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credit card loans; |
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new and used automobile loans; and |
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personal lines of credit. |
As of December 31, 2007, our loan portfolio totaled $3.6 billion, or approximately 72.4% of our
total assets. The following tables set forth the composition of our loan portfolio as of December
31, 2007.
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December 31, 2007 |
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Amount |
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Percent |
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Loan Type |
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($ in millions) |
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Construction and land development |
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$ |
806.1 |
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22.1 |
% |
Commercial real estate |
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1,514.5 |
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41.6 |
% |
Residential real estate |
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492.6 |
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13.5 |
% |
Commercial and industrial |
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784.4 |
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21.5 |
% |
Consumer |
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43.5 |
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1.3 |
% |
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Total gross loans |
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3,641.1 |
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100.0 |
% |
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Less: net deferred loan fees |
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(8.1 |
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Gross loans, net of deferred loan fees |
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$ |
3,633.0 |
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Credit Policies and Administration
General
We adhere to a specific set of credit standards across our bank subsidiaries that ensure the
proper management of credit risk. Furthermore, our holding companys 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,
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 establish 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. We monitor all changes to each respective banks loan policy to promote
this philosophy. 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:
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Individual Authorities. The board of directors 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 $1.5 million for real estate secured loans and $750,000 for
other loans. |
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Management Loan Committees. Credits in excess of individual loan limits are submitted
to the appropriate banks Management Loan Committee. The Management Loan Committees consist
of members of the senior management team of that bank and are chaired by that banks chief
credit officer. The Management Loan Committees have approval authority up to $6.0 million
at Bank of Nevada, $7.5 million at Alliance Bank of Arizona, $5.0 million at Torrey Pines
Bank and First Independent Bank of Nevada and $5.5 million at Alta Alliance Bank. |
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Credit Administration. Credits in excess of the Management Loan Committee authority
are submitted by the bank subsidiary to Western Alliances Credit Administration. Credit
Administration consists of the chief credit officers of Western Alliance and Bank of
Nevada. Credit Administration has approval authority up to $18.0 million. |
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Board of Directors Oversight. The CEO of Bank of Nevada acting with the Chairman of the
Board of Directors of Bank of Nevada has approval authority up to Bank of Nevadas legal
lending limit of $66.4 million. |
Our credit administration department works independent of loan production.
Loans to One Borrower. 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
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 may
not exceed 20% of the banks 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 exceed 25% of the sum of the banks shareholders equity, allowance for
loan losses, capital notes and debentures.
Notwithstanding the above limits, because of our business model, our affiliate banks are able
to leverage their relationships with one another to participate in loans collectively which they
otherwise would not be able to accommodate on an individual basis. As of December 31, 2007, the
aggregate lending limit of our subsidiary banks was approximately $126.2 million.
Concentrations of Credit Risk. Our lending policies also establish customer and product
concentration limits to control single customer and product exposures. As these policies are
directional and not absolute, at any particular point in time the ratios may be higher or lower
because of funding on outstanding
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commitments. Set forth below are our lending policies and the
segmentation of our loan portfolio by loan type as of December 31, 2007:
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Percent of Total Capital |
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Percent of Total Loans |
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Policy Limit |
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Actual |
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Policy Limit |
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Actual |
Commercial Real Estate Term |
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400 |
% |
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302 |
% |
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65 |
% |
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42 |
% |
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Construction |
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250 |
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161 |
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30 |
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22 |
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Commercial and Industrial |
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200 |
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156 |
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30 |
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21 |
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Residential Real Estate |
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225 |
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98 |
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65 |
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14 |
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Consumer |
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50 |
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9 |
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15 |
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1 |
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Asset Quality
General
One of our key strategies is to maintain high asset quality. We have 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 the FDIC. 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 annually by an external, independent loan review
firm.
Collection Procedure
If a borrower fails to make a scheduled payment on a loan, we attempt 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. Our Special Assets Department reviews all delinquencies on a
monthly basis. Each banks chief credit officer can approve charge-offs up to $5,000. Amounts in
excess of $5,000 require the approval of each banks respective board of directors. Loans deemed
uncollectible are proposed for charge-off on a monthly basis at each respective banks monthly
board meeting.
Non-performing Loans
Our policies require that the chief credit officer of each bank continuously monitor the
status of that banks loan portfolio and prepare and present to the board of directors a monthly
report listing all credits 30 days or more past due. All relationships graded substandard or
worse typically are transferred to the Special Assets Department for corrective action. In
addition, we prepare detailed status reports for all relationships rated watch or lower on a
quarterly basis. These reports are provided to management and the board of directors of the
applicable bank and Western Alliance.
Our policy is to classify all loans 90 days or more past due and all loans on a non-accrual
status as substandard or worse, unless extraordinary circumstances suggest otherwise.
We generally stop accruing income on loans when interest or principal payments are in arrears
for 90 days, or earlier if the banks management deems appropriate. We designate loans on which we
stop accruing income as non-accrual loans and we reverse outstanding interest that we previously
accrued. We recognize income in the period in which we collect it, when the ultimate collectibility
of principal is no longer in doubt. We return non-accrual loans to accrual status when factors
indicating doubtful collection no longer exist and the loan has been brought current.
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, classify them. We use grades six through nine of our
loan grading system to identify potential problem assets.
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The following describes grades six through nine of our loan grading system:
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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/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. |
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Substandard. These assets contain well-defined credit weaknesses and are
characterized by the 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 non-accrual are considered at
least substandard, unless extraordinary circumstances would suggest otherwise. |
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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. |
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Loss. These assets are considered uncollectible, and of such little value that their
continuance as bankable 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 Loan Losses
The allowance for loan losses reflects our evaluation of the probable losses in our loan
portfolio. Although management at each of our banking subsidiaries establishes its own allowance
for loan losses, each bank utilizes consistent evaluation procedures. The allowance for loan losses
is maintained at a level that represents each banks managements best estimate of losses in the
loan portfolio at the balance sheet date that are both probable and reasonably estimable. We
maintain the allowance through provisions for loan losses that we charge to income. We charge
losses on loans against the allowance for loan losses when we believe the collection of loan
principal is unlikely. Recoveries on loans charged-off are restored to the allowance for loan
losses.
Our evaluation of the adequacy of the allowance for loan losses includes the review of all
loans for which the collectibility of principal may not be reasonably assured. For commercial real
estate and commercial loans, review of financial performance, payment history and collateral values
is conducted on a quarterly basis by the lending staff, and the results of that review are then
reviewed by Credit Administration. For residential mortgage and consumer loans, this review
primarily considers delinquencies and collateral values.
The criteria that we consider in connection with determining the overall allowance for loan
losses include:
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results of the quarterly credit quality review; |
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historical loss experience in each segment of the loan portfolio; |
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general economic and business conditions affecting our key lending areas; |
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credit quality trends (including trends in non-performing loans expected to result from
existing conditions); |
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collateral values; |
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loan volumes and concentrations; |
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age of the loan portfolio; |
9
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specific industry conditions within portfolio segments; |
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duration of the current business cycle; |
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bank regulatory examination results; and |
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external loan review results. |
Additions to the allowance for loan losses may be made when management has identified
significant adverse conditions or circumstances related to a specific loan. Management continuously
reviews the entire loan portfolio to determine the extent to which additional loan loss provisions
might be deemed necessary. However, there can be no assurance that the allowance for loan losses
will be adequate to cover all losses that may in fact be realized in the future or that additional
provisions for loan losses will not be required.
Various regulatory agencies, as well as our outsourced loan review function, as an integral
part of their review process, periodically review our loan portfolios and the related allowance for
loan losses. Regulatory agencies may require us to increase the allowance for loan losses based on
their review of information available to them at the time of their examination.
As of December 31, 2007, our allowance for loan losses was $49.3 million or 1.36% of total
loans.
Investment Activities
Each of our banking subsidiaries has its own investment policy, which is established by our
board of directors and is approved by each respective banks 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 banks chief financial officer 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 investment policy. All
transactions for a specific bank are reviewed by that banks board of directors.
Our banks investment policies generally limit securities investments to U.S. Government,
agency and sponsored entity securities and municipal bonds, as well as investments in preferred and
common stock of government sponsored entities, such as Fannie Mae, Freddie Mac, and the Federal
Home Loan Bank. The policies also permit investments in mortgage-backed securities, including
pass-through securities issued and guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae, as well as
collateralized mortgage obligations (CMOs) issued or backed by securities issued by these
government agencies and privately issued investment grade CMOs. Privately issued CMOs typically
offer higher rates than those paid on government agency CMOs, but lack the guaranty of such
agencies and typically there is less market liquidity than agency bonds. The policies also permit
investments in securities issued or backed by the SBA and investment grade asset-backed securities
and adjustable rate preferred stock. Our current investment strategy uses a risk management
approach of diversified investing in fixed-rate securities with short to intermediate-term
maturities and floating-rate securities with long-term maturities. The emphasis of this approach is
to increase overall securities yields while managing interest rate risk. To accomplish these
objectives, we focus on investments in mortgage-backed securities and CMOs with a secondary focus
on higher yielding investment grade asset-backed securities and adjustable rate preferred stock.
All of our investment securities are classified as available for sale, held to maturity or
measured at fair value pursuant to SFAS No. 115, Accounting for Certain Investments in Debt and
Equity Securities and SFAS No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities. Available for sale securities are reported at fair value, with unrealized gains and
losses excluded from earnings and instead reported as a separate component of stockholders equity.
Held to maturity securities are those securities that we have both the intent and the ability to
hold to maturity. These securities are carried at cost adjusted for amortization of premium and
accretion of discount. Securities measured at fair value are reported at fair value, with
unrealized gains and losses included in current earnings.
As of December 31, 2007, we had an investment securities portfolio of $736.2 million,
representing approximately 14.7% of our total assets, with the majority of the portfolio invested
in AAA-rated
10
securities. The average duration of our investment securities is 4.4 years as of December 31,
2007. The following table summarizes our investment securities portfolio as of December 31, 2007.
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|
Amount |
|
Percent |
|
|
($ in millions) |
Mortgage-backed Securities |
|
$ |
502.8 |
|
|
|
68.3 |
% |
U.S. Government Sponsored Agencies |
|
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24.1 |
|
|
|
3.3 |
% |
Adjustable Rate Preferred Stock |
|
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29.7 |
|
|
|
4.0 |
% |
Municipal Bonds, U.S. Treasuries |
|
|
22.3 |
|
|
|
3.0 |
% |
Debt obligations and structured securities |
|
|
142.1 |
|
|
|
19.3 |
% |
Other |
|
|
15.2 |
|
|
|
2.1 |
% |
|
|
|
Total Investment Securities |
|
$ |
736.2 |
|
|
|
100.0 |
% |
|
|
|
As of December 31, 2007 and December 31, 2006, we had an investment in bank-owned life
insurance (BOLI) of $88.1 million and $82.1 million, respectively. We purchased the BOLI to help
offset employee benefit costs.
Deposit Products and Other Funding Sources
We offer a variety of deposit products to our customers, including checking accounts, savings
accounts, money market accounts and other deposit accounts, including fixed-rate, fixed maturity
retail certificates of deposit ranging in terms from 30 days to five years, individual retirement
accounts, and non-retail certificates of deposit consisting of jumbo certificates greater than or
equal to $100,000. We have historically focused on attracting low cost core deposits. As of
December 31, 2007, our deposit portfolio was comprised of 28.4% non-interest bearing deposits,
compared to 20.2% time deposits.
Our non-interest bearing deposits consist of non-interest bearing checking accounts, which, as
of December 31, 2007, were comprised of 14.3% title company deposits, which consist primarily of
deposits held in escrow pending the closing of commercial and residential real estate transactions,
and, to a lesser extent, operating accounts for title companies; 79.5% other business deposits,
which consist primarily of operating accounts for businesses; and 6.1% consumer deposits. We
consider these deposits to be core deposits. We believe these deposits are generally not interest
rate sensitive since these accounts are not created for investment purposes. The competition for
these deposits in our markets is strong. We believe our success in attracting and retaining these
deposits is based on several factors, including (1) the high level of service we provide to our
customers; (2) our ability to attract and retain experienced relationship bankers who have strong
relationships in their communities; (3) our broad array of cash management services; and (4) our
competitive pricing on earnings credits paid on these deposits. We intend to continue our efforts
to attract deposits from our business lending relationships in order to maintain our low cost of
funds and improve our net interest margin. However, the loss of a significant part of our low-cost
deposit base would negatively impact our profitability.
Deposit flows are significantly influenced by general and local economic conditions, changes
in prevailing interest rates, internal pricing decisions and competition. Our deposits are
primarily obtained from areas surrounding our branch offices. In order to attract and retain
deposits, we rely on providing quality service and introducing new products and services that meet
our customers needs.
Each subsidiary banks asset and liability committee sets its own deposit rates. Our banks
consider a number of factors when determining their individual deposit rates, including:
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Information on current and projected national and local economic conditions and the outlook
for interest rates; |
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The competitive environment in the markets it operates in; |
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Loan and deposit positions and forecasts, including any concentrations in either; and |
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FHLB advance rates and rates charged on other sources of funds. |
11
As of December 31, 2007, we had approximately $3.5 billion in total deposits. The following
table shows our deposit composition as of December 31, 2007:
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December 31, 2007 |
|
|
Amount |
|
Percent |
|
|
($ in thousands) |
Non-interest bearing demand |
|
$ |
1,007,642 |
|
|
|
28.4 |
% |
Savings and money market |
|
|
1,558,867 |
|
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43.9 |
% |
Time, $100K and over |
|
|
649,351 |
|
|
|
18.3 |
% |
Interest bearing demand |
|
|
264,586 |
|
|
|
7.5 |
% |
Other time |
|
|
66,476 |
|
|
|
1.9 |
% |
|
|
|
Total deposits |
|
$ |
3,546,922 |
|
|
|
100.0 |
% |
|
|
|
In addition to our deposit base, we have access to other sources of funding, including FHLB
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.
Financial Products & Services
In addition to traditional commercial banking activities, we provide other financial services
to our customers, including:
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Internet banking; |
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Wire transfers; |
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Electronic bill payment; |
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Lock box services; |
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Courier services; |
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Cash vault; and |
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Cash management services (including account reconciliation, collections and sweep accounts). |
We have a service center facility which increased our capacity to provide courier, cash
management and other business services.
Through Miller/Russell and Shine, we provide customers with asset allocation and investment
advisory services. In addition, we provide wealth management services including trust
administration of personal and retirement accounts, estate and financial planning, custody services
and investments through Premier Trust.
Through PartnersFirst we offer credit cards using an innovative, partner-centric model serving
affinity groups across a wide range of special interests and affiliations, including; colleges &
universities, professional associations, sports, outdoor sporting and wildlife conservation
organizations, and many more.
Customer, Product and Geographic Concentrations
Approximately 63.7% of our loan portfolio as of December 31, 2007 consisted of commercial real
estate secured loans, including commercial real estate loans and construction and land development
loans. Moreover, our business activities are currently focused in the Las Vegas, San Diego, Tucson,
Phoenix, Reno and Oakland metropolitan areas. Consequently, our business is dependent on the trends
of these regional economies. No individual or single group of related accounts is considered
material in relation to our assets or deposits or in relation to our overall business.
12
Competition
The banking and financial services business in our market areas is highly competitive. This
increasingly competitive environment is a result primarily of growth in community banks, changes in
regulation, changes in technology and product delivery systems, increased financial market
volatility and the accelerating pace of consolidation among financial services providers. We
compete for loans, deposits and customers with other commercial banks, local community banks,
savings and loan associations, securities and brokerage companies, mortgage companies, insurance
companies, finance companies, money market funds, credit unions, and other non-bank financial
services providers. Many of these 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.
Competition for deposit and loan products remains strong from both banking and non-banking
firms, and this competition 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, home computer 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 us.
Employees
As of December 31, 2007, we had 992 full-time equivalent employees.
Legal Proceedings
There are no material
pending legal proceedings to which we are 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. 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.
Financial Information Regarding Segment Reporting
We currently operate our business in eight operating segments: Bank of Nevada, Alliance Bank
of Arizona, Torrey Pines Bank, Alta Alliance Bank, First Independent Bank of Nevada, Premier Trust,
Inc., Miller/Russell & Associates, Inc. and Shine Investment Advisory Services, Inc. Please refer
to Note 19 Segment Information to our Consolidated Financial Statements for financial information
regarding segment reporting.
SUPERVISION AND REGULATION
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 qualified in their entirety by reference to the particular statute or
regulation that is referenced or described. Changes in applicable laws or regulations or in the
policies of banking supervisory agencies, or the adoption of new laws or regulations, may have a
material effect on Western Alliances business and prospects. Changes in fiscal or monetary
policies also may affect Western Alliance. The probability, timing, nature or extent of such
changes or their effect on Western Alliance cannot be predicted.
Bank Holding Company Regulation
General. Western Alliance Bancorporation is a bank holding company and is registered with the
Board of Governors of the Federal Reserve System (Federal Reserve) under the Bank Holding Company
Act of 1956 (the BHC Act). As such, the Federal Reserve is Western Alliances primary federal
regulator, and
Western Alliance is subject to extensive regulation, supervision and examination by the Federal
Reserve. Western
13
Alliance must file reports with the Federal Reserve and provide it with such
additional information as it may require.
Under Federal Reserve regulations, 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. In addition, it is the Federal Reserves policy that, in serving as a
source of strength to its subsidiary banks, a bank holding company should 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. This
expectation to serve as a source of financial strength is in addition
to certain guarantees required under the prompt correction actions
provisions discussed below. A bank holding companys 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 companys 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.
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.
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), as discussed below.
In addition, bank holding companies that qualify and elect to become financial holding
companies such as Western Alliance, 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 Department 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 ratings. Failure by a financial
holding company to maintain compliance with these requirements or correct non-compliance within a
fixed time period could lead to divestiture of all subsidiary banks or a requirement to conform all
non-banking activities to those permissible for a bank holding company that has not elected
financial holding company status.
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.
Control is conclusively presumed to exist if a person or entity acquires 25% or more of the
outstanding
14
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 Securities Exchange Act of 1934, as amended (the 1934 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.
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 also is 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. Western Alliance controls five subsidiary banks. Bank of Nevada, located in Las
Vegas, Nevada and First Independent Bank of Nevada, located in Reno, Nevada are chartered by the
State of Nevada and are subject to primary regulation, supervision and examination by the Nevada
FID. Alliance Bank, located in Phoenix, Arizona, is chartered by the State of Arizona and is
subject to primary regulation, supervision and examination by the Arizona State Banking Department
(Arizona SBD). Torrey Pines Bank, located in San Diego, California, is chartered by the State of
California and is subject to primary regulation, supervision and examination by the California DFI.
Bank of Nevada, Alliance Bank of Arizona, Torrey Pines Bank and First Independent Bank of Nevada
also are subject to regulation by the FDIC, which is
their primary federal banking agency. Alta Alliance Bank is chartered by the State of California
and is subject to primary regulation, supervision and examination by the California DFI. Alta
Alliance Bank is also a member of the Federal Reserve System and is subject to supervision and
regulation by the Federal Reserve, which is its primary federal banking agency.
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 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.
Deposits in the banks are insured by the FDIC to applicable limits through the Deposit
Insurance Fund. All of Western Alliances subsidiary banks are required to pay deposit insurance
premiums, which are assessed semiannually and paid quarterly. The premium amount is based upon a
risk classification system established by the FDIC. 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. The Federal Deposit
Insurance Reform Act of 2005 (the
Reform Act) merged the Bank Insurance Fund and the Savings Association Fund into a single Deposit
Insurance Fund, increased the maximum amount of the insurance coverage for certain retirement
accounts and possible inflation adjustments in the maximum amount of coverage available with
respect to other insured accounts, and gave the FDIC more
discretion to price deposit insurance coverage according to risk for all insured institutions
regardless of the
15
level of the fund reserve ratio. For 2008, the FDIC maintains rates of between 5
cents and 7 cents for $100.00 of deposits for banks with higher levels of capital and a low degree
of supervisory concern, up to 43 cents per $100.00 of deposits for institutions in the highest risk
category.
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
banks capital, to restrict the banks growth, to assess civil monetary penalties against the
banks 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
banks 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.
Change in Control. The application of the CIBC Act is described in the discussion above
regarding bank holding companies. Under Nevada banking law, a Nevada bank must report a change in
ownership of 10% or more of the banks outstanding voting stock to the Nevada FID within three
business days after obtaining knowledge of the change. Any person who acquires control of a Nevada
bank must obtain the prior approval of the Nevada Commissioner. Arizona banking law provides that
no person may acquire control of an Arizona bank without the prior approval of the Arizona
Superintendent. A person who has the power to vote 15% or more of the voting stock of an Arizona
bank is presumed to control the bank. California banking law requires that any person must obtain
the prior approval of the California Commissioner before that person may acquire control of a
California bank. A person who has the power to vote 10% or more of the voting stock of a California
bank is presumed to control the bank.
Bank Merger. Section 18(c) of the Federal Deposit Insurance Act (FDI Act) requires a bank
or any other insured depository institution to obtain the approval of its primary federal banking
supervisory authority before it may merge or consolidate with or acquire the assets or assume the
liabilities of any other insured depository institution. State law requirements are similar. Nevada
banking law requires that a bank must obtain the prior approval of the Nevada Commissioner before
it may merge or consolidate with or transfer its assets and liabilities to another bank. Arizona
banking law requires the approval of the Arizona Superintendent before a bank may merge or
consolidate with another bank. Under California law, a California bank that is the survivor of a
merger must file an application for approval with the California Commissioner.
Regulation of Non-banking Subsidiaries
Miller/Russell & Associates, Inc. and Shine Investment Advisory Services, Inc. Miller/Russell
& Associates, Inc., an Arizona corporation, and Shine Investment Advisory Services, Inc., 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 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
advisers 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.
Premier Trust Inc. Premier Trust, Inc. is a trust company licensed by the State of Nevada.
Under Nevada law, a company may not transact any trust business, with certain exceptions, unless
authorized by the Commissioner. The Commissioner examines the books and records of registered trust
companies and may take possession of all the property and assets of a trust company whose capital
is impaired or is otherwise determined to be unsafe and a danger to the public. Premier Trust, Inc. also
is licensed as a trust company in Arizona and is subject to regulation and examination by the
Arizona Superintendent.
16
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 organizations 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. 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 organizations 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 and off-balance-sheet items. Tier 1 capital
consists of common stock, retained earnings, non-cumulative perpetual preferred stock and minority
interests in certain subsidiaries, less most other intangible assets. Tier 2 capital may consist of
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 off-balance-sheet items of 4.0% and a minimum ratio
of qualifying total capital to risk-adjusted assets and 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 whose
specific circumstances warrant it, such as a bank or bank holding company anticipating significant
growth. 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. Neither the Federal Reserve nor the FDIC has advised Western Alliance or
any of its subsidiary banks that it is subject to any special capital requirements.
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.
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
banks 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, the
issuance of removal and prohibition orders against institution-affiliated parties and the
enforcement of such
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actions through injunctions or restraining orders. In addition, a bank holding
companys 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 Alliances board of directors and will depend on
the companys 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 Alliances ability to pay dividends is subject to the regulatory authority of the
Federal Reserve. Although there are no specific federal laws or regulations restricting dividend
payments by bank holding companies, the supervisory concern of the Federal Reserve focuses on a
holding companys 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.
As a bank holding company registered with the State of Nevada, Western Alliance also is
subject to limitations under Nevada law on the payment of dividends. Nevada banking law imposes no
restrictions on bank holding companies regarding 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 corporations 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. Holding company expenses and obligations with respect to its outstanding trust
preferred securities and corresponding subordinated debt also may limit or impair Western
Alliances 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. The ability of a state
non-member bank to pay cash dividends is not restricted by federal law or regulations. Under Federal Reserve
regulations, Alta Alliance Bank, as a state member bank, may not, without the prior approval of the Federal
Reserve pay dividends that exceed the sum of the bank's net income during the year and the retained net income
of the prior two years. State law
imposes restrictions on the ability of each of Western Alliances subsidiary banks to pay
dividends:
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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 banks surplus fund, not
including any initial surplus fund, equals the banks initial stockholders equity,
plus 10% of the previous years net profits, and the dividend would not reduce the
banks 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 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 banks 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
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Commissioner may approve a larger distribution, but in no event to exceed the
banks 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 companys 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
Interstate Banking And Branching. The Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994 (Riegle-Neal Act) generally authorizes interstate branching. Currently, bank holding
companies may purchase banks in any state, and banks may merge with banks in other states, unless
the home state of the bank holding company or either merging bank has opted out under the
legislation. After properly entering a state, an out-of-state bank may establish de novo branches
or acquire branches or acquire other banks on the same terms as a bank that is chartered by the
state.
Selected Regulation of Banking Activities
Transactions with Affiliates. Banks are subject to restrictions imposed by the FRA and
regulations adopted by the Federal Reserve to implement it 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. 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.
Additionally, banks may generally engage in transactions with affiliates only on terms that are substantially, the same, or at
least as favorable to the bank, as prevailing market terms.
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 banks board of directors.
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 banks 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 exceed 25% of an amount
equal to the sum of the banks shareholders equity, allowance for loan losses, capital notes and debentures, provided that the total unsecured obligations may not exceed 15% of such amount.
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Recent 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.
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, such as Webster and Webster Bank, 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
Alliances 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 Alliances other subsidiaries, that the customer provide some additional credit,
property or services to the bank, Western Alliance or any of Western Alliances 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 institutions 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
banks offices and the asset size of the institutions.
Safety and Soundness Standards. Federal law imposes upon banks certain non-capital safety and
soundness standards. These standards cover internal controls, information systems, internal audit
systems, loan documentation, credit underwriting, interest rate exposure, 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 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.
Community Reinvestment Act. The Community Reinvestment Act (CRA) is 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 banks 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 institutions 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. The agencies use the CRA
assessment factors in order to provide a rating to the financial institution. The ratings range
from a high of outstanding to a low of substantial noncompliance. Bank of Nevada has
consistently been rated Outstanding for CRA performance by the FDIC, most recently as of October
10, 2006. First Independent Bank of Nevada also was rated Outstanding for CRA performance by the
FDIC as of October 29, 2001. Alliance Bank of Arizona and Torrey Pines Bank were rated
Satisfactory for CRA performance by the FDIC as of November 1, 2005 and September 1, 2006,
respectively. Westerns other subsidiary bank, Alta Alliance Bank, opened on October 16, 2006, and
has not yet had its first CRA examination.
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.
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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:
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making unaffordable loans based on the borrowers assets rather than the borrowers
ability to repay an obligation; |
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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 |
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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 to implement it require extra 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 borrowers primary residence. The HOEPA disclosures and protections
are applicable to such high cost transactions with any of the following features:
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interest rates for first lien mortgage loans more than eight percentage points above the
yield on U.S. Treasury securities having a comparable maturity; |
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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 |
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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 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
consumers 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.
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Privacy
Under the GLB Act, 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 customers 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
Alliances 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 GLB 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
customers 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. Based on the assessments of its outside compliance auditors and
state and federal banking supervisory authorities of Western Alliance and its subsidiary banks,
Western Alliance believes that it materially complies with all the laws and regulations that apply
to its operations.
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 Securities Exchange Act of
1934 (Exchange Act), which includes Western Alliance. SOX requires the SEC and securities
exchanges to adopt extensive additional disclosure, corporate governance and other related rules
and mandates further studies of certain issues by the SEC and the Comptroller General. Among its
provisions, SOX subjects bonuses issued to top executives to disgorgement if a subsequent
restatement of a companys 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
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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 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 Department of the Treasurys 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.
ITEM IA. RISK FACTORS
Our businesses face risks and uncertainties, including those discussed below and elsewhere in
this report. These factors represent risks and uncertainties that could have a material adverse
effect on our business, results of operations and financial condition. These risks and
uncertainties are not the only ones we face. Others that we do not know about now, or that we do
not now think are significant, may impair our business or the trading price of our securities. The
following are significant risks we have identified.
Risks Related to Our Market and Business
Our current primary market area is substantially dependent on gaming and tourism revenue, and a
downturn in gaming or tourism could hurt our business and our prospects.
Our business is currently concentrated in the Las Vegas metropolitan area. The economy of the
Las Vegas metropolitan area is unique in the United States for its level of dependence on services
and industries related to gaming and tourism. Any event that negatively impacts the gaming or
tourism industry will adversely impact the Las Vegas economy.
Gaming and tourism revenue (whether or not such tourism is directly related to gaming) is
vulnerable to fluctuations in the national economy. A prolonged downturn in the national economy
could have a significant adverse effect on the economy of the Las Vegas area. Virtually any
development or event that could dissuade travel or spending related to gaming and tourism, whether
inside or outside of Las Vegas, could adversely affect the Las Vegas economy. In this regard, the
Las Vegas economy is more susceptible than the economies of other cities to issues such as higher
gasoline and other fuel prices, increased airfares, unemployment levels, recession, rising interest
rates, and other economic conditions, whether domestic or foreign. Gaming and tourism are also
susceptible to certain political conditions or events, such as military hostilities and acts of
terrorism, whether domestic or foreign. A terrorist act, or the mere threat of a terrorist
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act, may adversely affect gaming and tourism and the Las Vegas economy and may cause
substantial harm to our business.
In addition, Las Vegas competes with other areas of the country for gaming revenue, and it is
possible that the expansion of gaming operations in other states, such as California, as a result
of changes in laws or otherwise, could significantly reduce gaming revenue in the Las Vegas area.
Although we have no substantial customer relationships in the gaming and tourism industries, a
downturn in the Las Vegas economy, generally, could have an adverse effect on our customers and
result in an increase in loan delinquencies and foreclosures, a reduction in the demand for our
products and services and a reduction of the value of our collateral for loans which could result
in the reduction of a customers borrowing power, any of which could adversely affect our business,
financial condition, results of operations and prospects.
We are highly dependent on real estate and events that negatively impact the real estate market
could hurt our business.
A significant portion of our loan portfolio is dependent on real estate. As of December 31,
2007, real estate related loans accounted for approximately 77.2% of total loans. Our financial
condition may be adversely affected by a decline in the value of the real estate securing our
loans. Real estate values have recently been declining in most of our markets, which may adversely
affect our financial condition. In addition, acts of nature, including earthquakes, fires and
floods, which may cause uninsured damage and other loss of value to real estate that secures these
loans, may also negatively impact our financial condition.
In addition, title company deposits comprised 14.3% of our total non-interest bearing deposits
as of December 31, 2007. A slowdown in real estate activity in the markets we serve may cause a
decline in our deposit growth and may negatively impact our financial condition.
Our high concentration of commercial real estate, construction and land development and commercial,
industrial loans expose us to increased lending risks.
As of December 31, 2007, the composition of our loan portfolio was as follows:
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commercial real estate loans of $1.5 billion, or 41.6% of total loans, |
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construction and land development loans of $806.1 million, or 22.1% of total loans, |
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commercial and industrial loans of $784.4 million, or 21.5% of total loans, |
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residential real estate loans of $492.6 million, or 13.5% of total loans, and |
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consumer loans of $43.5 million, or 1.3% of total loans. |
Commercial real estate, construction and land development and commercial and industrial loans,
which comprised 85.2% of our total loan portfolio as of December 31, 2007, expose us to a greater
risk of loss than our residential real estate and consumer loans, which comprised 14.8% of our
total loan portfolio as of December 31, 2007. 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 may expose us to a significantly greater risk of loss compared to an
adverse development with respect to one residential mortgage loan.
We may not be able to continue our growth at the rate we have in the past.
We have grown substantially, from having one chartered bank with $443.7 million in total
assets and $410.2 million in total deposits as of December 31, 2000, to five chartered banks with
$5.0 billion in total assets and $3.5 billion in total deposits as of December 31, 2007. If we are
unable to effectively execute on our strategy, we may not be able to continue to grow at our
historical rates. In particular, Alliance Bank of Arizona and Torrey Pines Bank have achieved
unusually high annual rates of growth as compared to other
24
banks opened since 2004. We do not expect this high level of growth at Alliance Bank of
Arizona and Torrey Pines Bank to continue in the future.
Our growth and expansion strategy may not prove to be successful and our market value and
profitability may suffer.
Growth through acquisitions of banks or the organization of new banks in high-growth markets,
especially in markets outside of our current markets, represents an important component of our
business strategy. Any future acquisitions will be accompanied by the risks commonly encountered in
acquisitions. These risks include, among other things:
|
|
|
difficulty of integrating the operations and personnel; |
|
|
|
|
potential disruption of our ongoing business; and |
|
|
|
|
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. |
We expect 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. We 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, we may consider the
organization of new banks in new market areas. We do not have any current plan 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 required 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. |
We cannot assure you that we will be successful in overcoming these risks or any other
problems encountered in connection with acquisitions and the organization of new banks. Our
inability to overcome these risks could have an adverse effect on our ability to achieve our
business strategy and maintain our market value and profitability growth.
If we continue to grow as planned, we may not be able to control costs and maintain our asset
quality.
We expect to continue to grow our assets and deposits, the products and services which we
offer and the scale of our operations, generally, both internally and through acquisitions. Our
ability to manage our growth successfully will depend on our ability to maintain cost controls and
asset quality while attracting additional loans and deposits on favorable terms. If we grow too
quickly and are not able to control costs and maintain asset quality, this rapid growth could
materially adversely affect our financial performance.
We may have difficulty managing our growth, which may divert resources and limit our ability to
successfully expand our operations.
Our rapid growth has placed, and it may continue to place, significant demands on our
operations and management. Our future success will depend on the ability of our officers and other
key employees to
25
continue to implement and improve our operational, credit, financial, management and other
internal risk controls and processes and our reporting systems and procedures, and to manage a
growing number of client relationships. We may not successfully implement improvements to our
management information and control systems and control procedures and processes in an efficient or
timely manner and may discover deficiencies in existing systems and controls. In particular, our
controls and procedures must be able to accommodate an increase in expected loan volume and the
infrastructure that comes with new branches and banks. Thus, our growth strategy may divert
management from our existing businesses and may require us to incur additional expenditures to
expand our administrative and operational infrastructure. If we are unable to manage future
expansion in our operations, we may experience compliance and operational problems, have to slow
the pace of growth, or have to incur additional expenditures beyond current projections to support
such growth, any one of which could adversely affect our business.
Our future growth is dependent upon our ability to recruit additional, qualified employees,
especially seasoned relationship bankers.
Our market areas are experiencing a period of rapid growth, placing a premium on highly
qualified employees in a number of industries, including the financial services industry. Our
business plan includes, and is dependent upon, hiring and retaining highly qualified and motivated
executives and employees at every level. In particular, our success has been partly the result of
our managements 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 rapidly in our market areas. We expect to experience substantial competition in our endeavor
to identify, hire and retain the top-quality employees that we believe are key to our future
success. If we are unable to hire and retain qualified employees, we may not be able to grow our
franchise and successfully execute our business strategy.
If we lost a significant portion of our low-cost deposits, it would negatively impact our
profitability.
Our profitability depends in part on our success in attracting and retaining a stable base of
low-cost deposits. As of December 31, 2007, our deposit base was comprised of 28.4% non-interest
bearing deposits, of which 14.3% consisted of title company deposits, which consist primarily of
deposits held in escrow pending the closing of commercial and residential real estate transactions,
and to a lesser extent, operating accounts for title companies; 79.6% consisted of other business
deposits, which consist primarily of operating accounts for businesses; and 6.1% consisted of
consumer deposits. We consider these deposits to be core deposits. While we generally do not
believe these deposits are sensitive to interest rate fluctuations, the competition for these
deposits in our markets is strong and if we lost a significant portion of these low-cost deposits,
it would negatively impact our profitability.
Many of our loans have been made recently, and in certain circumstances there is limited repayment
history against which we can fully assess the adequacy of our allowance for loan losses. If our
allowance for loan losses is not adequate to cover actual loan losses, our earnings will decrease.
The risk of nonpayment of loans is inherent in all lending activities, and nonpayment, if it
occurs, may negatively impact our earnings and overall financial condition, as well as the value of
our common stock. Also, many of our loans have been made over the last three years and in certain
circumstances there is limited repayment history against which we can fully assess the adequacy of
our allowance for loan losses. We make various assumptions and judgments about the collectibility
of our loan portfolio and provide an allowance for probable losses based on several factors. If our
assumptions are wrong, our allowance for loan losses may not be sufficient to cover our losses,
which would have an adverse effect on our operating results. Additions to our allowance for loan
losses decrease our net income. While we have not experienced any significant charge-offs or had
large numbers of non-performing loans, due to the significant increase in loans originated during
this period, we cannot assure you that we will not experience an increase in delinquencies and
losses as these loans continue to mature. The actual amount of future provisions for loan losses
cannot be determined at this time and may exceed the amounts of past provisions.
Our future success will depend on our ability to compete effectively in a highly competitive
market.
We face 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
26
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 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 earnings 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 financial
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 profitability. For more information on the competition we have in our markets, see
Business Competition.
Our business would be harmed if we lost the services of any of our 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, our Chairman, President and Chief Executive Officer and Chief
Executive Officer of Bank of Nevada, Dale Gibbons, our Chief Financial Officer, Bruce Hendricks,
President of Bank of Nevada, James Lundy, President and Chief Executive Officer of Alliance Bank of
Arizona, Gerald Cady, President and Chief Executive Officer of Torrey Pines Bank, Grant Markham,
President and Chief Executive Officer of First Independent Bank of Nevada, Arnold Grisham,
President and Chief Executive Officer of Alta Alliance 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 cant
replace them with equally qualified persons who are also familiar with our market areas.
Mr. Sarvers involvement in outside business interests requires substantial time and attention and
may adversely affect our ability to achieve our strategic plan and maintain our current growth.
Mr. Sarver joined us in December of 2002 and has been an integral part of our recent growth.
He has substantial business interests that are unrelated to us, including his ownership interest in
the Phoenix Suns NBA franchise. Mr. Sarvers other business interests demand significant time
commitments, the intensity of which may vary throughout the year. Mr. Sarvers 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 and maintain our current growth.
Deterioration in economic conditions generally could adversely affect our business, financial
condition, results of operations and prospects.
Deterioration in economic conditions generally could adversely affect our business, financial
condition, results of operations and prospects. Such deterioration could result in a variety of
adverse consequences to us, including a reduction in net income and the following:
|
|
|
Loan delinquencies, non-performing assets and foreclosures may increase, which could
result in higher operating costs, as well as increases in our loan loss provisions; |
|
|
|
|
Demand for our products and services may decline, including the demand for loans, which
would adversely affect our revenues; and |
27
|
|
|
Collateral for loans made by us may decline in value, reducing a customers borrowing
power, and reducing the value of assets and collateral associated with our loans which
would cause decreases in net interest income and increasing loan loss provisions. |
Economic conditions either nationally or locally in areas in which our operations are concentrated
may continue to soften.
Deterioration in local, regional, national or global economic conditions could result in,
among other things, an increase in loan delinquencies, a general
decrease in credit quality, a decrease in property values, a change in
housing turnover rate or a reduction in the level of bank deposits. Particularly, continued
weakening of the real estate or employment market in our primary market areas of Las Vegas, San
Diego, Tucson, Phoenix, Reno and Oakland could result in an increase in the number of borrowers who
default on their loans and a reduction in the value of the collateral securing their loans, which
in turn could have an adverse effect on our profitability and asset quality.
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
our operating results, revenues and costs and may result in the volatility of the market price for
our common stock and impair its future price.
If our Real Estate Investment Trust (REIT) affiliate fails to qualify as a REIT, we may be subject
to a higher consolidated effective tax rate
The Company holds certain commercial real estate loans, residential real estate loans and other
loans in a real estate investment trust through its wholly owned subsidiary, Bank of Nevada.
Qualification as a REIT involves application of specific provisions of the Internal Revenue Code
relating to various assets. If the REIT fails to meet any of the required provisions for REITs, or
there are changes in tax laws or interpretations thereof, it could no longer qualify as a REIT and
the resulting tax consequences would increase our effective tax rate or cause us to have a tax
liability for prior years.
We do not anticipate paying any dividends on our common stock. As a result, capital appreciation,
if any, of our common stock may be an investors sole source of gains in the future.
We have never paid a cash dividend, and do not anticipate paying a cash dividend in the
foreseeable future. As a result, investors may only receive a return on their investment in the
common stock if the market price of the common stock increases.
The
current liquidity disruptions in the financial markets may adversely affect our ability to borrow
funds as well as cause significant impairments of our asset holdings.
The deteriorating credit quality of assets linked to the U.S. subprime mortgage market, caused
by rising mortgage delinquency rates and questionable business practices among mortgage
originators, has led to a decrease in the credit quality of mortgage-backed and asset-backed
securities. This, in turn, has triggered a broad-based liquidity shortfall in the global financial
system. The subsequent increase in risk aversion triggered a decline in credit availability in the
financial markets.
Some of our assets may become difficult to sell without a loss. Should market conditions
necessitate the sale of some of our assets, we may realize material losses. A continued lack of
liquidity may also require further impairment write downs on some of our asset holdings. Our
mortgage-backed and asset-backed security holdings are particularly susceptible to this type of
risk.
Our financial instruments expose the Company to certain market risks and may increase the
volatility of reported earnings.
Our financial instruments, including investment securities, junior subordinated debt and other
borrowings, are exposed to market risks related to changes in interest rates and market-based
credit spreads, as well as to the risk of default by specific obligors. Changes in the market
values of these financial instruments could have a material adverse impact on our financial
condition or results of operations. Effective January 1, 2007, the Company adopted Statement of
Financial Accounting Standards (SFAS) Nos. 157 and 159. In connection with this adoption the
Company elected to record selected investment securities previously reported as held to maturity
and available for sale and junior subordinated debt liabilities at fair value. In addition, the
Company recorded certain assets and liabilities acquired during 2007 at fair value, including
investment securities and fixed rate borrowings, and the Company entered into interest rate swaps
and other hedging transactions which are also recorded at fair value. The changes in fair value of
the financial instruments elected to be carried at fair value pursuant to the provisions of SFAS
No. 159 and the interest rate swaps and other hedges are recognized in earnings. We may classify
additional financial assets or financial liabilities at fair value and enter into further hedging
transactions in the future.
Our revenues derived from our investment securities may be volatile and subject to a variety of
risks.
We generally maintain investment portfolios in the fixed income and preferred equity markets.
Unrealized gains and losses associated with our investment portfolio and mark to market gains and
losses associated with our portfolio carried at fair value are affected by many factors, including
our credit position, interest rate volatility, volatility in capital markets and other economic
factors. Our return on such investments and trading have in the past experienced, and will likely
in the future experience, volatility and such volatility may materially adversely affect our
financial condition and results of operations.
28
Risks Related to the Banking Industry
We operate in a highly regulated environment; changes in laws and regulations and accounting
principles may adversely affect us.
We are subject to extensive regulation, supervision, and legislation which govern almost
all aspects of our operations. See Supervision and Regulation. The laws and regulations
applicable to the banking industry could change at any time and are primarily intended for the
protection of customers, depositors and the deposit insurance funds. Any changes to these laws or
any applicable accounting principles could make it more difficult and expensive for us to comply
and could affect the way that we conduct business, which 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 and stockholders.
Changes in interest rates could adversely affect our profitability, business and prospects.
Increases or decreases in prevailing interest rates could have an adverse effect on our
business, asset quality and prospects. Our 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 Board of
Governors of the Federal Reserve System, referred to as the FRB. 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, could be adversely affected. Our earnings could also 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. We cannot assure you that we will be able to minimize our 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 we 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.
We are required to maintain an allowance for loan losses. This allowance for loan losses may have
to be adjusted in the future. Any adjustment to the allowance for loan losses, whether due to
regulatory changes, economic changes or other factors, may affect our financial condition and
earnings.
We maintain an allowance for loan losses. The allowance is established through a provision for
loan losses based on our managements evaluation of the risks inherent in our loan portfolio and
the general economy. The allowance is based upon a number of factors, including the size of the
loan portfolio, asset classifications, economic trends, industry experience and trends, industry
and geographic concentrations, estimated collateral values, managements assessment of the credit
risk inherent in the portfolio, historical loan loss experience and loan underwriting policies. In
addition, we evaluate all loans identified as problem loans and augment the allowance based upon
our estimation of the potential loss associated with those problem loans.
The federal regulators, in reviewing our loan portfolio as part of a regulatory examination,
may request us to increase our allowance for loan losses, thereby negatively affecting our
financial condition and earnings at that time. Moreover, additions to the allowance may be
necessary based on changes in economic and real estate market conditions, new information regarding
existing loans, identification of additional problem loans and other factors, both within and
outside of our managements control.
29
We are exposed to risk of environmental liabilities with respect to properties to which we take
title.
About 77.2 % of our outstanding loan portfolio as of December 31, 2007 was secured by real
estate. In the course of our business, we 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.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
ITEM 2. PROPERTIES
At December 31, 2007, the Company operated 39 domestic locations of which 19 are owned and 20
are on leased premises. In addition, the Company opened a 7,000 square foot service center in San
Diego and owns a 36,000 square feet operations facility in Las Vegas,
Nevada. The Company has two leased properties under construction, owns three parcels of land for future development and has two leased branches that are not in use. The Companys corporate headquarters in Las Vegas, Nevada is
the collateral for a loan in the amount of $9.6 million. For information regarding rental payments,
see Note 12 of the Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which Western Alliance 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. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of 2007.
30
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ITEM 5. |
|
MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Our common stock began trading on the New York Stock Exchange under the symbol WAL on June
30, 2005.
The high and low closing sale prices per share of our common stock for each quarter during the
year ended December 31, 2007 and 2006 are shown in the table below.
|
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|
|
|
|
|
|
|
|
Closing Prices |
|
Quarter Ended |
|
Low |
|
|
High |
|
March 31, 2006 |
|
$ |
28.60 |
|
|
$ |
37.15 |
|
June 30, 2006 |
|
$ |
31.70 |
|
|
$ |
38.28 |
|
September 30, 2006 |
|
$ |
32.90 |
|
|
$ |
38.41 |
|
December 31, 2006 |
|
$ |
31.94 |
|
|
$ |
37.01 |
|
March 31, 2007 |
|
$ |
31.04 |
|
|
$ |
35.30 |
|
June 30, 2007 |
|
$ |
29.13 |
|
|
$ |
32.76 |
|
September 30, 2007 |
|
$ |
23.05 |
|
|
$ |
30.17 |
|
December 31, 2007 |
|
$ |
18.20 |
|
|
$ |
25.95 |
|
Holders
As of February 1, 2008, there were approximately 652 stockholders of record of our common
stock. At such date, our directors and executive officers owned approximately 39% of our
outstanding shares. There are no other classes of common equity outstanding.
Dividends
Western Alliance is a legal entity separate and distinct from the banks and our other
non-bank subsidiaries. Since we are a holding company with no significant assets other than the
capital stock of our subsidiaries, we depend upon dividends from our subsidiaries for a substantial
part of our revenue. Accordingly, our 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 earnings, financial
condition and need for funds, as well as federal and state governmental policies and regulations
applicable to us and each of those subsidiaries, which limit the amount that may be paid as
dividends without prior approval. See Supervision and Regulation for information regarding our
ability to pay cash dividends. In addition, if any required payments on outstanding trust preferred
securities are not made, we will be prohibited from paying dividends on our common stock. Western
Alliance has never paid a cash dividend on its common stock and does no anticipate paying any cash
dividends in the foreseeable future.
Sale of Unregistered Securities
There were no new unregistered sales of equity securities during the period covered by this
report.
Performance Graph
Below is a graph which summarizes the cumulative return earned by the Companys stockholders
since its shares of common stock were registered under Section 12 of the Exchange Act in June of
2005, compared with the cumulative total return on the S&P 500 Index and KBW Regional Banking
Index. This presentation assumes that the value of the investment in the Companys common stock and
each index was $100.00 on June 30, 2005 and that subsequent cash dividends were reinvested.
31
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Measurement Point |
|
|
|
|
|
|
|
|
|
|
Jun 05 |
|
|
Dec 05 |
|
|
Jun 06 |
|
|
Dec 06 |
|
|
Jun 07 |
|
|
Dec 07 |
|
Western Alliance
Bancorporation |
|
|
100.00 |
|
|
|
117.60 |
|
|
|
136.93 |
|
|
|
136.89 |
|
|
|
117.52 |
|
|
|
73.90 |
|
S&P 500 Index |
|
|
100.00 |
|
|
|
105.76 |
|
|
|
108.61 |
|
|
|
122.42 |
|
|
|
130.94 |
|
|
|
129.13 |
|
KBW Regional Banking Index |
|
|
100.00 |
|
|
|
103.38 |
|
|
|
105.67 |
|
|
|
112.21 |
|
|
|
104.64 |
|
|
|
87.61 |
|
Share Repurchases
A summary of our repurchases (in thousands, except average price per share) during the quarter
under the $50 million stock repurchase program authorized by our Board of Directors and publicly
announced on April 23, 2007, and expiring on December 31, 2008, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Shares |
|
|
Approximate Dollar |
|
|
|
|
|
|
|
|
|
|
|
Repurchased as |
|
|
Value of Shares |
|
|
|
Total Shares |
|
|
Average Price |
|
|
Part of Publicly |
|
|
that May Yet |
|
Period |
|
Repurchased |
|
|
Per Share |
|
|
Announced Program |
|
|
Be Purchased |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
34,631,348 |
|
October 1 - October 31 |
|
|
144,200 |
|
|
$ |
22.3995 |
|
|
|
144,200 |
|
|
|
31,401,342 |
|
November 1 - November 30 |
|
|
10,000 |
|
|
|
20.4699 |
|
|
|
10,000 |
|
|
|
31,196,643 |
|
December 1 - December 31 |
|
|
16,900 |
|
|
|
19.0766 |
|
|
|
16,900 |
|
|
|
30,874,249 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
171,100 |
|
|
$ |
21.9585 |
|
|
|
171,100 |
|
|
$ |
30,874,249 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEM 6. |
|
SELECTED FINANCIAL DATA |
The selected financial information in the table below as of and for the years ended December
31, 2007, 2006, 2005, 2004 and 2003 is derived from our audited consolidated financial statements.
Results for past periods are not necessarily indicative of results that may be expected for any
future period.
32
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|
|
|
|
|
|
At or for the Year Ended December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
(in thousands, except per share data) |
|
Selected Income Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
305,822 |
|
|
$ |
233,085 |
|
|
$ |
134,910 |
|
|
$ |
90,855 |
|
|
$ |
53,823 |
|
Interest expense |
|
|
125,933 |
|
|
|
84,297 |
|
|
|
32,568 |
|
|
|
19,720 |
|
|
|
12,798 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
179,889 |
|
|
|
148,788 |
|
|
|
102,342 |
|
|
|
71,135 |
|
|
|
41,025 |
|
Provision for loan losses |
|
|
20,259 |
|
|
|
4,660 |
|
|
|
6,179 |
|
|
|
3,914 |
|
|
|
5,145 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses |
|
|
159,630 |
|
|
|
144,128 |
|
|
|
96,163 |
|
|
|
67,221 |
|
|
|
35,880 |
|
Investment security gains (losses), net |
|
|
434 |
|
|
|
(4,436 |
) |
|
|
69 |
|
|
|
19 |
|
|
|
(265 |
) |
Derivative losses |
|
|
(1,833 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities impairment charges |
|
|
(2,861 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) on assets and
liabilities measured at fair value, net |
|
|
2,418 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income, excluding securities
and fair value gains (losses) |
|
|
24,380 |
|
|
|
17,870 |
|
|
|
12,069 |
|
|
|
8,707 |
|
|
|
4,535 |
|
Non-interest expense |
|
|
133,670 |
|
|
|
96,086 |
|
|
|
64,864 |
|
|
|
44,929 |
|
|
|
27,290 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
48,498 |
|
|
|
61,476 |
|
|
|
43,437 |
|
|
|
31,018 |
|
|
|
12,860 |
|
Minority interest |
|
|
110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
|
15,513 |
|
|
|
21,587 |
|
|
|
15,372 |
|
|
|
10,961 |
|
|
|
4,171 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
32,875 |
|
|
$ |
39,889 |
|
|
$ |
28,065 |
|
|
$ |
20,057 |
|
|
$ |
8,689 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per sharebasic |
|
$ |
1.14 |
|
|
$ |
1.56 |
|
|
$ |
1.36 |
|
|
$ |
1.17 |
|
|
$ |
0.61 |
|
Earnings per sharediluted |
|
$ |
1.06 |
|
|
$ |
1.41 |
|
|
$ |
1.24 |
|
|
$ |
1.09 |
|
|
$ |
0.59 |
|
Book value per share |
|
$ |
16.63 |
|
|
$ |
15.09 |
|
|
$ |
10.71 |
|
|
$ |
7.32 |
|
|
$ |
5.84 |
|
Tangible book value per share (net of tax) (3) |
|
$ |
8.88 |
|
|
$ |
9.81 |
|
|
$ |
10.48 |
|
|
$ |
7.02 |
|
|
$ |
5.80 |
|
Shares outstanding at period end |
|
|
30,157 |
|
|
|
27,085 |
|
|
|
22,810 |
|
|
|
18,250 |
|
|
|
16,681 |
|
Weighted average shares outstandingbasic |
|
|
28,918 |
|
|
|
25,623 |
|
|
|
20,583 |
|
|
|
17,190 |
|
|
|
14,314 |
|
Weighted average shares outstandingdiluted |
|
|
31,019 |
|
|
|
28,218 |
|
|
|
22,666 |
|
|
|
18,405 |
|
|
|
14,613 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
115,629 |
|
|
$ |
264,880 |
|
|
$ |
174,336 |
|
|
$ |
115,397 |
|
|
$ |
65,908 |
|
Investments and other securities |
|
|
736,200 |
|
|
|
542,321 |
|
|
|
748,533 |
|
|
|
788,622 |
|
|
|
715,978 |
|
Gross loans, including net deferred loan fees |
|
|
3,633,009 |
|
|
|
3,003,222 |
|
|
|
1,793,337 |
|
|
|
1,188,535 |
|
|
|
733,078 |
|
Allowance for loan losses |
|
|
49,305 |
|
|
|
33,551 |
|
|
|
21,192 |
|
|
|
15,271 |
|
|
|
11,378 |
|
Assets |
|
|
5,016,096 |
|
|
|
4,169,604 |
|
|
|
2,857,271 |
|
|
|
2,176,849 |
|
|
|
1,576,773 |
|
Deposits |
|
|
3,546,922 |
|
|
|
3,400,423 |
|
|
|
2,393,812 |
|
|
|
1,756,036 |
|
|
|
1,094,646 |
|
Junior subordinated and subordinated debt |
|
|
122,240 |
|
|
|
101,857 |
|
|
|
30,928 |
|
|
|
30,928 |
|
|
|
30,928 |
|
Stockholders equity |
|
|
501,518 |
|
|
|
408,579 |
|
|
|
244,223 |
|
|
|
133,571 |
|
|
|
97,451 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Other Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average assets |
|
$ |
4,667,243 |
|
|
$ |
3,668,405 |
|
|
$ |
2,488,740 |
|
|
$ |
1,902,947 |
|
|
$ |
1,148,820 |
|
Average earning assets |
|
|
4,123,956 |
|
|
|
3,304,325 |
|
|
|
2,324,463 |
|
|
|
1,776,362 |
|
|
|
1,069,990 |
|
Average stockholders equity |
|
|
493,365 |
|
|
|
348,294 |
|
|
|
195,284 |
|
|
|
114,765 |
|
|
|
71,276 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Financial and Liqudity Ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average assets |
|
|
0.70 |
% |
|
|
1.09 |
% |
|
|
1.13 |
% |
|
|
1.05 |
% |
|
|
0.76 |
% |
Return on average tangible assets (4) |
|
|
0.74 |
% |
|
|
1.12 |
% |
|
|
1.13 |
% |
|
|
1.06 |
% |
|
|
0.76 |
% |
Return on average stockholders equity |
|
|
6.66 |
% |
|
|
11.45 |
% |
|
|
14.37 |
% |
|
|
17.48 |
% |
|
|
12.19 |
% |
Return on average tangible stockholders equity (5) |
|
|
11.94 |
% |
|
|
16.47 |
% |
|
|
14.77 |
% |
|
|
18.07 |
% |
|
|
12.19 |
% |
Net interest margin (1) |
|
|
4.40 |
% |
|
|
4.52 |
% |
|
|
4.41 |
% |
|
|
4.00 |
% |
|
|
3.83 |
% |
Efficiency ratio tax equivalent basis (2) |
|
|
64.67 |
% |
|
|
57.51 |
% |
|
|
56.69 |
% |
|
|
56.26 |
% |
|
|
59.90 |
% |
Loan to deposit ratio |
|
|
102.43 |
% |
|
|
88.32 |
% |
|
|
74.92 |
% |
|
|
67.68 |
% |
|
|
66.97 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Ratios (Company): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage ratio |
|
|
7.4 |
% |
|
|
8.2 |
% |
|
|
10.2 |
% |
|
|
7.7 |
% |
|
|
8.9 |
% |
Tier 1 risk-based capital ratio |
|
|
7.9 |
% |
|
|
9.4 |
% |
|
|
12.8 |
% |
|
|
10.9 |
% |
|
|
13.3 |
% |
Total risk-based capital ratio |
|
|
10.3 |
% |
|
|
11.5 |
% |
|
|
13.8 |
% |
|
|
12.0 |
% |
|
|
14.4 |
% |
Average assets to average equity |
|
|
9.46 |
|
|
|
10.53 |
|
|
|
12.74 |
|
|
|
16.58 |
|
|
|
16.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Asset Quality Ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-accrual loans to gross loans |
|
|
0.49 |
% |
|
|
0.05 |
% |
|
|
0.01 |
% |
|
|
0.13 |
% |
|
|
0.03 |
% |
Non-accrual loans and OREO to total assets |
|
|
0.42 |
% |
|
|
0.03 |
% |
|
|
0.00 |
% |
|
|
0.07 |
% |
|
|
0.01 |
% |
Loans past due 90 days or more and still
accruing to total loans |
|
|
0.02 |
% |
|
|
0.03 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.01 |
% |
Allowance for loan losses to total loans |
|
|
1.36 |
% |
|
|
1.12 |
% |
|
|
1.18 |
% |
|
|
1.28 |
% |
|
|
1.55 |
% |
Allowance for loan losses to non-accrual loans |
|
|
275.86 |
% |
|
|
2367.75 |
% |
|
|
19805.61 |
% |
|
|
959.84 |
% |
|
|
4137.45 |
% |
Net charge-offs to average loans |
|
|
0.23 |
% |
|
|
0.04 |
% |
|
|
0.02 |
% |
|
|
0.00 |
% |
|
|
0.17 |
% |
|
|
|
(1) |
|
Net interest margin represents net interest income as a percentage of average interest-earning
assets. |
|
(2) |
|
Efficiency ratio represents noninterest expenses as a percentage of the total of net interest
income plus noninterest income (tax equivalent basis). |
|
(3) |
|
Tangible book value per share (net of tax) represents stockholders equity less intangibles,
adjusted for taxes, as a percentage of the shares outstanding at the end of the period. |
|
(4) |
|
Return on average tangible assets represents net income as a percentage of average total assets
less average intangible assets. |
|
(5) |
|
Return on average tangible stockholders equity represents net income as a percentage of
average total stockholders equity less average intangible assets. |
33
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements contained in Managements Discussion and Analysis of Financial
Condition and Results of Operations, Business and elsewhere in this prospectus constitute
forward-looking statements. Forward-looking statements relate to expectations, beliefs,
projections, future plans and strategies, anticipated events or trends and similar expressions
concerning matters that are not historical facts. In some cases, you can identify forward looking
statements by terms such as may, will, should, expect, intend, plan, anticipate,
believe, estimate, predict, potential or the negative of these terms or other comparable
terminology.
The forward-looking statements contained in this prospectus reflect our current views about
future events and financial performance and are subject to 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 annual report. Some factors that could cause actual results to
differ materially from historical or expected results include:
|
|
|
changes in general economic conditions, either nationally or locally in the areas in
which we conduct or will conduct our business; |
|
|
|
|
inflation, interest rate, market and monetary fluctuations; |
|
|
|
|
changes in gaming or tourism in our primary market area; |
|
|
|
|
risks associated with our growth and expansion strategy and related costs; |
|
|
|
|
increased lending risks associated with our concentration of commercial real estate,
construction and land development and commercial and industrial loans; |
|
|
|
|
increases in competitive pressures among financial institutions and businesses offering
similar products and services; |
|
|
|
|
higher defaults on our loan portfolio than we expect; |
|
|
|
|
changes in managements estimate of the adequacy of the allowance for loan losses; |
|
|
|
|
legislative or regulatory changes or changes in accounting principles, policies or
guidelines; |
|
|
|
|
managements estimates and projections of interest rates and interest rate policy; |
|
|
|
|
the execution of our business plan; and |
|
|
|
|
other factors affecting the financial services industry generally or the banking
industry in particular. |
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 23. We do not intend and
disclaim any duty or obligation to update or revise any industry information or forward-looking
statements set forth in this prospectus to reflect new information, future events or otherwise,
except as may be required by the securities laws.
|
|
|
ITEM 7. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion and analysis should be read in conjunction with Selected
Consolidated Financial Data and our consolidated financial statements and related notes included
elsewhere in this annual report. 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.
34
Overview and History
We are a bank holding company headquartered in Las Vegas, Nevada. We provide a full range of
banking and related services to locally owned businesses, professional firms, real estate
developers and investors, local nonprofit organizations, high net worth individuals and consumers
through our subsidiary banks and financial services companies located in Nevada, Arizona,
California and Colorado. In addition to traditional lending and deposit gathering capabilities, we
also offer a broad array of financial products and services aimed at satisfying the needs of small
to mid-sized businesses and their proprietors, including cash management, trust administration and
estate planning, custody and investments and equipment leasing.
We generate the majority of our revenue from interest on loans, service charges on customer
accounts and income from investment securities. This revenue is offset by interest expense paid on
deposits and other borrowings and non-interest expense such as administrative and occupancy
expenses. Net interest income is the difference between interest income on interest-earning assets
such as loans and securities and interest expense on interest-bearing liabilities such as customer
deposits and other borrowings which are used to fund those assets. Net interest income is our
largest source of net income. Interest rate fluctuations, as well as changes in the amount and type
of earning assets and liabilities, combine to affect net interest income.
We provide a variety of loans to our customers, including commercial and residential real
estate loans, construction and land development loans, commercial and industrial loans, Small
Business Administration, or SBA loans, and to a lesser extent, consumer loans. We rely primarily on
locally generated deposits to provide us with funds for making loans.
In addition to these traditional commercial banking capabilities, we also provide our
customers with cash management, trust administration and estate planning, equipment leasing,
custody and investment services and affinity card services resulting in revenue generated from
non-interest income. We receive fees from our deposit customers in the form of service fees,
checking fees and other fees. Other services such as safe deposit and wire transfers provide
additional fee income. We may also generate income from time to time from the sale of investment
securities. The fees collected by us are found in our Consolidated Statements of Income under
non-interest income. Offsetting these earnings are operating expenses referred to as
non-interest expense. Because banking is a very people intensive industry, our largest operating
expense is employee compensation and related expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At or for the Year Ended December 31, |
|
|
2007 |
|
2006 |
|
2005 |
|
|
($ in thousands, expect per share amounts) |
Net income |
|
$ |
32,875 |
|
|
$ |
39,889 |
|
|
$ |
28,065 |
|
Basic earnings per share |
|
|
1.14 |
|
|
|
1.56 |
|
|
|
1.36 |
|
Diluted earnings per share |
|
|
1.06 |
|
|
|
1.41 |
|
|
|
1.24 |
|
Total assets |
|
|
5,016,096 |
|
|
|
4,169,604 |
|
|
|
2,857,271 |
|
Gross loans |
|
|
3,633,009 |
|
|
|
3,003,222 |
|
|
|
1,793,337 |
|
Total deposits |
|
|
3,546,922 |
|
|
|
3,400,423 |
|
|
|
2,393,812 |
|
Net interest margin |
|
|
4.40 |
% |
|
|
4.52 |
% |
|
|
4.41 |
% |
Efficiency ratio |
|
|
64.67 |
|
|
|
57.51 |
|
|
|
56.69 |
|
Return on average assets |
|
|
0.70 |
|
|
|
1.09 |
|
|
|
1.13 |
|
Return on average equity |
|
|
6.66 |
|
|
|
11.45 |
|
|
|
14.37 |
|
Return on average
tangible equity |
|
|
11.94 |
|
|
|
16.47 |
|
|
|
14.77 |
|
Primary Factors in Evaluating Financial Condition and Results of Operations
As a bank holding company, we focus on several factors in evaluating our financial condition
and results of operations, including:
|
|
|
Return on Average Equity (ROE) and Return on Average Tangible Equity (ROTE); |
|
|
|
|
Return on Average Assets (ROA) and Return on Average Tangible Assets (ROTA); |
|
|
|
|
Asset Quality; |
35
|
|
|
Asset and Deposit Growth; and |
|
|
|
|
Operating Efficiency. |
Return on Average Equity and Tangible Equity. Our net income for the year ended December 31,
2007 decreased 17.6% to $32.9 million compared to $39.9 million for the year ended December 31,
2006. The decrease in net income was due primarily to a $37.6 million increase in non-interest
expenses related primarily to expansion efforts and a $15.6 million increase to the provision for
loan losses, offset by a $31.1 million increase in net interest income. Basic earnings per share
decreased to $1.14 per share for the year ended December 31, 2007, compared to $1.56 per share for
the same period in 2006. Diluted earnings per share decreased to $1.06 per share for the year ended
December 31, 2007, compared to $1.41 per share for the same period last year. Average shares
outstanding increased 3.3 million from 25.6 million for the year ended December 31, 2006 to 28.9
million for the year ended December 31, 2007. Average stockholders equity increased $145.1
million for the same periods. The increase in shares outstanding and average stockholders equity
was due primarily to our acquisitions of First Independent Bank of Nevada and Shine Investment
Advisory Services. The decrease in net income and increase in shares outstanding resulted in an
ROE of 6.7% for the year ended December 31, 2007, compared to 11.5% for the year ended December 31,
2006, and ROTE of 11.9% for the year ended December 31, 2007, compared to 16.5% for the year ended
December 31, 2006.
Return on Average Assets. Our ROA for the year ended December 31, 2007 decreased to 0.70%
compared to 1.09% for the same period in 2006. The ROTA decreased to 11.94% for the year ended
December 31, 2007 compared to 16.47% for the same period in 2006. The decrease in ROA and ROTA is
primarily due to the decrease in net income discussed above.
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. We measure
asset quality in terms of non-accrual loans and assets as a percentage of gross loans and assets,
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. As of December 31, 2007, non-accrual loans were $17.9 million compared to $1.4 million at
December 31, 2006. Non-accrual loans as a percentage of gross loans were 0.49% as of December 31,
2007, compared to 0.05% as of December 31, 2006. At December 31, 2007 and December 31, 2006, our
non-performing assets were comprised of non-accrual loans, other impaired loans, loans past due 90
days or more and still accruing and other real estate. For the year ended December 31, 2007, net
charge-offs as a percentage of average loans were 0.23%, compared to 0.04% for the year ended
December 31, 2006.
Asset Growth. The ability to produce loans and generate deposits is fundamental to our asset
growth. Our assets and liabilities are comprised primarily of loans and deposits, respectively.
Total assets increased 20.3% to $5.0 billion as of December 31, 2007 from $4.2 billion as of
December 31, 2006. Gross loans grew 21.0% (11.3% organically) to $3.6 billion as of December 31,
2007 from $3.0 billion as of December 31, 2006. Total deposits increased 4.3% (7.6% organic
decline) to $3.5 billion as of December 31, 2007 from $3.4 billion as of December 31, 2006. Loans
and deposits acquired through the First Independent Bank acquisition in 2007 were $290.7 million
and $402.3 million at March 31, 2007, respectively.
Operating Efficiency. Operating efficiency is measured in terms of how efficiently income
before income taxes is generated as a percentage of revenue. Our tax-equivalent efficiency ratio
(non-interest expenses divided by the sum of net interest income and non interest income, tax
adjusted) was 64.67% for the year ended December 31, 2007 compared to 57.51% for the same period in
2006. We recently implemented an initiative designed to reduce our efficiency ratio, which will
include more efficient deployment of FTE. In the short term we expect our branch expansion to slow
significantly, which should lead to a lower efficiency ratio as the opened branches become
profitable.
Critical Accounting Policies
The Notes to Consolidated Financial Statements contain a summary of our significant accounting
policies, including discussions on recently issued accounting pronouncements, our adoption of them
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 picture of our financial position. In addition, these estimates
require us to make complex and subjective
36
judgments, many of which include matters with a high
degree of uncertainty. The following is a discussion of these critical accounting policies and
significant estimates. Additional information about these policies can be found in Note 1 of the
Consolidated Financial Statements.
Allowance for Loan Losses. The allowance for loan losses is a valuation allowance for
probable losses incurred in the loan portfolio. Our allowance for loan loss methodology
incorporates a variety of risk considerations in establishing an allowance for loan losses that we
believe is adequate to absorb probable losses in the existing portfolio. Such analysis addresses
our historical loss experience, delinquency and charge-off trends, collateral values, changes in
non-performing loans, economic conditions, peer group experience and other considerations. This
information is then analyzed to determine estimated loss factors which, in turn, is assigned to
each loan category. These factors also incorporate known information about individual loans,
including the borrowers sensitivity to interest rate movements. Changes in the factors themselves
are driven by perceived risk in pools of homogenous loans classified by collateral type, purpose
and term. Management monitors local trends to anticipate future delinquency potential on a
quarterly basis. In addition to ongoing internal loan reviews and risk assessment, the audit
committee utilizes an independent loan review firm to provide advice on the appropriateness of the
allowance for loan losses.
The allowance for loan losses is increased by the provision for loan losses charged to expense
and reduced by loans charged off, net of recoveries. Provisions for loan losses are provided on
both a specific and general basis. Specific allowances are provided for watch, criticized, and
impaired credits for which the expected/anticipated loss may be measurable. General valuation
allowances are based on a portfolio segmentation based on collateral type, purpose and risk
grading, with a further evaluation of various factors noted above.
We incorporate our internal loss history to establish potential risk based on collateral type
securing each loan. As an additional comparison, we examine peer group banks to determine the
nature and scope of their losses. Finally, we closely examine each credit graded Watch
List/Special Mention and below to individually assess the appropriate specific loan loss reserve
for such credit.
At least annually, we review the assumptions and formulae by which additions are made to the
specific and general valuation allowances for loan losses in an effort to refine such allowance in
light of the current status of the factors described above. The total loan portfolio is thoroughly
reviewed at least quarterly for satisfactory levels of general and specific reserves together with
impaired loans to determine if write downs are necessary.
Although we believe the levels of the allowance as of December 31, 2007 and 2006 were adequate
to absorb probable losses in the loan portfolio, a decline in local economic conditions or other
factors could result in increasing losses that cannot be reasonably estimated at this time.
Available-for-Sale Securities. Statement of Financial Accounting Standards (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity Securities, requires that available-for-sale
securities be carried at fair value. Management utilizes the services of a third party vendor to
assist with the determination of estimated fair values. Adjustments to the available-for-sale
securities fair value impact the consolidated financial statements by increasing or decreasing
assets and stockholders equity.
Securities Measured at Fair Value. The Company elected early adoption of SFAS No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities, effective January 1, 2007.
Concurrent with the adoption of SFAS 159, the Company adopted SFAS No. 157, Fair Value
Measurements, effective January 1, 2007. SFAS 159 requires early adoption of SFAS 157 if the
company chooses to early adopt SFAS 159. SFAS 157 provides a definition of fair value and provides
a framework for calculating fair value. Election of SFAS No. 159 requires elected securities to be
carried at fair value with changes in value running through the income statement. See further
discussion in the notes to the consolidated financial statements.
Other than Temporary Impairment of Securities. We regularly review investment securities for
impairment based on criteria that include the extent to which cost exceeds market value, the
duration of that market decline, our intent and ability to hold to recovery and the financial
health and specific prospects for the issuer. We perform comprehensive market research and analysis
and monitor market conditions to identify potential impairments. Further information about actual
and potential impairment losses is provided in the notes to the financial statements.
37
Goodwill. The Company evaluates goodwill for impairment on at least an annual basis pursuant
to SFAS 142, Goodwill and Other Intangible Assets. The first step of the impairment evaluation
involves the determination of the fair value of each reporting unit to which goodwill has been
assigned. Goodwill is not impaired if the fair value of the reporting unit exceeds its carrying
value. The Companys fair value measurements were based on recent sales of similar companies. The
Company determined that none of its goodwill was impaired as of October 1, 2007.
Stock Based Compensation. SFAS 123R requires the Company to measure the cost of employee
services received in exchange for an award of equity instruments based on the grant-date fair value
of the award. Since an observable market price of an option with the same or similar terms and
conditions is not available, the Company estimates the fair value of stock options using the Black
Scholes option-pricing model. The Black Scholes model requires the Company to make assumptions
regarding the expected term of the option, the expected volatility of the price of the underlying
share for the expected term of the option, the expected dividends on the underlying share for the
expected term of the option, and the risk-free interest rates for the expected term of the option.
The assumptions and the methods used to determine those assumptions are described in Note 13 of the
financial statements included in this Form 10-K.
Trends and Developments Impacting Our Recent Results
Certain trends emerged and developments have occurred that are important in understanding our
recent results and that are potentially significant in assessing future performance.
Growth in our market areas. Our growth has been fueled in particular by the significant
population and economic growth of the greater Las Vegas area where we conduct the majority of our
operations. The growth in this area has coincided with significant investments in the gaming and
tourism industry. The significant population increase has resulted in an increase in the
acquisition of raw land for residential and commercial development, the construction of residential
communities, shopping centers and office buildings, and the development and expansion of the
businesses and professions that provide essential goods and services to this expanded population.
Similarly, growth in the Phoenix, Tucson, San Diego, Reno and Oakland markets has contributed to
our growth.
Recent trends in our local markets have been influenced by the weakening market nationwide.
Specifically, the real estate market has deteriorated considerably in the past year. This has led
to declines in our organic growth and decreases in future projected growth.
Asset sensitivity. Management uses various modeling strategies to manage the repricing
characteristics of our assets and liabilities. These models contain a number of assumptions and
cannot take into account all the various factors that influence the sensitivities of our assets and
liabilities. Despite these limitations, our models at December 31, 2007 indicated that our balance
sheet was modestly asset sensitive. A company is considered to be asset sensitive if the amount of
its interest earning assets maturing or repricing within a certain time period exceed the amount of
its interest-bearing liabilities also maturing or repricing within the same period. Being asset
sensitive means generally that in times of rising interest rates, a companys net interest income
will increase, and in times of falling interest rates, net interest income will decrease.
See Quantitative and Qualitative Disclosure about Market Risk.
Impact of expansion on non-interest expense. We plan to open 2 additional branches in our
existing markets over the next 12 months. We anticipate that the expansion will result in an
increase in occupancy and equipment expense. The cost to construct and furnish a new branch is
approximately $2.5 million, excluding the cost to lease or purchase the land on which the branch is
located. Consistent with our historical growth strategy, as we open new offices and expand both
within and outside our current markets, we plan to recruit seasoned relationship bankers, thereby
increasing our salary expenses. Initially, this increase in salary expense is expected to be higher
than the revenues to be received from the customer relationships brought to us by the new
relationship bankers.
In October 2006, Alta Alliance Bank opened to the public. Alta Alliance Bank is a wholly owned
subsidiary of the Company, headquartered in Oakland, CA. The opening of Alta had a significant
impact on the financial statements of the Company in 2007. Alta reported a $2.0 million net loss in
its first full year of operations.
38
On March 31, 2007, we completed our acquisition of First Independent Bank of Nevada. Total
loans and deposits acquired in this merger were $290.7 million and $402.3 million. We also added a
total of 4 full service branches in the Reno, Nevada area through this merger.
On July 31, 2007, we acquired a majority interest in Shine Investment Advisory Services.
Assets under management were $410 million as of the acquisition date. Shine has one office in Lone
Tree, Colorado.
Impact of service center on non-interest income. We have a service center facility which
became operational in the fourth quarter of 2006. This facility provides increased capacity for
courier, cash management and other business services. We anticipate this will have a long-term
favorable impact on our non-interest income.
Results of Operations
Our results of operations depend substantially on net interest income, which is the difference
between interest income on interest-earning assets, consisting primarily of loans receivable,
securities and other short-term investments, and interest expense on interest-bearing liabilities,
consisting primarily of deposits and borrowings. Our results of operations are also dependent upon
our generation of non-interest income, consisting of income from trust and investment advisory
services and banking service fees. Other factors contributing to our results of operations include
our provisions for loan losses, gains or losses on sales of securities and income taxes, as well as
the level of our non-interest expenses, such as compensation and benefits, occupancy and equipment
and other miscellaneous operating expenses.
Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
The following table sets forth a summary financial overview for the years ended December 31,
2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
|
December 31, |
|
Increase |
|
|
2007 |
|
2006 |
|
(Decrease) |
|
|
(in thousands, except per share amounts) |
Consolidated Statement of Earnings Data: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
305,822 |
|
|
$ |
233,085 |
|
|
$ |
72,737 |
|
Interest expense |
|
|
125,933 |
|
|
|
84,297 |
|
|
|
41,636 |
|
|
|
|
Net interest income |
|
|
179,889 |
|
|
|
148,788 |
|
|
|
31,101 |
|
Provision for loan losses |
|
|
20,259 |
|
|
|
4,660 |
|
|
|
15,599 |
|
|
|
|
Net interest income after provision for loan losses |
|
|
159,630 |
|
|
|
144,128 |
|
|
|
15,502 |
|
Investment security gains/(losses) |
|
|
434 |
|
|
|
(4,436 |
) |
|
|
4,870 |
|
Derivative swap losses |
|
|
(1,833 |
) |
|
|
|
|
|
|
(1,833 |
) |
Security impairment charges |
|
|
(2,861 |
) |
|
|
|
|
|
|
(2,861 |
) |
Unrealized gains on assets and liabilities measured at fair value |
|
|
2,418 |
|
|
|
|
|
|
|
2,418 |
|
Other income, excluding security and fair value
gains/(losses) |
|
|
24,380 |
|
|
|
17,870 |
|
|
|
6,510 |
|
Other expense |
|
|
133,670 |
|
|
|
96,086 |
|
|
|
37,584 |
|
|
|
|
Net income before income taxes |
|
|
48,498 |
|
|
|
61,476 |
|
|
|
(12,978 |
) |
Minority interest |
|
|
110 |
|
|
|
|
|
|
|
110 |
|
Income tax expense |
|
|
15,513 |
|
|
|
21,587 |
|
|
|
(6,074 |
) |
|
|
|
Net income |
|
$ |
32,875 |
|
|
$ |
39,889 |
|
|
$ |
(7,014 |
) |
|
|
|
Earnings per share basic |
|
$ |
1.14 |
|
|
$ |
1.56 |
|
|
$ |
(0.42 |
) |
|
|
|
Earnings per share diluted |
|
$ |
1.06 |
|
|
$ |
1.41 |
|
|
$ |
(0.35 |
) |
|
|
|
The 17.6% decrease in net income was due primarily to a $37.6 million increase in non-interest
expenses related to expansion efforts and a $15.6 million increase to the provision for loan losses
related to the challenging economic conditions in our primary markets, offset by a $31.1 million
increase in net interest income compared with the same period in 2006.
Net Interest Income and Net Interest Margin. The 20.9% increase in net interest income for
year ended December 31, 2007 compared to the year ended December 31, 2006 was due to an increase in
interest
39
income of $72.7 million, reflecting the effect of an increase of $819.6 million in average
interest-bearing assets which was primarily funded with an increase of $692.6 million in average
deposits, of which $64.9 million were non-interest bearing.
The average yield on our interest-earning assets was 7.45% for the year ended December 31,
2007, compared to 7.07% for the year ended December 31, 2006, an increase of 5.0%. The increase in
the yield on our interest-earning assets is primarily the result of an increase in the volume of
loans held in our portfolio. Other factors contributing to the higher yield are adjustments related
to the adoption of SFAS 159 and some changes in the investment portfolio mix to higher yielding
securities.
The cost of our average interest-bearing liabilities increased to 4.08% in the year ended
December 31, 2007, from 3.67% in the year ended December 31, 2006, which is a result of higher
balances in our interest bearing deposits and higher rates paid on deposit accounts and borrowings,
partially offset by a reduction in interest expense related to the election of the fair value
option for trust preferred securities upon early adoption of SFAS 159.
Our average rate on our interest-bearing deposits increased 12.9% from 3.42% for the year
ended December 31, 2006, to 3.86% for the year ended December 31, 2007, reflecting increases in
general market rates. Our average rate on total deposits (including non-interest bearing deposits)
increased 20.9% from 2.25% for the year ended December 31, 2006, to 2.72% for the year ended
December 31, 2007.
Our interest margin of 4.40% for the year ended December 31, 2007 was lower than our margin
for the previous year of 4.52% due to the increase in our cost of funds exceeding the increase in
our yield on earning assets. Our cost of funds increased more than the increase in market rates due
to an unfavorable shift in our deposit mix. Average non-interest bearing deposits increased 6.5%
while interest bearing deposits increased 32.8%.
Average Balances and Average Interest Rates. The table below sets forth balance sheet items
on a daily average basis for the years ended December 31, 2007 and 2006 and presents the daily
average interest rates earned on assets and the daily average interest rates paid on liabilities
for such periods. Non-accrual loans have been included in the average loan balances. Securities
include securities available for sale and securities held to maturity. Securities available for
sale are carried at amortized cost for purposes of calculating the average rate received on taxable
securities below.
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
($ in thousands) |
|
|
|
|
2007 |
|
|
|
|
|
|
|
|
2006 |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
Balance |
|
|
Interest |
|
|
Yield/Cost |
|
|
Balance |
|
|
Interest |
|
|
Yield/Cost |
|
Earning Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
$ |
629,846 |
|
|
$ |
36,320 |
|
|
|
5.77 |
% |
|
$ |
591,904 |
|
|
$ |
25,886 |
|
|
|
4.37 |
% |
Tax-exempt (1) |
|
|
50,432 |
|
|
|
2,396 |
|
|
|
7.46 |
% |
|
|
18,609 |
|
|
|
455 |
|
|
|
4.70 |
% |
|
|
|
|
|
Total securities |
|
|
680,278 |
|
|
|
38,716 |
|
|
|
5.89 |
% |
|
|
610,513 |
|
|
|
26,341 |
|
|
|
4.31 |
% |
Federal funds sold and other |
|
|
30,900 |
|
|
|
1,644 |
|
|
|
5.32 |
% |
|
|
35,149 |
|
|
|
1,798 |
|
|
|
5.12 |
% |
Loans (1) (2) (3) |
|
|
3,393,299 |
|
|
|
264,480 |
|
|
|
7.79 |
% |
|
|
2,641,636 |
|
|
|
203,792 |
|
|
|
7.71 |
% |
Restricted stock |
|
|
19,479 |
|
|
|
982 |
|
|
|
5.04 |
% |
|
|
17,027 |
|
|
|
1,154 |
|
|
|
6.78 |
% |
|
|
|
|
|
Total earnings assets |
|
|
4,123,956 |
|
|
|
305,822 |
|
|
|
7.45 |
% |
|
|
3,304,325 |
|
|
|
233,085 |
|
|
|
7.07 |
% |
Non-earning Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
|
103,163 |
|
|
|
|
|
|
|
|
|
|
|
101,749 |
|
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
|
(37,935 |
) |
|
|
|
|
|
|
|
|
|
|
(29,442 |
) |
|
|
|
|
|
|
|
|
Bank-owned life insurance |
|
|
85,509 |
|
|
|
|
|
|
|
|
|
|
|
58,022 |
|
|
|
|
|
|
|
|
|
Other assets |
|
|
392,550 |
|
|
|
|
|
|
|
|
|
|
|
233,751 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
4,667,243 |
|
|
|
|
|
|
|
|
|
|
$ |
3,668,405 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Bearing Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sources of Funds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest checking |
|
|
259,774 |
|
|
|
6,391 |
|
|
|
2.46 |
% |
|
|
222,851 |
|
|
|
5,319 |
|
|
|
2.39 |
% |
Savings and money market |
|
|
1,602,980 |
|
|
|
58,867 |
|
|
|
3.67 |
% |
|
|
1,215,139 |
|
|
|
40,097 |
|
|
|
3.30 |
% |
Time deposits |
|
|
681,229 |
|
|
|
32,870 |
|
|
|
4.83 |
% |
|
|
478,228 |
|
|
|
20,196 |
|
|
|
4.22 |
% |
|
|
|
|
|
Total interest-bearing deposits |
|
|
2,543,983 |
|
|
|
98,128 |
|
|
|
3.86 |
% |
|
|
1,916,218 |
|
|
|
65,612 |
|
|
|
3.42 |
% |
Short-term borrowings |
|
|
372,547 |
|
|
|
17,097 |
|
|
|
4.59 |
% |
|
|
243,780 |
|
|
|
11,101 |
|
|
|
4.55 |
% |
Long-term debt |
|
|
61,119 |
|
|
|
3,092 |
|
|
|
5.06 |
% |
|
|
73,155 |
|
|
|
2,724 |
|
|
|
3.72 |
% |
Junior subordinated and
subordinated debt |
|
|
106,802 |
|
|
|
7,616 |
|
|
|
7.13 |
% |
|
|
63,330 |
|
|
|
4,860 |
|
|
|
7.67 |
% |
|
|
|
|
|
Total interest-bearing liabilities |
|
|
3,084,451 |
|
|
|
125,933 |
|
|
|
4.08 |
% |
|
|
2,296,483 |
|
|
|
84,297 |
|
|
|
3.67 |
% |
Non-interest Bearing Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing demand deposits |
|
|
1,065,592 |
|
|
|
|
|
|
|
|
|
|
|
1,000,726 |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
23,835 |
|
|
|
|
|
|
|
|
|
|
|
22,902 |
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
493,365 |
|
|
|
|
|
|
|
|
|
|
|
348,294 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity |
|
$ |
4,667,243 |
|
|
|
|
|
|
|
|
|
|
$ |
3,668,405 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income and margin (4) |
|
|
|
|
|
$ |
179,889 |
|
|
|
4.40 |
% |
|
|
|
|
|
$ |
148,788 |
|
|
|
4.52 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread (5) |
|
|
|
|
|
|
|
|
|
|
3.37 |
% |
|
|
|
|
|
|
|
|
|
|
3.40 |
% |
|
|
|
(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. |
|
(2) |
|
Net loan fees of $6.3 million and $7.4 million are included in the yield computation for 2007
and 2006, respectively. |
|
(3) |
|
Includes average non-accrual loans of $9.3 million in 2007 and $0.4 million in 2006. |
|
(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. |
Net Interest Income. 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, non-accrual loans
have been included in the average loan balances.
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
2007 v. 2006 |
|
|
Increase (Decrease) |
|
|
Due to Changes in (1)(2) |
|
|
Volume |
|
Rate |
|
Total |
|
|
(in thousands) |
Interest on securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
$ |
2,188 |
|
|
$ |
8,246 |
|
|
$ |
10,434 |
|
Tax-exempt |
|
|
1,512 |
|
|
|
429 |
|
|
|
1,941 |
|
Federal funds sold and other |
|
|
(226 |
) |
|
|
72 |
|
|
|
(154 |
) |
Loans |
|
|
58,586 |
|
|
|
2,102 |
|
|
|
60,688 |
|
Restricted stock |
|
|
124 |
|
|
|
(296 |
) |
|
|
(172 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
62,184 |
|
|
|
10,553 |
|
|
|
72,737 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest checking |
|
|
908 |
|
|
|
164 |
|
|
|
1,072 |
|
Savings and Money market |
|
|
14,243 |
|
|
|
4,527 |
|
|
|
18,770 |
|
Time deposits |
|
|
9,795 |
|
|
|
2,879 |
|
|
|
12,674 |
|
Short-term borrowings |
|
|
5,909 |
|
|
|
87 |
|
|
|
5,996 |
|
Long-term debt |
|
|
(609 |
) |
|
|
977 |
|
|
|
368 |
|
Junior subordinated debt |
|
|
3,100 |
|
|
|
(344 |
) |
|
|
2,756 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
33,346 |
|
|
|
8,290 |
|
|
|
41,636 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase |
|
$ |
28,838 |
|
|
$ |
2,263 |
|
|
$ |
31,101 |
|
|
|
|
|
|
|
(1) |
|
Changes due to both volume and rate have been allocated to volume changes. |
|
(2) |
|
Changes due to mark-to-market gains/losses under SFAS 159 have been allocated to
volume changes. |
Provision for Loan Losses. The provision for loan 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 loan losses at a level that, in our judgment, is adequate to absorb probable loan
losses inherent in the loan portfolio.
Our provision for loan losses was $20.3 million for the year ended December 31, 2007, compared
with $4.7 million for the year ended December 31, 2006. The provision increased primarily because
of increases in net charge-offs and specific reserves applied to internally classified loans.
Non-Interest Income. We earn non-interest income primarily through fees related to:
|
|
|
Trust and investment advisory services, |
|
|
|
|
Services provided to deposit customers, |
|
|
|
|
Services provided to current and potential loan customers, and |
|
|
|
|
Bank owned life insurance. |
The following tables present, for the periods indicated, the major categories of non-interest
income (excluding securities and fair value gains/(losses):
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
|
December 31, |
|
Increase |
|
|
2007 |
|
2006 |
|
(Decrease) |
|
|
(in thousands) |
Trust and investment advisory services |
|
$ |
9,764 |
|
|
$ |
7,346 |
|
|
$ |
2,418 |
|
Service charges |
|
|
4,828 |
|
|
|
3,450 |
|
|
|
1,378 |
|
Income from bank owned life insurance |
|
|
3,763 |
|
|
|
2,661 |
|
|
|
1,102 |
|
Other |
|
|
6,025 |
|
|
|
4,413 |
|
|
|
1,612 |
|
|
|
|
Non-interest income, excluding
securities and fair value gains (losses) |
|
$ |
24,380 |
|
|
$ |
17,870 |
|
|
$ |
6,510 |
|
|
|
|
The $6.5 million, or 36.4%, increase in non-interest income was influenced by several factors.
Collectively, Premier Trust, Inc., Miller/Russell Associates, Inc. and Shine Investment Advisory
Services, Inc. produced $9.8 million in trust and investment advisory fees in the year ended
December 31, 2007, compared to $7.3 million in the year ended December 31, 2006. The increase was
due to an increase in volume of business from Premier and Miller Russell and the acquisition of
Shine in July 2007. Trust assets and assets under management have increased from a combined amount
of $1.83 billion at December 31, 2006 to $2.51 billion at December 31, 2007.
Service charges increased $1.4 million from 2006 to 2007 due to higher deposit balances,
increased fee charges on existing accounts and the growth in our customer base.
Income from bank owned life insurance, or BOLI, increased $1.1 million. In addition to $2.2
million of BOLI added through the First Independent acquisition, we purchased additional BOLI
products with a face amount of $25.0 million in late 2006 to help offset employee benefit costs.
Other income increased $1.6 million, due to the growth of the Company and its operations and
the sale of a branch facility in 2007. Other income also includes broker fees received on sales of
leases and mortgages and gains on sales of SBA loans.
Unrealized gains/losses on assets and liabilities measured at fair value. During the year
ended December 31, 2007, we recognized net unrealized gains on assets and liabilities measured at
fair value of $2.4 million. These gains and losses are primarily the result of changes in market
yields on securities similar to those in our portfolio. We view the majority of these gains and
losses as temporary in nature since the changes in value on most of our securities were not related
to a deterioration or improvement in credit profile, but rather such gains and losses were the
result of fluctuations in market yields.
During the year ended December 31, 2007, we recognized an impairment charge on one
collateralized debt obligation that has exposure to subprime mortgages. The reduction in fair value
of $2.9 million, or 57%, was deemed to be other than temporary due to a substantial deterioration
in the credit profile of the security as indicated by a credit rating downgrade.
SFAS 159 and 157 were adopted by the Company on January 1, 2007. A detailed explanation of the
adoptions is included in the notes to the financial statements.
During the year ended December 31, 2007, we recognized a gain on interest rate swap
derivatives of $0.7 million and losses of $2.5 million on credit default swap derivatives embedded
in certain structured securities.
Non-Interest Expense. The following table presents, for the periods indicated, the major
categories of non-interest expense:
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
|
December 31, |
|
Increase |
|
|
2007 |
|
2006 |
|
(Decrease) |
|
|
(in thousands) |
Salaries and employee benefits |
|
$ |
76,582 |
|
|
$ |
54,767 |
|
|
$ |
21,815 |
|
Occupancy |
|
|
18,120 |
|
|
|
12,958 |
|
|
|
5,162 |
|
Advertising, public relations and business development |
|
|
6,815 |
|
|
|
4,242 |
|
|
|
2,573 |
|
Customer service |
|
|
6,708 |
|
|
|
6,684 |
|
|
|
24 |
|
Legal, professional and director fees |
|
|
3,862 |
|
|
|
2,798 |
|
|
|
1,064 |
|
Insurance |
|
|
3,324 |
|
|
|
1,048 |
|
|
|
2,276 |
|
Data processing |
|
|
2,278 |
|
|
|
1,748 |
|
|
|
530 |
|
Audits and exams |
|
|
2,059 |
|
|
|
2,375 |
|
|
|
(316 |
) |
Supplies |
|
|
1,942 |
|
|
|
1,710 |
|
|
|
232 |
|
Correspondent banking service charges and wire transfer costs |
|
|
1,669 |
|
|
|
1,662 |
|
|
|
7 |
|
Telephone |
|
|
1,492 |
|
|
|
1,093 |
|
|
|
399 |
|
Intangible amortization |
|
|
1,455 |
|
|
|
607 |
|
|
|
848 |
|
Travel and automobile |
|
|
1,425 |
|
|
|
790 |
|
|
|
635 |
|
Merger expenses |
|
|
747 |
|
|
|
|
|
|
|
747 |
|
Organizational costs |
|
|
|
|
|
|
977 |
|
|
|
(977 |
) |
Other |
|
|
5,192 |
|
|
|
2,627 |
|
|
|
2,565 |
|
|
|
|
Total non-interest expense |
|
$ |
133,670 |
|
|
$ |
96,086 |
|
|
$ |
37,584 |
|
|
|
|
Non-interest expense grew $37.6 million, or 39.1%. These increases are attributable to our
overall growth, and specifically to merger and acquisition activity, the opening of new branches
and hiring of new relationship officers and other employees. At December 31, 2007, we had 992
full-time equivalent employees compared to 785 at December 31, 2006. Given current market
conditions, we expect branch expansion activity to slow dramatically in 2008.
The increase in salaries and occupancy expenses related to the growth discussed above totaled
$27.0 million, which is 71.8% of the total increase in non-interest expenses.
Insurance expense increased $2.3 million from the year ended December 31, 2006 to the same
period in 2007 primarily due to significant FDIC depository insurance rate increases assessed for
the 2007 year.
Other non-interest expense increased $2.6 million from December 31, 2006 to December 31, 2007.
Other non-interest expense increased, in general, as a result of the growth in assets and
operations of the Company.
Provision for Income Taxes. We recorded tax provisions of $15.5 million and $21.6 million for
the years ended December 31, 2007 and 2006, respectively. Our effective tax rates were 31.9% and
35.1% for 2007 and 2006, respectively.
The effective tax rate decreased from 35.1% for the year ended December 31, 2006 to 31.9% for
the same period in 2007 primarily due to an increase in securities yielding dividends received
deductions, non-taxable increases in the cash surrender value of life insurance and increased
tax-exempt income from a larger tax-exempt loan and bond portfolio.
44
Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
The following table sets forth a summary financial overview for the years ended December 31,
2006 and 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
|
December 31, |
|
Increase |
|
|
2006 |
|
2005 |
|
(Decrease) |
|
|
(in thousands, except per share amounts) |
Consolidated Statement of Earnings Data: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
233,085 |
|
|
$ |
134,910 |
|
|
$ |
98,175 |
|
Interest expense |
|
|
84,297 |
|
|
|
32,568 |
|
|
|
51,729 |
|
|
|
|
Net interest income |
|
|
148,788 |
|
|
|
102,342 |
|
|
|
46,446 |
|
Provision for loan losses |
|
|
4,660 |
|
|
|
6,179 |
|
|
|
(1,519 |
) |
|
|
|
Net interest income after provision for loan losses |
|
|
144,128 |
|
|
|
96,163 |
|
|
|
47,965 |
|
Investment security gains/(losses) |
|
|
(4,436 |
) |
|
|
69 |
|
|
|
(4,505 |
) |
Other income, excluding security gains/(losses) |
|
|
17,870 |
|
|
|
12,069 |
|
|
|
5,801 |
|
Other expense |
|
|
96,086 |
|
|
|
64,864 |
|
|
|
31,222 |
|
|
|
|
Net income before income taxes |
|
|
61,476 |
|
|
|
43,437 |
|
|
|
18,039 |
|
Income tax expense |
|
|
21,587 |
|
|
|
15,372 |
|
|
|
6,215 |
|
|
|
|
Net income |
|
$ |
39,889 |
|
|
$ |
28,065 |
|
|
$ |
11,824 |
|
|
|
|
Earnings per share basic |
|
$ |
1.56 |
|
|
$ |
1.36 |
|
|
$ |
0.20 |
|
|
|
|
Earnings per share diluted |
|
$ |
1.41 |
|
|
$ |
1.24 |
|
|
$ |
0.17 |
|
|
|
|
The 42.1% increase in net income in the year ended December 31, 2006 compared to the year
ended December 31, 2005 was due primarily to increases in net interest income of $46.4 million and
other income of $5.8 million, partially offset by an increase of $31.2 million in other expenses
and a loss on portfolio restructuring of $4.4 million. Also contributing to the increase in net
income was a decrease in the provision for loan losses of $1.5 million. The increase in net
interest income was the result of an increase in the volume of interest-earning assets, primarily
loans, partially offset by an increase in our cost of funds, due principally to a rising deposit
market rate environment and an increase in borrowing rates.
Net Interest Income and Net Interest Margin. The 45.4% increase in net interest income for
the year ended December 31, 2006 compared to the year ended December 31, 2005 was due to an
increase in interest income of $98.2 million, reflecting the effect of an increase of $980 million
in average interest-bearing assets which was funded with an increase of $847 million in average
deposits, of which $155 million were non-interest bearing.
The average yield on our interest-earning assets was 7.07% for the year ended December 31,
2006, compared to 5.81% for the year ended December 31, 2005, an increase of 21.7%. The increase in
the yield on our interest-earning assets is primarily a result of an increase in the yield earned
on our loan portfolio and a shift of funds previously held in securities into higher-yielding
loans. The increase in the yield on our loan portfolio from 6.83% in 2005 to 7.71% in 2006 was due
to two factors: (1) market rates in 2006 were higher than those in 2005, and therefore the new
loans booked in 2006 were generally at higher rates than the average portfolio rate at December 31,
2005; and (2) approximately one-half of our loan portfolio is variable rate, and therefore these
loans reprice at higher rates in a rising rate environment as was seen in the year ended December
31, 2006.
The cost of our average interest-bearing liabilities increased to 3.67% in the year ended
December 31, 2006, from 2.27% in the year ended December 31, 2005, which is a result of higher
rates paid on deposit accounts, borrowings and junior subordinated debt caused by the steady upward
pressure on short-term interest rates driven by the Federal Open Market Committees (FOMC) rate
increases through the first half of 2006. Due in part to our acquisitions, we have also seen a
shift in our deposit mix whereby non-interest bearing deposits comprise a smaller percentage of our
entire deposit portfolio, thus increasing our funding costs.
Our average rate on our interest-bearing deposits increased 63.6% from 2.09% for the year
ended December 31, 2005, to 3.42% for the year ended December 31, 2006, reflecting increases in
general market
45
rates. Our average rate on total deposits (including non-interest bearing deposits)
increased 82.9% from 1.23% for the year ended December 31, 2005, to 2.25% for the year ended
December 31, 2006.
Our interest margin of 4.52% for the year ended December 31, 2006 was higher than our margin
for the previous year of 4.41% due to an increase in our yield on interest-bearing assets and our
elevated mix of variable rate loans to our total portfolio, offset by a smaller relative increase
in our overall cost of funds.
Average Balances and Average Interest Rates. The table below sets forth balance sheet items
on a daily average basis for the years ended December 31, 2006 and 2005 and presents the daily
average interest rates earned on assets and the daily average interest rates paid on liabilities
for such periods. Non-accrual loans have been included in the average loan balances. Securities
include securities available for sale and securities held to maturity. Securities available for
sale are carried at amortized cost for purposes of calculating the average rate received on taxable
securities below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
($ in thousands) |
|
2006 |
|
|
2005 |
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
Balance |
|
|
Interest |
|
|
Yield/Cost |
|
|
Balance |
|
|
Interest |
|
|
Yield/Cost |
|
Earning Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
$ |
591,904 |
|
|
$ |
25,886 |
|
|
|
4.37 |
% |
|
$ |
729,884 |
|
|
$ |
29,099 |
|
|
|
3.99 |
% |
Tax-exempt (1) |
|
|
18,609 |
|
|
|
455 |
|
|
|
4.70 |
% |
|
|
8,558 |
|
|
|
394 |
|
|
|
6.30 |
% |
|
|
|
|
|
Total securities |
|
|
610,513 |
|
|
|
26,341 |
|
|
|
4.31 |
% |
|
|
738,442 |
|
|
|
29,493 |
|
|
|
3.99 |
% |
Federal funds sold and other |
|
|
35,149 |
|
|
|
1,798 |
|
|
|
5.12 |
% |
|
|
71,450 |
|
|
|
2,341 |
|
|
|
3.28 |
% |
Loans (1) (2) (3) |
|
|
2,641,636 |
|
|
|
203,792 |
|
|
|
7.71 |
% |
|
|
1,501,089 |
|
|
|
102,481 |
|
|
|
6.83 |
% |
Restricted stock |
|
|
17,027 |
|
|
|
1,154 |
|
|
|
6.78 |
% |
|
|
13,482 |
|
|
|
595 |
|
|
|
4.41 |
% |
|
|
|
|
|
Total earnings assets |
|
|
3,304,325 |
|
|
|
233,085 |
|
|
|
7.07 |
% |
|
|
2,324,463 |
|
|
|
134,910 |
|
|
|
5.81 |
% |
Non-earning Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
|
101,749 |
|
|
|
|
|
|
|
|
|
|
|
77,347 |
|
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
|
(29,442 |
) |
|
|
|
|
|
|
|
|
|
|
(17,954 |
) |
|
|
|
|
|
|
|
|
Bank-owned life insurance |
|
|
58,022 |
|
|
|
|
|
|
|
|
|
|
|
36,200 |
|
|
|
|
|
|
|
|
|
Other assets |
|
|
233,751 |
|
|
|
|
|
|
|
|
|
|
|
68,684 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
3,668,405 |
|
|
|
|
|
|
|
|
|
|
$ |
2,488,740 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Bearing Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sources of Funds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest checking |
|
$ |
222,851 |
|
|
$ |
5,319 |
|
|
|
2.39 |
% |
|
$ |
109,415 |
|
|
$ |
594 |
|
|
|
0.54 |
% |
Savings and money market |
|
|
1,215,139 |
|
|
|
40,097 |
|
|
|
3.30 |
% |
|
|
827,886 |
|
|
|
16,908 |
|
|
|
2.04 |
% |
Time deposits |
|
|
478,228 |
|
|
|
20,196 |
|
|
|
4.22 |
% |
|
|
287,083 |
|
|
|
8,044 |
|
|
|
2.80 |
% |
|
|
|
|
|
Total interest-bearing deposits |
|
|
1,916,218 |
|
|
|
65,612 |
|
|
|
3.42 |
% |
|
|
1,224,384 |
|
|
|
25,546 |
|
|
|
2.09 |
% |
Short-term borrowings |
|
|
243,780 |
|
|
|
11,101 |
|
|
|
4.55 |
% |
|
|
117,703 |
|
|
|
3,234 |
|
|
|
2.75 |
% |
Long-term debt |
|
|
73,155 |
|
|
|
2,724 |
|
|
|
3.72 |
% |
|
|
63,754 |
|
|
|
1,675 |
|
|
|
2.63 |
% |
Junior subordinated and
subordinated debt |
|
|
63,330 |
|
|
|
4,860 |
|
|
|
7.67 |
% |
|
|
30,928 |
|
|
|
2,113 |
|
|
|
6.83 |
% |
|
|
|
|
|
Total interest-bearing liabilities |
|
|
2,296,483 |
|
|
|
84,297 |
|
|
|
3.67 |
% |
|
|
1,436,769 |
|
|
|
32,568 |
|
|
|
2.27 |
% |
Non-interest Bearing Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing demand
deposits |
|
|
1,000,726 |
|
|
|
|
|
|
|
|
|
|
|
845,581 |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
22,902 |
|
|
|
|
|
|
|
|
|
|
|
11,106 |
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
348,294 |
|
|
|
|
|
|
|
|
|
|
|
195,284 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity |
|
$ |
3,668,405 |
|
|
|
|
|
|
|
|
|
|
$ |
2,488,740 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income and margin (4) |
|
|
|
|
|
$ |
148,788 |
|
|
|
4.52 |
% |
|
|
|
|
|
$ |
102,342 |
|
|
|
4.41 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread (5) |
|
|
|
|
|
|
|
|
|
|
3.40 |
% |
|
|
|
|
|
|
|
|
|
|
3.54 |
% |
|
|
|
(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. |
|
(2) |
|
Net loan fees of $7,365,000 and $5,051,000 are included in the yield computation for 2006 and
2005, respectively. |
|
(3) |
|
Includes average non-accrual loans of $374,000 in 2006 and $481,000 in 2005. |
|
(4) |
|
Net interest margin is computed by dividing net interest income by total average earning
assets. |
46
|
|
|
(5) |
|
Net interest spread represents average yield earned on interest-earning assets less the
average rate paid on interest bearing liabilities. |
Net Interest Income. 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, non-accrual loans
have been included in the average loan balances.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
2006 v. 2005 |
|
|
Increase (Decrease) |
|
|
Due to Changes in (1) |
|
|
Volume |
|
Rate |
|
Total |
|
|
(in thousands) |
Interest on securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
$ |
(6,034 |
) |
|
$ |
2,821 |
|
|
$ |
(3,213 |
) |
Tax-exempt |
|
|
246 |
|
|
|
(185 |
) |
|
|
61 |
|
Federal funds sold and other |
|
|
(1,857 |
) |
|
|
1,314 |
|
|
|
(543 |
) |
Loans |
|
|
87,989 |
|
|
|
13,322 |
|
|
|
101,311 |
|
Restricted stock |
|
|
240 |
|
|
|
319 |
|
|
|
559 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
80,584 |
|
|
|
17,591 |
|
|
|
98,175 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest checking |
|
|
2,707 |
|
|
|
2,018 |
|
|
|
4,725 |
|
Savings and Money market |
|
|
12,779 |
|
|
|
10,410 |
|
|
|
23,189 |
|
Time deposits |
|
|
8,072 |
|
|
|
4,080 |
|
|
|
12,152 |
|
Short-term borrowings |
|
|
5,741 |
|
|
|
2,126 |
|
|
|
7,867 |
|
Long-term debt |
|
|
350 |
|
|
|
699 |
|
|
|
1,049 |
|
Junior subordinated debt |
|
|
2,487 |
|
|
|
260 |
|
|
|
2,747 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
32,136 |
|
|
|
19,593 |
|
|
|
51,729 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase |
|
$ |
48,448 |
|
|
$ |
(2,002 |
) |
|
$ |
46,446 |
|
|
|
|
|
|
|
(1) |
|
Changes due to both volume and rate have been allocated to volume changes. |
Provision for Loan Losses. The provision for loan 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 loan losses at a level that, in our judgment, is adequate to absorb probable loan
losses inherent in the loan portfolio.
Our provision for loan losses was $4.7 million for the year ended December 31, 2006, compared
with $6.2 million for the year ended December 31, 2005. The provision decreased primarily because
of our low level of historical charge-offs, which yielded lower loss experience factors in our
required reserve calculations.
Investment Security Losses. During the fourth quarter of 2006, we liquidated $159 million of
our securities portfolio and recognized a pre-tax loss of $4.4 million.
Non-Interest Income. We earn non-interest income primarily through fees related to:
|
|
|
Trust and investment advisory services, |
|
|
|
|
Services provided to deposit customers, |
|
|
|
|
Services provided to current and potential loan customers, and |
47
|
|
|
Bank owned life insurance. |
The following tables present, for the periods indicated, the major categories of non-interest
income (excluding securities gains/(losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
|
December 31, |
|
Increase |
|
|
2006 |
|
2005 |
|
(Decrease) |
|
|
(in thousands) |
Trust and investment advisory services |
|
$ |
7,346 |
|
|
$ |
5,699 |
|
|
$ |
1,647 |
|
Service charges |
|
|
3,450 |
|
|
|
2,495 |
|
|
|
955 |
|
Income from bank owned life insurance |
|
|
2,661 |
|
|
|
1,664 |
|
|
|
997 |
|
Other |
|
|
4,413 |
|
|
|
2,211 |
|
|
|
2,202 |
|
|
|
|
Total non-interest income |
|
$ |
17,870 |
|
|
$ |
12,069 |
|
|
$ |
5,801 |
|
|
|
|
The $5.8 million, or 48%, increase in non-interest income was influenced by several factors.
Collectively, Premier Trust, Inc. and Miller/Russell Associates, Inc. produced $7.3 million in
trust and investment advisory fees in the year ended December 31, 2006, compared to $5.7 million in
the year ended December 31, 2005. The increase was due to an increase in volume of business from
both entities. Trust assets and assets under management have increased at both entities from a
combined amount of $1.41 billion at December 31, 2005 to $1.83 billion at December 31, 2006.
Service charges increased $955,000 from 2005 to 2006 due to higher deposit balances and the
growth in our customer base.
Income from bank owned life insurance, or BOLI, increased $997,000. In addition to $2.7
million of BOLI acquired through merger, we purchased additional BOLI products with a face amount
of $25.0 million in 2006 to help offset employee benefit costs.
Other income increased $2.2 million, due to the growth of the Company and its operations, and
includes broker fees received on sales of leases and mortgages and gains on sales of SBA loans.
Non-Interest Expense. The following table presents, for the periods indicated, the major
categories of non-interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
|
December 31, |
|
Increase |
|
|
2006 |
|
2005 |
|
(Decrease) |
|
|
(in thousands) |
Salaries and employee benefits |
|
$ |
54,767 |
|
|
$ |
36,816 |
|
|
$ |
17,951 |
|
Occupancy |
|
|
12,958 |
|
|
|
9,819 |
|
|
|
3,139 |
|
Customer service |
|
|
6,684 |
|
|
|
3,720 |
|
|
|
2,964 |
|
Advertising, public relations and business development |
|
|
4,242 |
|
|
|
2,806 |
|
|
|
1,436 |
|
Legal, professional and director fees |
|
|
2,798 |
|
|
|
2,051 |
|
|
|
747 |
|
Correspondent banking service charges and wire transfer costs |
|
|
1,662 |
|
|
|
1,651 |
|
|
|
11 |
|
Audits and exams |
|
|
2,375 |
|
|
|
1,538 |
|
|
|
837 |
|
Supplies |
|
|
1,710 |
|
|
|
1,083 |
|
|
|
627 |
|
Data processing |
|
|
1,748 |
|
|
|
1,053 |
|
|
|
695 |
|
Telephone |
|
|
1,093 |
|
|
|
759 |
|
|
|
334 |
|
Insurance |
|
|
1,048 |
|
|
|
752 |
|
|
|
296 |
|
Organizational Costs |
|
|
977 |
|
|
|
|
|
|
|
977 |
|
Travel and automobile |
|
|
790 |
|
|
|
684 |
|
|
|
106 |
|
Other |
|
|
3,234 |
|
|
|
2,132 |
|
|
|
1,102 |
|
|
|
|
Total non-interest expense |
|
$ |
96,086 |
|
|
$ |
64,864 |
|
|
$ |
31,222 |
|
|
|
|
48
Non-interest expense grew $31.2 million, or 48.1%. This growth is attributable to our overall
growth, and specifically to the acquisition of Bank of Nevada and First Intermountain Bancorp, the
opening of new branches and the hiring of new relationship officers and other employees. At
December 31, 2006, we had 785 full-time equivalent employees compared to 537 at December 31, 2005.
The increase in salaries and occupancy expenses related to the growth discussed above totaled $21
million, which is 67.6% of the total increase in non-interest expenses.
Also affecting non-interest expenses was the increase in our customer service costs. This line
item grew $3.0 million, or 79.7%, due primarily to an increase in analysis earnings credit rates
during the year ended December 31, 2006 compared to those during the year ended December 31, 2005.
Advertising, public relations and business development increased $1.4 million, or 51.2%. This
increase is a result of the growth in assets and operations of the Company.
Audits and exams increased $837,000 to $2.4 million. The increase is primarily attributable to
2006 being the first year in which we were subject to the Sarbanes-Oxley Rule 404.
The $977,000 in organizational costs relates to the opening of Alta Alliance Bank in October
2006. This total includes salaries, marketing, legal and other professional costs incurred prior to
the opening of the bank.
Other non-interest expense increased $1.1 million from December 31, 2006 to December 31, 2005.
Other non-interest expense increased, in general, as a result of the growth in assets and
operations of the Company.
We incurred $100,000 of audit, legal and recovery costs, net of insurance proceeds, due to the
defalcation which was discovered in the third quarter of 2006. The defalcation also resulted in
$350,000 in fraud losses, net of insurance proceeds, which are included in other expenses.
Provision for Income Taxes. We recorded tax provisions of $21.6 million and $15.4 million for
the years ended December 31, 2006 and 2005, respectively. Our effective tax rates were 35.1% and
35.4% for 2006 and 2005, respectively.
Financial Condition
Total Assets
On a consolidated basis, our total assets as of December 31, 2007, December 31, 2006 and
December 31, 2005 were $5.0 billion, $4.2 billion, and $2.9 billion, respectively. The overall
increase from December 31, 2006 to December 31, 2007 was primarily due to a $629.8 million, or
21.0% (11.3% organic), increase in gross loans, a $194.1 million, or 35.8% increase in securities
and a $43.6 million, or 43.6% increase in premises and equipment. The overall increase from
December 31, 2005 to December 31, 2006 was primarily due to a $1.2 billion, or 67.6%, increase in
gross loans, a $90.5 million, or 51.9% increase in cash and cash equivalents and a $41.4 million,
or 70.1% increase in premises and equipment.
Loans
Our gross loans, including deferred loan fees, on a consolidated basis as of December 31,
2007, December 31, 2006, and December 31, 2005 were $3.6 billion, $3.0 billion, and $1.8 billion,
respectively. Since January 1, 2003, residential real estate loans experienced the highest
percentage growth within the portfolio, growing from $21.9 million to $447.6 million as of December
31, 2007. Our overall growth in loans from December 31, 2003 to December 31, 2007 is consistent
with our focus and strategy to grow our loan portfolio by focusing on markets which we believe have
attractive growth prospects.
The following table shows the amounts of loans outstanding by type of loan at the end of each
of the periods indicated.
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
|
|
|
|
(in thousands) |
|
Construction and land development |
|
$ |
806,110 |
|
|
$ |
715,546 |
|
|
$ |
432,668 |
|
|
$ |
323,176 |
|
|
$ |
195,182 |
|
Commercial real estate |
|
|
1,514,533 |
|
|
|
1,232,260 |
|
|
|
727,210 |
|
|
|
491,949 |
|
|
|
324,702 |
|
Residential real estate |
|
|
492,551 |
|
|
|
384,082 |
|
|
|
272,861 |
|
|
|
116,360 |
|
|
|
42,773 |
|
Commercial and industrial |
|
|
784,378 |
|
|
|
645,469 |
|
|
|
342,452 |
|
|
|
241,292 |
|
|
|
159,889 |
|
Consumer |
|
|
43,517 |
|
|
|
29,561 |
|
|
|
20,434 |
|
|
|
17,682 |
|
|
|
11,802 |
|
Net deferred loan fees |
|
|
(8,080 |
) |
|
|
(3,696 |
) |
|
|
(2,288 |
) |
|
|
(1,924 |
) |
|
|
(1,270 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loans, net of deferred fees |
|
|
3,633,009 |
|
|
|
3,003,222 |
|
|
|
1,793,337 |
|
|
|
1,188,535 |
|
|
|
733,078 |
|
Less: Allowance for loan losses |
|
|
(49,305 |
) |
|
|
(33,551 |
) |
|
|
(21,192 |
) |
|
|
(15,271 |
) |
|
|
(11,378 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,583,704 |
|
|
$ |
2,969,671 |
|
|
$ |
1,772,145 |
|
|
$ |
1,173,264 |
|
|
$ |
721,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables set forth the amount of loans outstanding by type of loan as of December
31, 2007 which 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007 |
|
|
|
Due Within |
|
|
Due 1-5 |
|
|
Due Over |
|
|
|
|
|
|
One Year |
|
|
Years |
|
|
Five Years |
|
|
Total |
|
|
|
(in thousands) |
|
Construction and land development |
|
$ |
658,983 |
|
|
$ |
103,130 |
|
|
$ |
43,997 |
|
|
$ |
806,110 |
|
Commercial real estate |
|
|
180,688 |
|
|
|
496,397 |
|
|
|
837,448 |
|
|
|
1,514,533 |
|
Residential real estate |
|
|
67,582 |
|
|
|
49,708 |
|
|
|
375,261 |
|
|
|
492,551 |
|
Commercial and industrial |
|
|
440,090 |
|
|
|
306,348 |
|
|
|
37,940 |
|
|
|
784,378 |
|
Consumer |
|
|
14,087 |
|
|
|
8,299 |
|
|
|
21,131 |
|
|
|
43,517 |
|
Net deferred loan fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,080 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loans, net of deferred fees |
|
$ |
1,361,430 |
|
|
$ |
963,882 |
|
|
$ |
1,315,777 |
|
|
$ |
3,633,009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rates: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed |
|
$ |
251,299 |
|
|
$ |
620,467 |
|
|
$ |
844,991 |
|
|
$ |
1,716,757 |
|
Variable |
|
|
1,110,131 |
|
|
|
343,415 |
|
|
|
470,786 |
|
|
|
1,924,332 |
|
Net deferred loan fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,080 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loans, net of deferred fees |
|
$ |
1,361,430 |
|
|
$ |
963,882 |
|
|
$ |
1,315,777 |
|
|
$ |
3,633,009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Concentrations. Our loan portfolio has a concentration of loans in commercial real-estate
related loans and includes significant credit exposure to the commercial real estate industry. As
of December 31, 2007, December 31, 2006 and December 31, 2005, commercial real estate-related loans
comprised 63.7%, 64.9%, and 64.7% of total gross loans, respectively. Substantially all of these
loans are secured by first liens with an initial loan to value ratio of generally no more than 80%.
Approximately one-half of these commercial real estate loans are owner occupied. One-to-four family
residential real estate loans have a lower risk than commercial real estate and construction and
land development loans due to lower loan balances to single borrowers. Our policy for requiring
collateral is to obtain collateral whenever it is available or desirable, depending upon the degree
of risk we are willing to accept. Repayment of loans is expected from the sale proceeds of the
collateral or from the borrowers cash flows. Deterioration in the performance of the economy or
real estate values in our primary market areas, in particular, could have an adverse impact on
collectibility, and consequently have an adverse effect on our profitability.
50
Non-Performing Assets. Non-performing assets include loans past due 90 days or more and still
accruing interest, non-accrual loans, restructured loans, and other real estate owned, or OREO. In
general, loans are placed on non-accrual status when we determine timely recognition of interest to
be in doubt due to the borrowers financial condition and collection efforts. Restructured loans
have modified terms to reduce either principal or interest due to deterioration in the borrowers
financial condition. OREO results from loans where we have received physical possession of the
borrowers assets. The following table summarizes the loans for which the accrual of interest has
been discontinued, loans past due 90 days or more and still accruing interest, restructured loans,
and OREO.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
($ in thousands) |
|
Total non-accrual loans |
|
$ |
17,873 |
|
|
$ |
1,417 |
|
|
$ |
107 |
|
|
$ |
1,591 |
|
|
$ |
210 |
|
Impaired loans acquired through merger |
|
|
2,760 |
|
|
|
839 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
impaired loans, excluding restructured loans |
|
|
9,920 |
|
|
|
|
|
|
|
|
|
|
|
127 |
|
|
|
|
|
Loans past due 90 days or more and still accruing |
|
|
779 |
|
|
|
794 |
|
|
|
34 |
|
|
|
2 |
|
|
|
65 |
|
Restructured loans |
|
|
3,782 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other real estate owned (OREO) |
|
|
3,412 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-accrual loans to gross loans |
|
|
0.49 |
% |
|
|
0.05 |
% |
|
|
0.01 |
% |
|
|
0.13 |
% |
|
|
0.03 |
% |
Loans past due 90 days or more and still accruing to
total loans |
|
|
0.02 |
|
|
|
0.03 |
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.01 |
|
Interest income received on nonaccrual loans |
|
$ |
30 |
|
|
$ |
120 |
|
|
$ |
1 |
|
|
$ |
61 |
|
|
$ |
6 |
|
Interest income that would have been recorded
under the original terms of the loans |
|
$ |
765 |
|
|
$ |
147 |
|
|
$ |
10 |
|
|
$ |
96 |
|
|
$ |
29 |
|
As of December 31, 2007 and December 31, 2006, non-accrual loans totaled $17.9 million and
$1.4 million, respectively. Non-accrual loans at December 31, 2007 consisted of 28 customer
relationships with no single customer relationship having a principal balance greater than $8.3
million.
Impaired Loans. A loan is impaired when it is probable we will be unable to collect all
contractual principal and interest payments due in accordance with the terms of the loan agreement.
Impaired loans are measured based on the present value of expected future cash flows discounted at
the loans effective interest rate or, as a practical expedient, at the loans observable market
price or the fair value of the collateral if the loan is collateral dependent. The categories of
non-accrual loans and impaired loans overlap, although they are not coextensive. We consider all
circumstances regarding the loan and borrower on an individual basis when determining whether a
loan is impaired such as the collateral value, reasons for the delay, payment record, the amount
past due, and number of days past due.
As of December 31, 2007, December 31, 2006 and December 31, 2005, the aggregate total amount
of loans classified as impaired, excluding restructured loans, was $30.6 million, $2.3 million and $0.1 million, respectively. The
total specific allowance for loan losses related to these loans was $6.6 million, $0.5 million and
$26,000 for December 31, 2007, 2006 and 2005, respectively.
The amount of interest income recognized on impaired loans for the years ended December 31,
2007, 2006 and 2005 was $30,000, $120,000 and $1,000, respectively. We would have recorded interest
income of $765,000, $147,000 and $10,000 on non-accrual loans had the loans been current for the
years ended December 31, 2007, 2006 and 2005, respectively.
Allowance for Loan Losses
Like all financial institutions, we must maintain an adequate allowance for loan losses. The
allowance for loan losses is established through a provision for loan losses charged to expense.
Loans are charged against the allowance for loan losses when we believe that collectibility of the
principal is unlikely. Subsequent recoveries, if any, are credited to the allowance. The allowance
is an amount that we believe will be adequate to absorb probable losses on existing loans that may
become uncollectible, based on evaluation of the collectibility of loans and prior credit loss
experience, together with the other factors noted earlier.
Our allowance for loan loss methodology incorporates several quantitative and qualitative risk
factors used to establish the appropriate allowance for loan loss at each reporting date.
Quantitative factors include
51
our historical loss experience, peer group experience, delinquency and charge-off trends,
collateral values, changes in non-performing loans, other factors, and information about individual
loans including the borrowers sensitivity to interest rate movements. 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. Statistics on local trends, peers, and an internal five-year
loss history are also incorporated into the allowance. 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. 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 Federal Deposit Insurance Corporation, or
FDIC, and state banking regulatory agencies, as an integral part of their examination processes,
periodically review the Banks allowance for loan losses, and may require us to make additions to
the allowance based on their judgment about information available to them at the time of their
examinations. Management periodically 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. For such loans, an allowance is established when the discounted cash flows (or
collateral value or observable market price) of the impaired loan are lower than the carrying value
of that loan, pursuant to Financial Accounting Standards Board, or FASB, Statement No. 114,
Accounting by Creditors for Impairment of a Loan. The general allowance covers non-classified loans
and is based on historical loss experience adjusted for the various qualitative and quantitative
factors listed above, pursuant to FASB Statement No. 5, or FASB 5, Accounting for Contingencies.
Loans graded Watch List/Special Mention and below are individually examined closely to determine
the appropriate loan loss reserve.
The following table summarizes the activity in our allowance for loan losses for the period
indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2007 |
|
2006 |
|
2005 |
|
2004 |
|
2003 |
|
|
($ in thousands) |
Allowance for loan losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
$ |
33,551 |
|
|
$ |
21,192 |
|
|
$ |
15,271 |
|
|
$ |
11,378 |
|
|
$ |
6,449 |
|
Provisions charged to operating expenses |
|
|
20,259 |
|
|
|
4,660 |
|
|
|
6,179 |
|
|
|
3,914 |
|
|
|
5,145 |
|
Acquisitions |
|
|
3,419 |
|
|
|
8,768 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
737 |
|
Recoveries of loans previously charged-off: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land development |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
140 |
|
Residential real estate |
|
|
|
|
|
|
5 |
|
|
|
3 |
|
|
|
15 |
|
|
|
1 |
|
Commercial and industrial |
|
|
213 |
|
|
|
324 |
|
|
|
164 |
|
|
|
132 |
|
|
|
272 |
|
Consumer |
|
|
49 |
|
|
|
107 |
|
|
|
29 |
|
|
|
10 |
|
|
|
7 |
|
|
|
|
Total recoveries |
|
|
262 |
|
|
|
436 |
|
|
|
196 |
|
|
|
157 |
|
|
|
420 |
|
Loans charged-off: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land development |
|
|
2,361 |
|
|
|
64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
140 |
|
Residential real estate |
|
|
49 |
|
|
|
|
|
|
|
|
|
|
|
9 |
|
|
|
20 |
|
Commercial and industrial |
|
|
5,304 |
|
|
|
1,273 |
|
|
|
194 |
|
|
|
115 |
|
|
|
1,090 |
|
Consumer |
|
|
472 |
|
|
|
168 |
|
|
|
260 |
|
|
|
54 |
|
|
|
123 |
|
|
|
|
Total charged-off |
|
|
8,186 |
|
|
|
1,505 |
|
|
|
454 |
|
|
|
178 |
|
|
|
1,373 |
|
Net charge-offs |
|
|
7,924 |
|
|
|
1,069 |
|
|
|
258 |
|
|
|
21 |
|
|
|
953 |
|
|
|
|
Balance at end of period |
|
$ |
49,305 |
|
|
$ |
33,551 |
|
|
$ |
21,192 |
|
|
$ |
15,271 |
|
|
$ |
11,378 |
|
|
|
|
Net charge-offs to average loans outstanding |
|
|
0.23 |
% |
|
|
0.04 |
% |
|
|
0.02 |
% |
|
|
0.00 |
% |
|
|
0.17 |
% |
Allowance for loan losses to gross loans |
|
|
1.36 |
|
|
|
1.12 |
|
|
|
1.18 |
|
|
|
1.28 |
|
|
|
1.55 |
|
|
|
|
(1) |
|
In accordance with regulatory reporting requirements and American Institute of Certified
Public Accountants Statement of Position 01-06, Accounting by Certain Entities that Lend to
or Finance the Activities of Others, the Company has reclassified the portion of its allowance
for loan losses that relates to undisbursed commitments during the year ended December 31,
2002. During the year ended |
52
|
|
|
|
|
December 31, 2003, management reevaluated its methodology for
calculating this amount and reclassified an amount from other liabilities to the allowance for
loan losses. |
The following table details the allocation of the allowance for loan losses to the various
categories. The allocation is made for analytical purposes and it is not necessarily indicative of
the categories in which future credit losses may occur. The total allowance is available to absorb
losses from any segment of loans. The allocations in the table below were determined by a
combination of the following factors: specific allocations made on loans considered impaired as
determined by management and the loan review committee, a general allocation on certain other
impaired loans, and historical losses in each loan type category combined with a weighting of the
current loan composition.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Loan Losses at December 31, |
|
|
2007 |
|
2006 |
|
2005 |
|
2004 |
|
2003 |
|
|
($ in thousands) |
|
|
|
|
|
|
% of Loans |
|
|
|
|
|
% of Loans |
|
|
|
|
|
% of Loans |
|
|
|
|
|
% of Loans in |
|
|
|
|
|
|
|
|
|
|
|
|
in Each |
|
|
|
|
|
in Each |
|
|
|
|
|
in Each |
|
|
|
|
|
Each |
|
|
|
|
|
% of Loans in |
|
|
|
|
|
|
Category to |
|
|
|
|
|
Category to |
|
|
|
|
|
Category to |
|
|
|
|
|
Category to |
|
|
|
|
|
Each Category |
|
|
Amount |
|
Gross Loans |
|
Amount |
|
Gross Loans |
|
Amount |
|
Gross Loans |
|
Amount |
|
Gross Loans |
|
Amount |
|
to Gross Loans |
|
|
|
|
|
|
|
|
|
|
|
Construction and land |
|
$ |
18,979 |
|
|
|
22.1 |
% |
|
$ |
13,456 |
|
|
|
23.8 |
% |
|
$ |
6,646 |
|
|
|
24.1 |
% |
|
$ |
4,920 |
|
|
|
27.1 |
% |
|
$ |
3,252 |
|
|
|
26.6 |
% |
development |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
|
|
10,929 |
|
|
|
41.6 |
|
|
|
6,483 |
|
|
|
41.0 |
|
|
|
3,050 |
|
|
|
40.5 |
|
|
|
2,095 |
|
|
|
41.3 |
|
|
|
1,446 |
|
|
|
44.2 |
|
Residential real estate |
|
|
3,184 |
|
|
|
13.5 |
|
|
|
1,729 |
|
|
|
12.8 |
|
|
|
1,219 |
|
|
|
15.2 |
|
|
|
327 |
|
|
|
9.8 |
|
|
|
179 |
|
|
|
5.8 |
|
Commercial
and industrial |
|
|
15,442 |
|
|
|
21.5 |
|
|
|
11,312 |
|
|
|
21.5 |
|
|
|
9,842 |
|
|
|
19.1 |
|
|
|
7,502 |
|
|
|
20.3 |
|
|
|
6,192 |
|
|
|
21.8 |
|
Consumer |
|
|
771 |
|
|
|
1.3 |
|
|
|
571 |
|
|
|
0.9 |
|
|
|
435 |
|
|
|
1.1 |
|
|
|
427 |
|
|
|
1.5 |
|
|
|
309 |
|
|
|
1.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
49,305 |
|
|
|
100 |
% |
|
$ |
33,551 |
|
|
|
100 |
% |
|
$ |
21,192 |
|
|
|
100 |
% |
|
$ |
15,271 |
|
|
|
100 |
% |
|
$ |
11,378 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
Historically, the Commercial and Industrial Loans category represents the highest risk
category for commercial banks. Our largest source of losses has been in this category in prior
years. As a result, we utilize a larger estimated loss factor for this category than we do for real
estate secured loans. The reserve related to our commercial loan portfolio as of December 31, 2007
was $15.4 million, or 31.3% of the total allowance. As a result of current market conditions in the
areas in which we operate, the reserve in the Construction and Land Development has increased
significantly as of December 31, 2007 to $19.0 million, or 38.5% of the total allowance. Other
categories, such as stock and bond secured or assignment of cash collateral loans are provided a
nominal loss factor based upon a history of comparatively lower losses. We believe that the
allowance allocation is adequate when considering the current composition of our loan portfolio and
related loss factors.
Our Construction and Land Development category reflects some borrower concentration risk and
carries the enhanced risk encountered with construction loans in general. Currently, the markets in
which we primarily operate are experiencing a slowdown in construction and development activity.
Property values have declined and construction financing has generally become more difficult to
obtain, especially for projects without a very low loan-to-value ratio. As a result, a higher loan
loss provision is allocated to this loan category than to other loan categories.
Our Commercial Real Estate loan category contains a mixture of new and seasoned properties,
retail, office, warehouse, medical and some special purpose. Loans on properties are generally
underwritten at a loan to value ratio of less than 80% with a minimum debt coverage ratio of 1.20.
Historically, our losses on this product have been minimal and the portfolio continues to exhibit
exceptionally high credit quality. Moreover, a large percentage of the Commercial Real Estate loan
portfolio is comprised of owner-occupied relationships, which usually reflect a relatively low risk
profile. Consequently, the estimated loan loss factor applied to this sub-category is comparatively
low.
Investments
Securities are identified as either held-to-maturity, available-for-sale, or measured at fair
value based upon various factors, including asset/liability management strategies, liquidity and
profitability objectives, and regulatory requirements. Held-to-maturity securities are carried at
cost, adjusted for amortization of premiums or accretion of discounts. Available-for-sale securities are securities that may be
sold prior to maturity based upon asset/liability management decisions. Securities identified as
available-for-sale are carried at fair value. Unrealized gains or losses on available-for-sale
securities are recorded as accumulated
53
other comprehensive income in stockholders equity.
Amortization of premiums or accretion of discounts on mortgage-backed securities is periodically
adjusted for estimated prepayments. Securities measured at fair value are reported at fair value,
with unrealized gains and losses included in current earnings.
We use our investment securities portfolio to ensure liquidity for cash requirements, manage
interest rate risk, provide a source of income and to manage asset quality. The carrying value of
our investment securities as of December 31, 2007 totaled $736.2 million, compared to $542.3
million at December 31, 2006, and $748.5 million as of December 31, 2005. The increase experienced
from December 31, 2006 to December 31, 2007 was primarily the result of the acquisition of FICN and
the purchase of additional higher yielding, investment grade securities, including collateralized
mortgage obligations, adjustable rate preferred stock and collateralized debt obligations. The
decrease experienced from December 31, 2005 to December 31, 2006 was a result of the maturity of
our Auction Rate Securities portfolio, called U.S. Government-sponsored agency obligations and the
liquidation of securities with a book value of $159 million in December 2006.
Our portfolio of investment securities during 2006 and 2005 consisted primarily of
mortgage-backed obligations, asset-backed securities and adjustable rate preferred stock. In 2007
we maintained a high level of investment in mortgage-backed securities while shifting from U.S.
Government agency obligations to higher yielding asset-backed securities and adjustable rate
preferred stock.
The carrying value of our portfolio of investment securities at December 31, 2007, 2006 and
2005 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Value |
|
|
At December 31, |
|
|
2007 |
|
2006 |
|
2005 |
U.S. Treasury securities |
|
$ |
|
|
|
$ |
3,646 |
|
|
$ |
3,498 |
|
U.S. Government-sponsored agencies |
|
|
24,128 |
|
|
|
27,747 |
|
|
|
137,578 |
|
Mortgage-backed obligations |
|
|
502,496 |
|
|
|
379,497 |
|
|
|
519,858 |
|
SBA Loan Pools |
|
|
288 |
|
|
|
392 |
|
|
|
426 |
|
State and Municipal obligations |
|
|
22,211 |
|
|
|
10,502 |
|
|
|
7,128 |
|
Adjustable rate preferred stock |
|
|
29,710 |
|
|
|
49,065 |
|
|
|
|
|
Auction rate securities |
|
|
|
|
|
|
|
|
|
|
67,999 |
|
Debt obligations and structured securities |
|
|
142,127 |
|
|
|
47,983 |
|
|
|
|
|
Other |
|
|
15,240 |
|
|
|
23,489 |
|
|
|
12,046 |
|
|
|
|
Total investment securities |
|
$ |
736,200 |
|
|
$ |
542,321 |
|
|
$ |
748,533 |
|
|
|
|
The
maturity distribution and weighted average yield of our investment
securities portfolios at December 31, 2007 are summarized in the table below. This table excludes
investments in equity securities with amortized cost of $53.0 million as such securities have no
stated maturity. Weighted average yield is calculated by dividing income within each maturity range
by the outstanding amount of the related investment and has not been tax affected on tax-exempt
obligations. Securities available for sale are carried at amortized cost in the table below for
purposes of calculating the weighted average yield received on such securities.
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due Over 10 |
|
|
|
|
December 31, 2007 |
|
Due Under 1 Year |
|
|
Due 1-5 Years |
|
|
Due 5-10 Years |
|
|
Years |
|
|
Total |
|
($ in thousands) |
|
Amount/Yield |
|
|
Amount/Yield |
|
|
Amount/Yield |
|
|
Amount/Yield |
|
|
Amount/Yield |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for Sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government-sponsored Agency obligations |
|
$ |
|
|
|
|
0.00 |
% |
|
$ |
1,350 |
|
|
|
5.28 |
% |
|
$ |
8,621 |
|
|
|
5.82 |
% |
|
$ |
5,000 |
|
|
|
5.88 |
% |
|
$ |
14,971 |
|
|
|
5.50 |
% |
Mortgage-backed obligations |
|
|
|
|
|
|
0.00 |
|
|
|
|
|
|
|
0.00 |
|
|
|
943 |
|
|
|
5.23 |
|
|
|
272,425 |
|
|
|
5.41 |
|
|
|
273,368 |
|
|
|
5.40 |
|
State and Municipal obligations |
|
|
373 |
|
|
|
5.16 |
|
|
|
7,066 |
|
|
|
3.55 |
|
|
|
4,939 |
|
|
|
3.98 |
|
|
|
1,765 |
|
|
|
5.93 |
|
|
|
14,143 |
|
|
|
3.69 |
|
Debt
obligations and structured securities |
|
|
|
|
|
|
0.00 |
|
|
|
240 |
|
|
|
7.13 |
|
|
|
|
|
|
|
0.00 |
|
|
|
162,615 |
|
|
|
7.22 |
|
|
|
162,855 |
|
|
|
7.22 |
|
Other |
|
|
13,890 |
|
|
|
4.20 |
|
|
|
|
|
|
|
0.00 |
|
|
|
|
|
|
|
0.00 |
|
|
|
|
|
|
|
0.00 |
|
|
|
13,890 |
|
|
|
4.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale |
|
$ |
14,263 |
|
|
|
4.23 |
% |
|
$ |
8,656 |
|
|
|
3.92 |
% |
|
$ |
14,503 |
|
|
|
5.16 |
% |
|
$ |
441,805 |
|
|
|
6.08 |
% |
|
$ |
479,227 |
|
|
|
5.94 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to Maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and Municipal obligations |
|
$ |
650 |
|
|
|
4.70 |
% |
|
$ |
|
|
|
|
0.00 |
% |
|
$ |
|
|
|
|
0.00 |
% |
|
$ |
7,256 |
|
|
|
4.20 |
% |
|
$ |
7,906 |
|
|
|
4.24 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total held to maturity |
|
$ |
650 |
|
|
|
4.70 |
% |
|
$ |
|
|
|
|
0.00 |
|
|
$ |
|
|
|
|
0.00 |
% |
|
$ |
7,256 |
|
|
|
4.20 |
% |
|
$ |
7,906 |
|
|
|
4.24 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Measured at fair value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government-sponsored Agency obligations |
|
$ |
|
|
|
|
0.00 |
% |
|
$ |
448 |
|
|
|
5.31 |
% |
|
$ |
8,525 |
|
|
|
5.86 |
% |
|
$ |
|
|
|
|
0.00 |
% |
|
$ |
8,973 |
|
|
|
5.84 |
% |
Mortgage-backed obligations |
|
|
|
|
|
|
0.00 |
|
|
|
|
|
|
|
0.00 |
|
|
|
|
|
|
|
0.00 |
|
|
|
227,431 |
|
|
|
5.31 |
|
|
|
227,431 |
|
|
|
5.31 |
|
State and Municipal obligations |
|
|
|
|
|
|
0.00 |
|
|
|
|
|
|
|
0.00 |
|
|
|
|
|
|
|
0.00 |
|
|
|
107 |
|
|
|
6.29 |
|
|
|
107 |
|
|
|
6.29 |
|
Other |
|
|
|
|
|
|
0.00 |
|
|
|
|
|
|
|
0.00 |
|
|
|
|
|
|
|
0.00 |
|
|
|
5,000 |
|
|
|
8.34 |
|
|
|
5,000 |
|
|
|
8.34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total measured at fair value |
|
$ |
|
|
|
|
0.00 |
% |
|
$ |
448 |
|
|
|
5.31 |
% |
|
$ |
8,525 |
|
|
|
5.86 |
% |
|
$ |
232,538 |
|
|
|
5.38 |
% |
|
$ |
241,511 |
|
|
|
5.39 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We had a concentration of mortgage-backed securities during the year ended December 31, 2007.
The aggregate carrying value and aggregate fair value of these securities at December 31, 2007 are
$499.4 million and $502.6 million, respectively.
We had a concentration of U.S. Government sponsored agencies and mortgage-backed securities
during each of the years ended December 31, 2006 and 2005. The aggregate carrying value and
aggregate fair value of these securities at December 31, 2006 and 2005 are as follows.
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2006 |
|
2005 |
|
|
(in thousands) |
Aggregate carrying value |
|
$ |
407,244 |
|
|
$ |
657,436 |
|
|
|
|
|
Aggregate fair value |
|
$ |
404,937 |
|
|
$ |
654,636 |
|
|
|
|
At December 31, 2007, the combined unrealized loss on our adjustable rate preferred stock and
debt and other structured securities portfolios classified as available for sale was $45.3 million,
which is discussed in Note 5 to our Consolidated Financial Statements. Of this amount $7.5 million
is related to leveraged exposure to Merrill Lynch and Bank of America adjustable rate preferred
stock in two securities. The rate earned on these two securities is set through a quarterly
auction. Recent debt market dislocations have resulted in failed auctions for similarly structured
securities. Beginning in the third quarter 2007, certain of the auctions related to our two
holdings failed, resulting in the Companys yield on these securities being reduced to 0% through
year-end. As discussed in Note 5, we concluded that the two securities had not suffered declines
that were considered other than temporary due to the lack of credit rating downgrades of our
holdings and macroeconomic conditions widening the spreads of virtually all types of corporate
debt. Should auctions continue to fail in future periods, we have the option to purchase securities
in tranches which are senior to our positions and convert our holdings to the underlying Merrill
Lynch and Bank of America adjustable rate preferred stock. If we are unable to accomplish this
without incurring additional losses it may be necessary to recognize an impairment charge in a
future period.
55
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, 2007 is $9.6 million, has a fixed interest rate of 8.79%, and matures in
2010. The note is collateralized by the purchased building.
Due to a combination of acquisitions and investment in new branch and operations locations,
premises and equipment increased $43.6 million from December 31, 2006 to December 31, 2007.
Premises and equipment acquired through the First Independent acquisition totaled $17.5 million
with the remaining increase attributable to new branch locations in various locations and the new
operations center in Las Vegas, Nevada.
Goodwill and other intangible assets
As a result of the acquisition of FICN on March 30, 2007, we recorded goodwill of $79.2 million and
a core deposit intangible asset of $8.0 million. As a result of the acquisition of Shine on July
31, 2007, we recorded goodwill of $7.6 million. These amounts are subject to further change when
the determination of the asset and liability values is finalized within one year from the merger
date.
Deposits
Deposits historically have been the primary source of funding our asset growth. As of December
31, 2007, total deposits were $3.5 billion, compared to $3.4 billion as of December 31, 2006 and
$2.4 billion as of December 31, 2005. As of December 31, 2007, non-interest bearing deposits were
$1.0 billion, compared to $1.2 billion as of December 31, 2006 and $980.0 million as of December
31, 2005. As of December 31, 2007, title company deposits comprised 14.3% of our total non-interest
bearing deposits. Interest-bearing accounts have also experienced growth. As of December 31, 2007,
interest-bearing deposits were $2.5 billion, compared to $2.2 billion and $1.4 billion as of
December 31, 2006 and 2005, respectively. Interest-bearing deposits are comprised of NOW accounts,
savings and money market accounts, certificates of deposit under $100,000, and certificates of
deposit over $100,000.
The average balances and weighted average rates paid on deposits for the years ended December
31, 2007, 2006 and 2005, are presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2007 Average |
|
|
2006 Average |
|
|
2005 Average |
|
|
|
Balance/Rate |
|
|
Balance/Rate |
|
|
Balance/Rate |
|
|
|
($ in thousands) |
|
Interest checking (NOW) |
|
$ |
259,774 |
|
|
|
2.46 |
% |
|
$ |
222,851 |
|
|
|
2.39 |
% |
|
$ |
109,415 |
|
|
|
0.54 |
% |
Savings and money market |
|
|
1,602,980 |
|
|
|
3.67 |
|
|
|
1,215,139 |
|
|
|
3.30 |
|
|
|
827,886 |
|
|
|
2.04 |
|
Time |
|
|
681,229 |
|
|
|
4.83 |
|
|
|
478,228 |
|
|
|
4.22 |
|
|
|
287,083 |
|
|
|
2.80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits |
|
|
2,543,983 |
|
|
|
3.86 |
|
|
|
1,916,218 |
|
|
|
3.42 |
|
|
|
1,224,384 |
|
|
|
2.09 |
|
Non-interest bearing demand deposits |
|
|
1,065,592 |
|
|
|
|
|
|
|
1,000,726 |
|
|
|
|
|
|
|
845,581 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
$ |
3,609,575 |
|
|
|
2.72 |
% |
|
$ |
2,916,944 |
|
|
|
2.25 |
% |
|
$ |
2,069,965 |
|
|
|
1.23 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2007, deposits at acquired branches totaled $760 million, a decline of $292 million
from the dates of acquisition and an organic decline of $167 million from December 31, 2006. The
organic decline from December 31, 2006 through December 31, 2007 is primarily attributable to the
following:
|
|
|
Certificates of deposit declined by $23 million. This is a continuation of the run-off
of non-core, interest rate sensitive CDs which began prior to December 31, 2006. |
56
|
|
|
Approximately $12 million of deposits moved into customer repurchase agreements and
remain on our balance sheet, but not in the deposit totals. This was an account option not
offered by the acquired Bank of Nevada and Nevada First Bank (Intermountain First
Bancorporation). |
|
|
|
|
Consistent with our strategy listed on page 4 of our Form 10-K of attracting low cost
deposits, as part of the acquisitions, management determined that approximately $57
million of deposits did not fit our customer profile or were excessively interest rate
sensitive (i.e., interest tied to the Prime Rate, which is not offered by the Company) and
thus were managed out of the Company. |
The remaining decline from the acquisition dates through December 31, 2007 of $70 million, or
8% of December 31, 2006 balances and First Independent Bank acquired balances, is attributable to
declines in deposit accounts which routinely occur shortly after mergers are consummated combined
with reduced escrow account and other deposit declines experienced throughout the Company.
The remaining maturity for certificates of deposit of $100,000 or more as of December 31, 2007
is presented in the following table.
|
|
|
|
|
|
|
December 31, 2007 |
|
|
|
(in thousands) |
|
3 months or less |
|
$ |
346,434 |
|
3 to 6 months |
|
|
199,756 |
|
6 to 12 months |
|
|
83,792 |
|
Over 12 months |
|
|
19,369 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
649,351 |
|
|
|
|
|
Capital Resources
Current risk-based regulatory capital standards generally require banks and bank holding
companies to maintain three minimum capital ratios. Tier 1 risk-based capital ratio compares Tier
1 or core capital, which consists principally of common equity, and risk-weighted assets for a
minimum ratio of at least 4%. Total risk-based capital ratio compares total capital, which consists
of Tier 1 capital, certain forms of subordinated debt, a portion of the allowance for loan losses,
and preferred stock, to risk-weighted assets for a minimum ratio of at least 8%. Risk-weighted
assets are calculated by multiplying the balance in each category of assets and certain off-balance
sheet obligations by a risk factor, which ranges from zero for cash assets and certain government
obligations to 100% for some types of loans, and adding the products together.
The following table provides a comparison of our risk-based capital ratios and leverage ratios
to the minimum regulatory requirements for the periods indicated.
57
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adequately- |
|
Minimum For |
|
|
|
|
|
|
|
|
|
|
Capitalized |
|
Well-Capitalized |
|
|
Actual |
|
Requirements |
|
Requirements |
|
|
($ in thousands) |
As of December 31, 2007 |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
Total Capital (to Risk Weighted Assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank of Nevada |
|
$ |
297,613 |
|
|
|
11.0 |
% |
|
$ |
215,760 |
|
|
|
8.0 |
% |
|
$ |
269,700 |
|
|
|
10.0 |
% |
Alliance Bank of Arizona |
|
|
81,781 |
|
|
|
10.8 |
|
|
|
60,674 |
|
|
|
8.0 |
|
|
|
75,842 |
|
|
|
10.0 |
|
Torrey Pines Bank |
|
|
71,695 |
|
|
|
11.0 |
|
|
|
52,257 |
|
|
|
8.0 |
|
|
|
65,321 |
|
|
|
10.0 |
|
Alta Alliance Bank |
|
|
22,984 |
|
|
|
36.5 |
|
|
|
5,037 |
|
|
|
8.0 |
|
|
|
6,296 |
|
|
|
10.0 |
|
First Independent Bank |
|
|
47,066 |
|
|
|
12.1 |
|
|
|
31,168 |
|
|
|
8.0 |
|
|
|
38,960 |
|
|
|
10.0 |
|
Company |
|
|
466,138 |
|
|
|
10.3 |
|
|
|
361,059 |
|
|
|
8.0 |
|
|
|
451,324 |
|
|
|
10.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I Capital (Tier 1 to Risk Weighted Assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank of Nevada |
|
$ |
204,387 |
|
|
|
7.6 |
% |
|
$ |
107,880 |
|
|
|
4.0 |
% |
|
$ |
161,820 |
|
|
|
6.0 |
% |
Alliance Bank of Arizona |
|
|
56,960 |
|
|
|
7.5 |
|
|
|
30,337 |
|
|
|
4.0 |
|
|
|
45,505 |
|
|
|
6.0 |
|
Torrey Pines Bank |
|
|
46,513 |
|
|
|
7.1 |
|
|
|
26,128 |
|
|
|
4.0 |
|
|
|
39,192 |
|
|
|
6.0 |
|
Alta Alliance Bank |
|
|
22,607 |
|
|
|
35.9 |
|
|
|
2,518 |
|
|
|
4.0 |
|
|
|
3,778 |
|
|
|
6.0 |
|
First Independent Bank |
|
|
38,071 |
|
|
|
9.8 |
|
|
|
15,584 |
|
|
|
4.0 |
|
|
|
23,376 |
|
|
|
6.0 |
|
Company |
|
|
356,536 |
|
|
|
7.9 |
|
|
|
180,530 |
|
|
|
4.0 |
|
|
|
270,795 |
|
|
|
6.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage ratio (Tier 1 to Average Assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank of Nevada |
|
$ |
204,387 |
|
|
|
6.9 |
% |
|
$ |
117,937 |
|
|
|
4.0 |
% |
|
$ |
147,422 |
|
|
|
5.0 |
% |
Alliance Bank of Arizona |
|
|
56,960 |
|
|
|
7.0 |
|
|
|
32,634 |
|
|
|
4.0 |
|
|
|
40,793 |
|
|
|
5.0 |
|
Torrey Pines Bank |
|
|
46,513 |
|
|
|
6.5 |
|
|
|
28,553 |
|
|
|
4.0 |
|
|
|
35,692 |
|
|
|
5.0 |
|
Alta Alliance Bank |
|
|
22,607 |
|
|
|
25.1 |
|
|
|
3,598 |
|
|
|
4.0 |
|
|
|
4,498 |
|
|
|
5.0 |
|
First Independent Bank |
|
|
38,071 |
|
|
|
7.8 |
|
|
|
19,429 |
|
|
|
4.0 |
|
|
|
24,286 |
|
|
|
5.0 |
|
Company |
|
|
356,536 |
|
|
|
7.4 |
|
|
|
192,716 |
|
|
|
4.0 |
|
|
|
240,895 |
|
|
|
5.0 |
|
Alta Alliance Bank has agreed to maintain a total Tier I capital to average assets ratio of at
least 9% for its first three years of existence.
We were well capitalized at all the banks and the holding company as of December 31, 2007.
Junior Subordinated and Subordinated Debt
In order to manage our capital position more efficiently, we have formed or acquired through
merger seven statutory business trusts for the sole purpose of issuing trust preferred securities.
The junior subordinated debt has maturity dates as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Name of Trust |
|
Maturity |
|
|
2007 |
|
|
2006 |
|
BankWest Nevada Capital Trust I |
|
|
2031 |
|
|
$ |
|
|
|
$ |
15,464 |
|
BankWest Nevada Capital Trust II |
|
|
2033 |
|
|
|
15,464 |
|
|
|
15,464 |
|
Intermountain First Statutory Trust I |
|
|
2034 |
|
|
|
10,310 |
|
|
|
10,310 |
|
WAL Trust No. 1 |
|
|
2036 |
|
|
|
20,619 |
|
|
|
20,619 |
|
First Independent Capital Trust I |
|
|
2034 |
|
|
|
7,217 |
|
|
|
|
|
WAL Statutory Trust No. 2 |
|
|
2037 |
|
|
|
5,155 |
|
|
|
|
|
WAL
Statutory Trust No. 3 |
|
|
2037 |
|
|
|
7,732 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
66,497 |
|
|
$ |
61,857 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains on trust preferred securities
measured at fair value, net |
|
|
|
|
|
|
(4,257 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
62,240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average contractual rate of the junior subordinated debt was 7.36% as of December
31, 2007.
58
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.
In 2006, Bank of Nevada issued $40.0 million in floating rate unsecured subordinated debt. The
rate is based on three month LIBOR plus 1.20%. The debt requires quarterly interest payments and
matures in September 2016.
In 2007, Bank of Nevada issued $20.0 million in floating rate unsecured subordinated debt. The
rate is based on three month LIBOR plus 1.60%. The debt requires quarterly interest payments and
matures in September 2017.
Contractual Obligations and Off-Balance Sheet Arrangements
We routinely enter into contracts for services in the conduct of ordinary business operations
which 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 our customers, we are also
parties to financial instruments with off-balance sheet risk including commitments to extend credit
and standby letters of credit. We have 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. We do not believe that these off-balance
sheet arrangements have or are reasonably likely to have a material effect on our 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.
Long-Term Borrowed Funds. We also have entered into long-term contractual obligations
consisting of advances from Federal Home Loan Bank (FHLB). These advances are secured with
collateral generally consisting of securities. As of December 31, 2007, these long-term FHLB
advances totaled $45.0 million and will mature by June 30, 2012. Interest payments are due
semi-annually. The weighted average rate of the long-term FHLB advances as of December 31, 2007 was
4.63%.
The following table sets forth our significant contractual obligations as of December 31,
2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
(in thousands) |
|
|
|
|
|
|
|
Less Than |
|
|
1-3 |
|
|
3-5 |
|
|
After |
|
|
|
Total |
|
|
1 Year |
|
|
Years |
|
|
Years |
|
|
5 Years |
|
Contractual Obligations |
|
(in thousands) |
|
Long term borrowed funds |
|
$ |
55,369 |
|
|
$ |
5,118 |
|
|
$ |
40,251 |
|
|
$ |
10,000 |
|
|
$ |
|
|
Junior subordinated deferrable interest debentures |
|
|
62,240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62,240 |
|
Subordinated debt |
|
|
60,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,000 |
|
Construction contracts |
|
|
1,283 |
|
|
|
1,283 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase obligations |
|
|
2,351 |
|
|
|
1,451 |
|
|
|
450 |
|
|
|
450 |
|
|
|
|
|
Operating lease obligations |
|
|
30,297 |
|
|
|
4,255 |
|
|
|
8,405 |
|
|
|
8,178 |
|
|
|
9,459 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
211,540 |
|
|
$ |
12,107 |
|
|
$ |
49,106 |
|
|
$ |
18,628 |
|
|
$ |
131,699 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our commitments associated with outstanding letters of credit, commitments to extend credit,
and credit card guarantees as of December 31, 2007 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.
59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
Amount of Commitment Expiration Per Period |
|
|
|
Amounts |
|
|
Less Than |
|
|
1-3 |
|
|
3-5 |
|
|
After |
|
|
|
Committed |
|
|
1 Year |
|
|
Years |
|
|
Years |
|
|
5 Years |
|
Other Commitments |
|
(In thousands) |
|
Commitments to extend credit |
|
$ |
1,193,522 |
|
|
$ |
922,368 |
|
|
$ |
104,775 |
|
|
$ |
22,713 |
|
|
$ |
143,666 |
|
Credit card commitments and guarantees |
|
|
26,507 |
|
|
|
26,507 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Standby letters of credit |
|
|
80,790 |
|
|
|
78,842 |
|
|
|
1,948 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,300,819 |
|
|
$ |
1,027,717 |
|
|
$ |
106,723 |
|
|
$ |
22,713 |
|
|
$ |
143,666 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-Term Borrowed Funds. Short-term borrowed funds are used to support liquidity needs
created by seasonal deposit flows, to temporarily satisfy funding needs from increased loan demand,
and for other short-term purposes. The majority of these short-term borrowed funds consist of
advances from FHLB and customer repurchase agreements. The borrowing capacity at FHLB is determined
based on collateral pledged, generally consisting of securities and loans, at the time of
borrowing. We also have borrowings 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. As of December
31, 2007, total short-term borrowed funds were $744.3 million with a weighted average interest rate
at period end of 3.41%, compared to total short-term borrowed funds of $181.7 million as of
December 31, 2006 with a weighted average interest rate at year end of 4.47%. The increase of
$562.6 million was primarily the result of loan growth in excess of deposit growth.
The following table sets forth certain information regarding FHLB advances and repurchase
agreements at the dates or for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2007 |
|
2006 |
|
2005 |
|
|
($ in thousands) |
FHLB Advances and other: |
|
|
|
|
|
|
|
|
|
|
|
|
Maximum month-end balance |
|
$ |
489,330 |
|
|
$ |
52,000 |
|
|
$ |
155,400 |
|
Balance at end of year |
|
|
489,330 |
|
|
|
11,000 |
|
|
|
7,000 |
|
Average balance |
|
|
149,278 |
|
|
|
145,586 |
|
|
|
71,075 |
|
Customer Repurchase Accounts: |
|
|
|
|
|
|
|
|
|
|
|
|
Maximum month-end balance |
|
$ |
275,016 |
|
|
$ |
170,656 |
|
|
$ |
78,170 |
|
Balance at end of year |
|
|
275,016 |
|
|
|
170,656 |
|
|
|
78,170 |
|
Average balance |
|
|
200,043 |
|
|
|
98,194 |
|
|
|
46,628 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Short-Term Borrowed Funds |
|
$ |
764,346 |
|
|
$ |
181,656 |
|
|
$ |
85,170 |
|
|
Weighted average interest rate at end of year |
|
|
3.41 |
% |
|
|
4.47 |
% |
|
|
2.85 |
% |
|
Weighted average interest rate during year |
|
|
4.44 |
% |
|
|
4.56 |
% |
|
|
2.75 |
% |
Since growth in core deposits may be at intervals different from loan demand, we may follow a
pattern of funding irregular growth in assets with short-term borrowings, which are then replaced
with core deposits. This temporary funding source is likely to be utilized for generally short-term
periods, although no assurance can be given that this will, in fact, occur.
Liquidity
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 due from banks, federal funds sold and available-for-sale securities, is a result of our
operating, investing and financing activities and related cash flows. In order to ensure funds are
available at all times, on at least a quarterly basis, we project the amount of funds that will be
required and maintain relationships with a diversified customer base so funds are accessible.
Liquidity requirements can also be met through short-term borrowings or the disposition of
short-term assets. We have borrowing lines at correspondent banks totaling $160.0 million. In
addition, securities and loans are pledged to the FHLB totaling $1.72 billion and $65.3 million,
respectively, on total borrowings from the FHLB of $492.6 million as of December 31, 2007.
60
We have a formal liquidity policy, and in the opinion of management, our liquid assets are
considered adequate to meet our cash flow needs for loan funding and deposit cash withdrawal for
the next 60-90 days. At December 31, 2007, we had $602.0 million in liquid assets comprised of
$115.6 million in cash and cash equivalents (including federal funds sold of $11.0 million) and
$486.4 million in available-for-sale securities.
On a long-term basis, our 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, we will increase liquidity by soliciting higher levels of deposit accounts through
promotional activities and/or borrowing from our correspondent banks as well as the Federal Home
Loan Bank of San Francisco. At the current time, our long-term liquidity needs primarily relate to
funds required to support loan originations and commitments and deposit withdrawals. All of these
needs can currently be met by cash flows from investment payments and maturities, and investment
sales if the need arises.
Our 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, 2007, 2006 and 2005 net cash provided by operating
activities was $54.8, $43.8 and $34.4 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 organic
increase in loans for the years ended December 31, 2007, 2006 and 2005 was $347.0 million, $602.2
million and $574.5 million, respectively. Purchases of securities, net of proceeds from the
maturities and sales of securities for the year ended December 31, 2007 were $180.2 million.
Proceeds from the maturities and sales of securities, net of purchases of securities for the year
ended December 31, 2006 were $241.6 million. Net proceeds from the maturities and sales of
securities were $50.3 million for the year ended December 31, 2005.
Net cash provided by financing activities has been impacted significantly by increases in
deposit levels in prior years. During the years ended December 31, 2007, 2006 and 2005, deposits
decreased organically by $255.8 million, and increased $339.1 million and $637.8 million,
respectively. The net increase in our borrowings combined with proceeds from the issuance of
junior subordinated and subordinated debt totaled $594.4 million for the year ended December 31,
2007, compared with a net increase in borrowings of $122.0 million for 2006.
Our federal funds sold decreased $110.2 million from December 31, 2006 to December 31, 2007.
This is due to the lack of growth in our deposits combined with the increase of our investment
portfolio over the same period.
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 Banks capital to be reduced below
applicable minimum capital requirements.
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 do not have any market risk sensitive instruments entered into for trading purposes.
We manage our interest rate sensitivity by matching the 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 designed to ensure that exposure to interest rate fluctuations is
limited within our guidelines of acceptable levels of risk-taking. Hedging strategies, including
the terms and pricing of loans and
61
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 banks respective Asset Liability Management
Committee, or ALCO, (or its equivalent) which is comprised of senior finance, operations, human
resources and lending officers. 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 consider 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 banks 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, 2007, 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, 2007.
Economic Value of Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Economic Value of Equity |
|
|
|
|
|
|
|
|
Percentage |
|
Percentage |
|
Percentage of |
|
|
Economic |
|
Change |
|
of Total |
|
Equity |
Interest Rate Scenario |
|
Value |
|
from Base |
|
Assets |
|
Book Value |
|
|
($ in millions) |
Up 300 basis points |
|
$ |
652.8 |
|
|
|
(2.0 |
)% |
|
|
13.0 |
% |
|
|
130.2 |
% |
Up 200 basis points |
|
|
661.2 |
|
|
|
(0.8 |
) |
|
|
13.2 |
|
|
|
131.8 |
|
Up 100 basis points |
|
|
667.0 |
|
|
|
0.1 |
|
|
|
13.3 |
|
|
|
133.0 |
|
BASE |
|
|
666.4 |
|
|
|
|
|
|
|
13.3 |
|
|
|
132.9 |
|
Down 100 basis points |
|
|
666.2 |
|
|
|
(0.0 |
) |
|
|
13.3 |
|
|
|
132.8 |
|
Down 200 basis points |
|
|
656.0 |
|
|
|
(1.6 |
) |
|
|
13.1 |
|
|
|
130.8 |
|
Down 300 basis points |
|
|
642.4 |
|
|
|
(3.6 |
) |
|
|
12.8 |
|
|
|
128.1 |
|
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, 2007,
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 a rising and a falling interest rate scenario and a net interest income using a
base market interest rate derived from the current treasury yield curve. 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 indexes to estimate these prepayments and reinvest their proceeds at current
yields. Our non-term deposit products re-price more slowly, usually changing less than the change
in market rates and at our discretion.
62
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 impact this
analysis, including changes by management to mitigate the impact of interest rate changes or
secondary impacts 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 rates that will differ from the
market estimates incorporated in this analysis. Changes that vary significantly from the
assumptions may have significant effects on our net interest income.
For the rising and falling interest rate scenarios, the base market interest rate forecast was
increased and decreased over twelve months by 300 basis points. At December 31, 2007, 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
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
Adjusted Net |
|
Change |
Interest Rate Scenario |
|
Interest Income |
|
from Base |
|
|
(in millions) |
|
|
Up 300 basis points |
|
$ |
203.2 |
|
|
|
6.7 |
% |
Up 200 basis points |
|
|
199.2 |
|
|
|
4.6 |
|
Up 100 basis points |
|
|
194.0 |
|
|
|
1.8 |
|
BASE |
|
|
190.5 |
|
|
|
|
|
Down 100 basis points |
|
|
186.3 |
|
|
|
(2.2 |
) |
Down 200 basis points |
|
|
182.4 |
|
|
|
(4.3 |
) |
Down 300 basis points |
|
|
178.5 |
|
|
|
(6.3 |
) |
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 and terms of the Companys derivative
holdings.
Derivative Contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Notional |
|
Average |
|
|
Amounts |
|
Term |
|
|
(in thousands) |
|
(in years) |
Fixed-to-floating interest rate swaps |
|
$ |
51,418 |
|
|
|
5.3 |
|
Floating-to-fixed interest rate swaps |
|
|
50,000 |
|
|
|
4.0 |
|
Credit default swap |
|
|
10,000 |
|
|
|
20.0 |
|
Recent Accounting Pronouncements
On January 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting for Uncertainty
in Income Taxes, an Interpretation of FASB Statement 109 (FIN 48), which clarifies the accounting
for uncertainty in tax positions. This Interpretation provides that the tax effects from an
uncertain tax position can be recognized in our financial statements only if the position is more
likely than not of being sustained on audit, based on the technical merits of the position. We had
no cumulative adjustment to retained earnings on our financial statements related to FIN 48.
Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements, defines
fair value, establishes a framework for measuring fair value in generally accepted accounting
principles (GAAP), and expands disclosures about fair value measurements. The Company adopted SFAS
157 on January 1, 2007. The impact of this new standard on our financial statements is discussed
in the notes to the financial statements.
63
The Company adopted SFAS 159, The Fair Value Option for Assets and Financial
Liabilities-Including an Amendment of FASB Statement No. 115, on January 1, 2007. SFAS 159 permits
an entity to choose to measure many financial instruments and certain other items at fair value.
For financial instruments elected to be accounted for at fair value, the Company reports the unrealized
gains and losses in earnings. The impact of this new standard on our financial statements is
discussed in Note 2 to the consolidated financial statements.
In September 2007, the FASB ratified the consensus of the Emerging Issues Task Force (EITF)
Issue No. 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of
Endorsement Split-Dollar Life Insurance Arrangement. EITF 06-4 applies to endorsement split dollar
life insurance policies that provide a benefit to an employee that extends to postretirement
periods and requires an employer to recognize a liability for future benefits over the service
period based on the substantive agreement with the employee. EITF 06-4 is effective for fiscal
years beginning after December 15, 2007, with early adoption permitted. EITF 06-4 does not have a
material impact on our financial statements.
In September 2007, the FASB ratified the consensus reached by the Emerging Issues Task Force
in Issue No. 06-5, Accounting for Purchases of Life Insurance Determining the Amount That Could
Be Realized in Accordance with FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life
Insurance (EITF 06-5). EITF 06-5 is effective for fiscal years beginning after December 15, 2007.
EITF 06-5 is not expected to have a material impact on our financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a discussion of quantitative and qualitative disclosures about market risk, please
see Item 7 Managements Discussion and Analysis of Financial Condition and results of Operations -
Quantitative and Qualitative Disclosure about Market Risk on page 62.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements and supplementary data included in this annual
report are listed in Item 15 and begin at page F-1 immediately following the signature page.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
As of December 31, 2007, the Company carried out an evaluation, under the supervision and with
the participation of the Companys management, including the Companys Chief Executive Officer
along with the Companys Chief Financial Officer, of the effectiveness of the design and operation
of the Companys disclosure controls and procedures pursuant to Rule 13a-15(b), as adopted by the
Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934 (Exchange Act).
Based upon that evaluation, the Companys Chief Executive Officer along with the Companys Chief
Financial Officer concluded that the Companys disclosure controls and procedures are effective to
timely alert them to material information relating to the Company (including its consolidated
subsidiary) required to be included in the Companys periodic SEC filings.
Disclosure controls and procedures are the controls and other procedures that are designed to
ensure that information required to be disclosed in the reports that the Company files or submits
under the Exchange Act is recorded, processed, summarized and reported within the time periods
specified in the SECs rules and forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required to be disclosed in
the reports that the Company files or submits under the Exchange Act is accumulated and
communicated to management, including the Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure.
64
There have been no changes in the Companys internal controls, or in other factors which could
significantly affect these controls, over financial reporting that have materially affected, or are
or are reasonably likely to materially affect, the Companys internal control over financial
reporting.
Managements Report on Internal Control Over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate
internal control over financial reporting. The Companys internal control over financial reporting
is a process designed under the supervision of the Companys Chief Executive Officer and Chief
Financial Officer to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of the Companys financial statements for external purposes in accordance with
U.S. generally accepted accounting principles.
As of December 31, 2007, management assessed the effectiveness of the Companys internal
control over financial reporting based on the criteria for effective internal control over
financial reporting established in Internal ControlIntegrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Based on the assessment, management
determined that the Company maintained effective internal control over financial reporting as of
December 31, 2007, based on those criteria.
The Company acquired First Independent Capital of Nevada, parent company of First Independent
Bank of Nevada on March 30, 2007, and management excluded the operations of First Independent Bank
from its assessment of the effectiveness of the Companys internal control over financial reporting
as of December 31, 2007. First Independent Bank had total assets
of approximately $549.9 million as
of December 31, 2007. The Company acquired a majority interest in Shine Investment Advisory Services,
Inc. on July 31, 2007, and management excluded Shine Investment Advisory Services, Inc. from its
assessment of the effectiveness of the Companys internal control over financial reporting as of
December 31, 2007. Shine Investment Advisory Services, Inc had total assets under management of
$428 million as of December 31, 2007. While the acquisitions were considered material to the Company,
it did not result in a material change in our internal controls over financial reporting.
The Companys independent registered public accounting firm, McGladrey & Pullen, LLP, has
audited the effectiveness of the Companys internal control over financial reporting as of December
31, 2007, as stated in their report, which is included herein.
The Companys management, including its Chief Executive Officer and Chief Financial Officer,
does not expect that its disclosure controls and procedures, or its internal controls will prevent
all error and all fraud. A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are resource constraints,
and the benefit of controls must be considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the Company have been detected.
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|
/s/ Dale Gibbons
|
|
|
Robert Sarver
|
|
Dale Gibbons |
|
|
Chief Executive Officer
|
|
Executive Vice President, Chief Financial Officer |
|
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Western Alliance Bancorporation
Las Vegas, Nevada
We have audited Western Alliance Bancorporations internal control over financial reporting as
of December 31, 2007, based on criteria established in Internal ControlIntegrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Western Alliance
Bancorporations 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
65
the accompanying Managements Report on Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on the companys 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.
The Company acquired First Independent Bank of Nevada on March 30, 2007 and Shine Investment
Advisory Services on July 31, 2007, and management excluded all of the operations of these acquired
entities from its assessment of the effectiveness of the Companys internal control over financial
reporting as of December 31, 2007. First Independent Bank had $549.9 million in assets as of
December 31, 2007 and net income of $4.4 million for the period from April 1, 2007 to December 31,
2007. Shine Investment Advisory Services had total assets under management of $428 million as of
December 31, 2007. Our audit of internal controls over financial reporting of the Company also
excluded an evaluation of the internal control over financial reporting of First Independent Bank
of Nevada and Shine Investment Advisory Services.
A companys 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 companys internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (2) 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 (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the companys 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, 2007, based on criteria
established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
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 February 21, 2008 expressed an unqualified opinion.
/s/ McGLADREY & PULLEN, LLP
Las Vegas, Nevada
February 21, 2008
ITEM 9B. OTHER INFORMATION
Not applicable.
66
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Item 10 of Form 10-K is incorporated by reference from the
information contained in the Companys Proxy Statement for the
2008 Annual Meeting of Shareholders
which will be filed pursuant to Regulation 14A.
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 Companys website at
www.westernalliancebancorp.com.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 of Form 10-K is incorporated by reference from the
information contained in the Companys Proxy Statement for the
2008 Annual Meeting of Shareholders
which will be filed pursuant to Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The information required by Item 12 of Form 10-K is incorporated by reference from the
information contained in the Companys Proxy Statement for the 2008 Annual Meeting of Shareholders
which will be filed pursuant to Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information required by Item 13 of Form 10-K is incorporated by reference from the
information contained in the Companys Proxy Statement for the 2008 Annual Meeting of Shareholders
which will be filed pursuant to Regulation 14A.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by Item 14 of Form 10-K is incorporated by reference from the
information contained in the Companys Proxy Statement for the 2008 Annual Meeting of Shareholders
which will be filed pursuant to Regulation 14A.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Documents Filed as Part of this Report
(1) The following financial statements are incorporated by reference from Item 8 hereto:
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|
Consolidated Balance Sheets as of December 31, 2007 and 2006 |
|
Page F-2 |
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|
|
Consolidated Statements of Income for the three years ended December 31, 2007, 2006 and 2005 |
|
Page F-3 |
|
|
|
|
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|
|
Consolidated Statements of Stockholders Equity for the three years ended December 31, 2007, 2006 and 2005 |
|
Page F-4 |
|
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|
|
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|
|
Consolidated Statements of Cash Flows for the three years ended December 31, 2007, 2006 and 2005 |
|
Page F-5 |
|
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|
|
Notes to Consolidated Financial Statements |
|
Page F-6 |
|
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|
|
Report of Independent Registered Public Accounting Firm |
|
Page F-44 |
(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, and such listing is
incorporated herein by reference.
67
EXHIBITS
|
|
|
3.1
|
|
Amended and Restated Articles of Incorporation (incorporated by
reference to Exhibit 3.1 to Amendment No. 1 to Western Alliances
Registration Statement on Form S-1 filed with the SEC on June 7,
2005). |
|
|
|
3.2
|
|
Amended and Restated By-Laws (incorporated by reference to Exhibit
3.1 to Western Alliances Form 8-K filed with the SEC on January 25,
2008). |
|
|
|
4.1
|
|
Form of common stock certificate (incorporated by reference to
Exhibit 4.1 to Amendment No. 3 to Western Alliances Registration
Statement on Form S-1 filed with the SEC on June 27, 2005). |
|
|
|
10.1
|
|
Employment Agreement by and between Western Alliance Bancorporation
and Mr. Markham (incorporated by reference to Exhibit 5.1 to Western
Alliances Registration Statement on Form 8-K filed with the SEC on
April 23, 2007).± |
|
|
|
10.2
|
|
Employment Agreement by and between Western Alliance Bancorporation
and Mr. Grisham (incorporated by reference to Exhibit 10.1 to
Western Alliances 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 Alliances 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 Alliances Form S-4 filed with
the SEC on February 1, 2007).± |
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|
|
10.5
|
|
Western Alliance Bancorporation 2005 Stock Incentive Plan
(incorporated by reference to Exhibit 10.1 to Amendment No. 1 to
Western Alliances Registration Statement on Form S-1 filed with the
SEC on June 7, 2005).± |
|
|
|
10.6
|
|
Form of BankWest Nevada Corporation Incentive Stock Option Plan
Agreement (incorporated by reference to Exhibit 10.3 to Western
Alliances Registration Statement on Form S-1 filed with the SEC on
April 28, 2005).± |
|
|
|
10.7
|
|
Form of Western Alliance Incentive Stock Option Plan Agreement
(incorporated by reference to Exhibit 10.4 to Western Alliances
Registration Statement on Form S-1 filed with the SEC on April 28,
2005).± |
|
|
|
10.8
|
|
Form of Western Alliance 2002 Stock Option Plan Agreement
(incorporated by reference to Exhibit 10.5 to Western Alliances
Registration Statement on Form S-1 filed with the SEC on April 28,
2005).± |
|
|
|
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 Alliances Registration Statement on Form
S-1 filed with the SEC on April 28, 2005).± |
68
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|
10.10 |
|
Form of Indemnification Agreement by and between Western Alliance
Bancorporation and the following directors and officers: Messrs.
Baker, Beach, Boyd, Cady, Froeschle, Gibbons, Hilton, Lundy, Mack,
A. Marshall, T. Marshall, Nigro, Sarver, Snyder, Wall and Woodrum,
Drs. Nagy and Nave, and Mses. Boyd Johnson and Mahan (incorporated
by reference to Exhibit 10.7 to Western Alliances Registration
Statement on Form S-1 filed with the SEC on April 28, 2005).± |
|
|
|
10.11 |
|
Form of Non-Competition Agreement by and between Western Alliance
Bancorporation and the following directors and officers: Messrs.
Froeschle, Sarver, Lundy, Snyder and Woodrum (incorporated by
reference to Exhibit 10.8 to Western Alliances Registration
Statement on Form S-1 filed with the SEC on April 28, 2005).± |
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|
10.12 |
|
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 Alliances Registration Statement on Form S-1 filed
with the SEC on April 28, 2005).± |
|
|
|
10.13 |
|
Real Estate Purchase Agreement between GRS Sahara Ave. Corp. and
BankWest of Nevada (incorporated by reference to Exhibit 10.1 to
Western Alliances Form 8-K filed with the SEC on September 26,
2005). |
|
|
|
21.1
|
|
List of Subsidiaries of Western Alliance Bancorporation |
|
|
|
23.1
|
|
Consent of McGladrey & Pullen, LLP. |
|
|
|
31.1
|
|
CEO Certification Pursuant Rule 13a-14(a)/15d-a4(a) |
|
|
|
31.2
|
|
CFO Certification Pursuant Rule 13a-14(a)/15d-14(a) |
|
|
|
32
|
|
CEO and CFO Certification Pursuant 18 U.S.C. Section 1350, as
adopted pursuant to section 906 of the Sarbanes Oxley Act of 2003 |
Shareholders may obtain copies of exhibits by writing to: Dale Gibbons, Western Alliance
Bancorporation, 2700 West Sahara Avenue, Las Vegas, Nevada 89102.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Company has caused this Report to be signed on its behalf by the undersigned, thereunto
duly authorized.
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|
WESTERN ALLIANCE BANCORPORATION
|
|
February 22, 2008 |
By: |
/s/ Robert Sarver |
|
|
|
|
|
|
|
Robert Sarver
Chairman of the Board; President
and Chief Executive Officer |
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this registration
statement has been signed by the following persons on behalf of the Company in their listed
capacities on February 22, 2008:
|
|
|
Name |
|
Title |
|
/s/ Robert Sarver |
|
|
|
|
Chairman
of the Board; President and Chief Executive
Officer (Principal Executive Officer) |
|
|
|
/s/ Dale Gibbons |
|
|
|
|
Executive
Vice President and
Chief Financial Officer
(Principal Financial Officer) |
69
|
|
|
Name |
|
Title |
/s/
Terry A. Shirey |
|
|
Terry A. Shirey
|
|
Senior
Vice President and Controller (Principal Accounting
Officer) |
/s/
John P. Sande III |
|
|
|
|
Director |
/s/
Bruce Beach |
|
|
|
|
Director |
/s/
William S. Boyd |
|
|
|
|
Director |
/s/
Steve Hilton |
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|
|
Director |
/s/
Marianne Boyd Johnson |
|
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|
|
Director |
/s/
Cary Mack |
|
|
|
|
Director |
/s/
George J. Maloof, Jr. |
|
|
|
|
Director |
/s/
Arthur Marshall |
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|
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|
Director |
|
|
|
|
|
Director |
/s/
M. Nafees Nagy, M.D. |
|
|
|
|
Director |
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|
Director |
/s/
Donald Synder |
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|
Director |
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Director |
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|
|
Director |
70
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
Page |
Consolidated Financial Statements |
|
|
|
|
|
F-2 |
|
|
|
F-3 |
|
|
|
F-4 |
|
|
|
F-5 |
|
|
|
F-6 |
|
|
|
F-44 |
F-1
WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
|
|
|
(in thousands, except per |
|
|
share amounts) |
Assets |
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
104,650 |
|
|
$ |
143,721 |
|
Federal funds sold and other |
|
|
10,979 |
|
|
|
121,159 |
|
|
|
|
Cash and cash equivalents |
|
|
115,629 |
|
|
|
264,880 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held to maturity (approximate fair value
$9,530 and $95,404, respectively) |
|
|
9,406 |
|
|
|
97,495 |
|
Securities available for sale |
|
|
486,354 |
|
|
|
444,826 |
|
Securities measured at fair value |
|
|
240,440 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loans, including net deferred loan fees |
|
|
3,633,009 |
|
|
|
3,003,222 |
|
Less: Allowance for loan losses |
|
|
(49,305 |
) |
|
|
(33,551 |
) |
|
|
|
Loans, net |
|
|
3,583,704 |
|
|
|
2,969,671 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Premises and equipment, net |
|
|
143,421 |
|
|
|
99,859 |
|
Bank owned life insurance |
|
|
88,061 |
|
|
|
82,058 |
|
Investment in restricted stock |
|
|
27,003 |
|
|
|
18,483 |
|
Accrued interest receivable |
|
|
22,344 |
|
|
|
17,425 |
|
Deferred tax assets, net |
|
|
25,900 |
|
|
|
8,000 |
|
Goodwill |
|
|
217,810 |
|
|
|
132,188 |
|
Other intangible assets, net of accumulated amortization of
$3,693 and $1,457, respectively |
|
|
24,370 |
|
|
|
16,042 |
|
Other assets |
|
|
31,654 |
|
|
|
18,677 |
|
|
|
|
Total assets |
|
$ |
5,016,096 |
|
|
$ |
4,169,604 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Non-interest bearing demand deposits |
|
$ |
1,007,642 |
|
|
$ |
1,154,245 |
|
Interest bearing deposits: |
|
|
|
|
|
|
|
|
Demand |
|
|
264,586 |
|
|
|
246,318 |
|
Savings and money market |
|
|
1,558,867 |
|
|
|
1,407,916 |
|
Time, $100 and over |
|
|
649,351 |
|
|
|
524,935 |
|
Other time |
|
|
66,476 |
|
|
|
67,009 |
|
|
|
|
|
|
|
3,546,922 |
|
|
|
3,400,423 |
|
Customer repurchase agreements |
|
|
275,016 |
|
|
|
170,656 |
|
Federal Home Loan Bank advances and other borrowings: |
|
|
|
|
|
|
|
|
One year or less |
|
|
489,330 |
|
|
|
11,000 |
|
Over one year (2007 $30,768 measured at fair value) |
|
|
55,369 |
|
|
|
58,011 |
|
Junior subordinated debt (2007 measured at fair value) |
|
|
62,240 |
|
|
|
61,857 |
|
Subordinated debt |
|
|
60,000 |
|
|
|
40,000 |
|
Accrued interest payable and other liabilities |
|
|
25,591 |
|
|
|
19,078 |
|
|
|
|
Total liabilities |
|
|
4,514,468 |
|
|
|
3,761,025 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Notes 7, 9, 10 and 12) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority Interest |
|
|
110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity |
|
|
|
|
|
|
|
|
Preferred stock, par value $.0001; shares authorized
20,000; no shares issued and outstanding 2007 and 2006 |
|
|
|
|
|
|
|
|
Common stock, par value $.0001; shares authorized
100,000; shares issued and outstanding 2007: 30,157; 2006: 27,085 |
|
|
3 |
|
|
|
3 |
|
Additional paid-in capital |
|
|
377,973 |
|
|
|
287,553 |
|
Retained earnings |
|
|
152,286 |
|
|
|
126,170 |
|
Accumulated other comprehensive loss net unrealized loss on
available for sale securities |
|
|
(28,744 |
) |
|
|
(5,147 |
) |
|
|
|
Total stockholders equity |
|
|
501,518 |
|
|
|
408,579 |
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
5,016,096 |
|
|
$ |
4,169,604 |
|
|
|
|
See Notes to Consolidated Financial Statements.
F-2
WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2007, 2006 and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
(in thousands, except per share amounts) |
|
Interest income on: |
|
|
|
|
|
|
|
|
|
|
|
|
Loans, including fees |
|
$ |
264,480 |
|
|
$ |
203,792 |
|
|
$ |
102,481 |
|
Securities taxable |
|
|
35,602 |
|
|
|
25,886 |
|
|
|
29,099 |
|
Securities nontaxable |
|
|
720 |
|
|
|
455 |
|
|
|
394 |
|
Dividends taxable |
|
|
1,700 |
|
|
|
1,004 |
|
|
|
595 |
|
Dividends nontaxable |
|
|
1,676 |
|
|
|
150 |
|
|
|
|
|
Federal funds sold and other |
|
|
1,644 |
|
|
|
1,798 |
|
|
|
2,341 |
|
|
|
|
Total interest income |
|
|
305,822 |
|
|
|
233,085 |
|
|
|
134,910 |
|
|
|
|
Interest expense on: |
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
98,128 |
|
|
|
65,612 |
|
|
|
25,546 |
|
Customer repurchase agreements |
|
|
8,397 |
|
|
|
5,156 |
|
|
|
1,217 |
|
Short-term borrowings |
|
|
8,700 |
|
|
|
5,945 |
|
|
|
2,017 |
|
Long-term borrowings |
|
|
3,092 |
|
|
|
2,724 |
|
|
|
1,675 |
|
Junior subordinated debt |
|
|
4,318 |
|
|
|
4,134 |
|
|
|
2,113 |
|
Subordinated debt |
|
|
3,298 |
|
|
|
726 |
|
|
|
|
|
|
|
|
Total interest expense |
|
|
125,933 |
|
|
|
84,297 |
|
|
|
32,568 |
|
|
|
|
Net interest income |
|
|
179,889 |
|
|
|
148,788 |
|
|
|
102,342 |
|
Provision for loan losses |
|
|
20,259 |
|
|
|
4,660 |
|
|
|
6,179 |
|
|
|
|
Net interest income after provision for loan losses |
|
|
159,630 |
|
|
|
144,128 |
|
|
|
96,163 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income: |
|
|
|
|
|
|
|
|
|
|
|
|
Trust and investment advisory services |
|
|
9,764 |
|
|
|
7,346 |
|
|
|
5,699 |
|
Service charges |
|
|
4,828 |
|
|
|
3,450 |
|
|
|
2,495 |
|
Income from bank owned life insurance |
|
|
3,763 |
|
|
|
2,661 |
|
|
|
1,664 |
|
Other |
|
|
6,025 |
|
|
|
4,413 |
|
|
|
2,211 |
|
|
|
|
Other income, excluding securities and fair value gains (losses) |
|
|
24,380 |
|
|
|
17,870 |
|
|
|
12,069 |
|
Investment securities gains (losses), net |
|
|
434 |
|
|
|
(4,436 |
) |
|
|
69 |
|
Derivative losses |
|
|
(1,833 |
) |
|
|
|
|
|
|
|
|
Securities impairment charges |
|
|
(2,861 |
) |
|
|
|
|
|
|
|
|
Unrealized gains on assets and liabilities
measured at fair value, net |
|
|
2,418 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,538 |
|
|
|
13,434 |
|
|
|
12,138 |
|
|
|
|
Other expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
|
76,582 |
|
|
|
54,767 |
|
|
|
36,816 |
|
Occupancy |
|
|
18,120 |
|
|
|
12,958 |
|
|
|
9,819 |
|
Advertising, public relations and business development |
|
|
6,815 |
|
|
|
4,242 |
|
|
|
2,806 |
|
Customer service |
|
|
6,708 |
|
|
|
6,684 |
|
|
|
3,720 |
|
Legal, professional and director fees |
|
|
3,862 |
|
|
|
2,798 |
|
|
|
2,051 |
|
Insurance |
|
|
3,324 |
|
|
|
1,048 |
|
|
|
752 |
|
Data processing |
|
|
2,278 |
|
|
|
1,748 |
|
|
|
1,053 |
|
Audits and exams |
|
|
2,059 |
|
|
|
2,375 |
|
|
|
1,538 |
|
Supplies |
|
|
1,942 |
|
|
|
1,710 |
|
|
|
1,083 |
|
Correspondent banking service charges and wire transfer costs |
|
|
1,669 |
|
|
|
1,662 |
|
|
|
1,651 |
|
Telephone |
|
|
1,492 |
|
|
|
1,093 |
|
|
|
759 |
|
Intangible amortization |
|
|
1,455 |
|
|
|
607 |
|
|
|
68 |
|
Travel and automobile |
|
|
1,425 |
|
|
|
790 |
|
|
|
684 |
|
Merger expenses |
|
|
747 |
|
|
|
|
|
|
|
|
|
Organizational costs |
|
|
|
|
|
|
977 |
|
|
|
|
|
Other |
|
|
5,192 |
|
|
|
2,627 |
|
|
|
2,064 |
|
|
|
|
|
|
|
133,670 |
|
|
|
96,086 |
|
|
|
64,864 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
48,498 |
|
|
|
61,476 |
|
|
|
43,437 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interest |
|
|
110 |
|
|
|
|
|
|
|
|
|
Income tax expense |
|
|
15,513 |
|
|
|
21,587 |
|
|
|
15,372 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
32,875 |
|
|
$ |
39,889 |
|
|
$ |
28,065 |
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.14 |
|
|
$ |
1.56 |
|
|
$ |
1.36 |
|
|
|
|
Diluted |
|
$ |
1.06 |
|
|
$ |
1.41 |
|
|
$ |
1.24 |
|
|
|
|
See Notes to Consolidated Financial Statements.
F-3
WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
Years Ended December 31, 2007, 2006 and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
Comprehensive |
|
|
|
|
|
|
Comprehensive |
|
|
Common Stock |
|
|
Paid-in |
|
|
Retained |
|
|
Income |
|
|
|
|
(in thousands, except per share amounts) |
|
Income |
|
|
Shares Issued |
|
|
Amount |
|
|
Capital |
|
|
Earnings |
|
|
(Loss) |
|
|
Total |
|
|
Description |
Balance, December 31, 2004 |
|
|
|
|
|
|
18,249 |
|
|
$ |
2 |
|
|
$ |
80,459 |
|
|
$ |
58,216 |
|
|
$ |
(5,106 |
) |
|
$ |
133,571 |
|
Stock options exercised |
|
|
|
|
|
|
228 |
|
|
|
|
|
|
|
1,222 |
|
|
|
|
|
|
|
|
|
|
|
1,222 |
|
Stock warrants exercised |
|
|
|
|
|
|
106 |
|
|
|
|
|
|
|
806 |
|
|
|
|
|
|
|
|
|
|
|
806 |
|
Issuance of 4,200 shares of common stock
net of offering costs of $7,337 |
|
|
|
|
|
|
4,200 |
|
|
|
|
|
|
|
85,063 |
|
|
|
|
|
|
|
|
|
|
|
85,063 |
|
Restricted stock granted |
|
|
|
|
|
|
27 |
|
|
|
|
|
|
|
82 |
|
|
|
|
|
|
|
|
|
|
|
82 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
28,065 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,065 |
|
|
|
|
|
|
|
28,065 |
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding losses on securities available for sale
arising during the period, net of taxes of $2,679 |
|
|
(4,541 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less reclassification adjustment for gains included in net
income, net of taxes of $24 |
|
|
(45 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized holding losses |
|
|
(4,586 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,586 |
) |
|
|
(4,586 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
23,479 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005 |
|
|
|
|
|
|
22,810 |
|
|
|
2 |
|
|
|
167,632 |
|
|
|
86,281 |
|
|
|
(9,692 |
) |
|
|
244,223 |
|
Stock options exercised, including tax benefit of $362 |
|
|
|
|
|
|
319 |
|
|
|
|
|
|
|
2,549 |
|
|
|
|
|
|
|
|
|
|
|
2,549 |
|
Stock warrants exercised |
|
|
|
|
|
|
72 |
|
|
|
|
|
|
|
546 |
|
|
|
|
|
|
|
|
|
|
|
546 |
|
Issuance of common stock in connection with
acquisition, net of offering costs of $264 |
|
|
|
|
|
|
3,390 |
|
|
|
1 |
|
|
|
101,003 |
|
|
|
|
|
|
|
|
|
|
|
101,004 |
|
Stock options converted at acquisition |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,406 |
|
|
|
|
|
|
|
|
|
|
|
3,406 |
|
Issuance of 263 shares of common
stock, net of offering costs of $46 |
|
|
|
|
|
|
263 |
|
|
|
|
|
|
|
9,057 |
|
|
|
|
|
|
|
|
|
|
|
9,057 |
|
Restricted stock granted, net of forfeitures |
|
|
|
|
|
|
208 |
|
|
|
|
|
|
|
1,857 |
|
|
|
|
|
|
|
|
|
|
|
1,857 |
|
Stock based compensation expense |
|
|
|
|
|
|
23 |
|
|
|
|
|
|
|
1,503 |
|
|
|
|
|
|
|
|
|
|
|
1,503 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
39,889 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,889 |
|
|
|
|
|
|
|
39,889 |
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains on securities available for sale
arising during the period, net of taxes of $949 |
|
|
1,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plus reclassification adjustment for losses included in net
income, net of taxes of $1,553 |
|
|
2,883 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized holding gains |
|
|
4,545 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,545 |
|
|
|
4,545 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
44,434 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006 |
|
|
|
|
|
|
27,085 |
|
|
|
3 |
|
|
|
287,553 |
|
|
|
126,170 |
|
|
|
(5,147 |
) |
|
|
408,579 |
|
Stock options exercised, including tax benefit of $115 |
|
|
|
|
|
|
431 |
|
|
|
|
|
|
|
3,336 |
|
|
|
|
|
|
|
|
|
|
|
3,336 |
|
Stock warrants exercised |
|
|
|
|
|
|
30 |
|
|
|
|
|
|
|
26 |
|
|
|
|
|
|
|
|
|
|
|
26 |
|
Issuance of common stock in connection with acquisition,
net of offering costs of $361 |
|
|
|
|
|
|
2,862 |
|
|
|
|
|
|
|
89,197 |
|
|
|
|
|
|
|
|
|
|
|
89,197 |
|
Stock options converted at acquisition |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,075 |
|
|
|
|
|
|
|
|
|
|
|
10,075 |
|
Restricted stock granted, net of forfeitures |
|
|
|
|
|
|
456 |
|
|
|
|
|
|
|
4,101 |
|
|
|
|
|
|
|
|
|
|
|
4,101 |
|
Stock-based compensation expense |
|
|
|
|
|
|
44 |
|
|
|
|
|
|
|
2,755 |
|
|
|
|
|
|
|
|
|
|
|
2,755 |
|
Adoption of FAS 159 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,759 |
) |
|
|
3,810 |
|
|
|
(2,949 |
) |
Stock repurchases |
|
|
|
|
|
|
(751 |
) |
|
|
|
|
|
|
(19,070 |
) |
|
|
|
|
|
|
|
|
|
|
(19,070 |
) |
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
32,875 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,875 |
|
|
|
|
|
|
|
32,875 |
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding losses on securities available for sale
arising during the period, net of taxes of $14,605 |
|
|
(27,125 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plus reclassification adjustment for gains included in net
income, net of taxes of $152 |
|
|
(282 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized holding losses |
|
|
(27,407 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(27,407 |
) |
|
|
(27,407 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,468 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007 |
|
|
|
|
|
|
30,157 |
|
|
$ |
3 |
|
|
$ |
377,973 |
|
|
$ |
152,286 |
|
|
$ |
(28,744 |
) |
|
$ |
501,518 |
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
F-4
WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2007, 2006 and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
|
2005 |
|
|
|
($ in thousands) |
|
Cash Flows from Operating Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
32,875 |
|
|
$ |
39,889 |
|
|
$ |
28,065 |
|
Adjustments to reconcile net income to net
cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
12,086 |
|
|
|
6,668 |
|
|
|
3,783 |
|
Net amortization of securities premiums (discounts) |
|
|
696 |
|
|
|
1,066 |
|
|
|
1,219 |
|
Stock dividends received |
|
|
(982 |
) |
|
|
(875 |
) |
|
|
(890 |
) |
Provision for loan losses |
|
|
20,259 |
|
|
|
4,660 |
|
|
|
6,179 |
|
(Gain) loss on sale of securities |
|
|
(434 |
) |
|
|
4,436 |
|
|
|
(69 |
) |
Securities impairment charges |
|
|
2,861 |
|
|
|
|
|
|
|
|
|
Change in fair value of assets and liabilities measured at fair value |
|
|
(4,583 |
) |
|
|
|
|
|
|
|
|
Derivative losses |
|
|
1,833 |
|
|
|
|
|
|
|
|
|
Deferred taxes |
|
|
(4,219 |
) |
|
|
2,968 |
|
|
|
(2,158 |
) |
Compensation cost on restricted stock |
|
|
4,101 |
|
|
|
1,857 |
|
|
|
|
|
Stock based compensation expense |
|
|
2,755 |
|
|
|
1,503 |
|
|
|
|
|
(Increase) in accrued interest receivable |
|
|
(3,045 |
) |
|
|
(3,772 |
) |
|
|
(2,186 |
) |
(Increase) in bank-owned life insurance |
|
|
(3,763 |
) |
|
|
(2,661 |
) |
|
|
(1,664 |
) |
(Increase) in other assets |
|
|
(7,293 |
) |
|
|
(6,161 |
) |
|
|
(479 |
) |
Increase (decrease) in accrued interest payable and
other liabilities |
|
|
905 |
|
|
|
(5,720 |
) |
|
|
2,530 |
|
Other, net |
|
|
703 |
|
|
|
(94 |
) |
|
|
29 |
|
|
|
|
Net cash provided by operating activities |
|
|
54,755 |
|
|
|
43,764 |
|
|
|
34,359 |
|
|
|
|
Cash Flows from Investing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of securities held to maturity |
|
|
(1,527 |
) |
|
|
(2,927 |
) |
|
|
(13,209 |
) |
Proceeds from maturities of securities held to maturity |
|
|
16 |
|
|
|
20,571 |
|
|
|
27,373 |
|
Purchases of securities available for sale |
|
|
(360,610 |
) |
|
|
(202,821 |
) |
|
|
(135,271 |
) |
Proceeds from maturities of securities available for sale |
|
|
49,335 |
|
|
|
272,637 |
|
|
|
152,707 |
|
Proceeds from the sale of securities available for sale |
|
|
87,114 |
|
|
|
154,177 |
|
|
|
18,728 |
|
Purchases of securities measured at fair value |
|
|
(14,612 |
) |
|
|
|
|
|
|
|
|
Proceeds from maturities of securities measured at fair value |
|
|
54,379 |
|
|
|
|
|
|
|
|
|
Proceeds from the sale of securities measured at fair value |
|
|
5,712 |
|
|
|
|
|
|
|
|
|
Net cash paid (received) in settlement of acquisition |
|
|
47,491 |
|
|
|
(5,965 |
) |
|
|
|
|
Liquidation (purchase) of restricted stock |
|
|
(7,596 |
) |
|
|
459 |
|
|
|
1,531 |
|
Net increase in loans made to customers |
|
|
(350,402 |
) |
|
|
(602,176 |
) |
|
|
(574,456 |
) |
Purchased mortgages |
|
|
|
|
|
|
|
|
|
|
(30,346 |
) |
Purchase of premises and equipment |
|
|
(35,873 |
) |
|
|
(35,172 |
) |
|
|
(22,756 |
) |
Purchase of bank-owned life insurance |
|
|
|
|
|
|
(25,000 |
) |
|
|
(24,000 |
) |
Other, net |
|
|
|
|
|
|
|
|
|
|
(264 |
) |
|
|
|
Net cash used in investing activities |
|
|
(526,573 |
) |
|
|
(426,217 |
) |
|
|
(599,963 |
) |
|
|
|
Cash Flows from Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in deposits |
|
|
(255,762 |
) |
|
|
339,124 |
|
|
|
637,776 |
|
Net (repayments) proceeds from borrowings |
|
|
579,280 |
|
|
|
61,985 |
|
|
|
(100,324 |
) |
Proceeds from issuance of junior subordinated and
subordinated debt |
|
|
32,000 |
|
|
|
60,000 |
|
|
|
|
|
Repayment of junior subordinated debt |
|
|
(16,882 |
) |
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options and stock warrants |
|
|
3,247 |
|
|
|
2,733 |
|
|
|
2,028 |
|
Excess tax benefits from share-based payment arrangements |
|
|
115 |
|
|
|
362 |
|
|
|
|
|
Cost of issuing stock in acquisition |
|
|
(361 |
) |
|
|
(264 |
) |
|
|
|
|
Stock repurchases |
|
|
(19,070 |
) |
|
|
|
|
|
|
|
|
Proceeds from stock issuance, net |
|
|
|
|
|
|
9,057 |
|
|
|
85,063 |
|
|
|
|
Net cash provided by financing activities |
|
|
322,567 |
|
|
|
472,997 |
|
|
|
624,543 |
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
(149,251 |
) |
|
|
90,544 |
|
|
|
58,939 |
|
Cash and Cash Equivalents, beginning of year |
|
|
264,880 |
|
|
|
174,336 |
|
|
|
115,397 |
|
|
|
|
Cash and Cash Equivalents, end of year |
|
$ |
115,629 |
|
|
$ |
264,880 |
|
|
$ |
174,336 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosure of Cash Flow Information: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash payments for interest, net of capitalized interest (Note 6) |
|
$ |
125,612 |
|
|
$ |
81,667 |
|
|
$ |
32,373 |
|
Cash payments for income taxes |
|
$ |
22,127 |
|
|
$ |
23,385 |
|
|
$ |
17,481 |
|
Supplemental Disclosure of Noncash Investing and Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of premises and equipment funded with borrowings |
|
$ |
|
|
|
$ |
|
|
|
$ |
9,812 |
|
Loan transferred to other real estate |
|
$ |
3,412 |
|
|
$ |
|
|
|
$ |
|
|
Securities available for sale in process of settlement |
|
$ |
|
|
|
$ |
|
|
|
$ |
20,000 |
|
Stock and stock options issued in connection with acquisitions |
|
$ |
99,633 |
|
|
$ |
104,674 |
|
|
$ |
|
|
Business combination: |
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of assets acquired, excluding intangibles |
|
$ |
446,114 |
|
|
$ |
755,514 |
|
|
|
|
|
Goodwill and other intangibles acquired |
|
|
95,975 |
|
|
|
144,118 |
|
|
|
|
|
Liabilities assumed |
|
|
(417,630 |
) |
|
|
(711,969 |
) |
|
|
|
|
Common stock and options issued |
|
|
(99,633 |
) |
|
|
(104,674 |
) |
|
|
|
|
Cash acquired from acquisitions |
|
|
(72,317 |
) |
|
|
(77,024 |
) |
|
|
|
|
|
|
|
|
|
|
|
Cash paid (received) for acquisitions |
|
$ |
(47,491 |
) |
|
$ |
5,965 |
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
F-5
WESTERN ALLIANCE BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
Note 1. Nature of Business and Summary of Significant Accounting Policies
Nature of business
Western Alliance Bancorporation is a bank holding company providing a full range of banking
services to commercial and consumer clientele through its wholly owned subsidiaries Bank of Nevada
and First Independent Bank of Nevada, operating in Nevada, Alliance Bank of Arizona, operating in
Arizona, Torrey Pines Bank and Alta Alliance Bank, operating in California, Miller/Russell &
Associates, Inc., operating in Nevada, Arizona and Southern California, Premier Trust, Inc.,
operating in Nevada and Arizona and Shine Investment Advisory Services, Inc., operating in
Colorado. These entities are collectively referred to herein as the Company. First Independent
Bank was acquired on March 30, 2007. The Company acquired a majority interest in Shine Investment
Advisory Services on July 31, 2007. The accounting and reporting policies of the Company conform to
accounting principles generally accepted in the United States of America and general industry
practices.
A summary of the significant accounting policies of the Company follows:
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 loan losses; fair value of collateralized debt obligations
(CDOs); synthetic CDOs and related embedded derivatives; classification of impaired securities as
other than temporary; and impairment of goodwill and other intangible assets.
Principles of consolidation
With the exception of certain trust subsidiaries (Note 11) which do not meet the criteria for
consolidation pursuant to Financial Accounting Standards Board (FASB) Interpretation No. 46 (FIN
46), Consolidation of Variable Interest Entities, the consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries, Bank of Nevada and its subsidiary BW
Real Estate, Inc., Alliance Bank of Arizona, Torrey Pines Bank, Alta Alliance Bank, First
Independent Bank of Nevada (collectively referred to herein as the Banks), Miller/Russell &
Associates, Inc., Premier Trust, Inc., and Shine Investment Advisory Services, Inc. All significant
intercompany balances and transactions have been eliminated in consolidation.
Repurchase program
For the year ended December 31, 2007, the Company repurchased approximately 751,000 shares of
common stock on the open market with a weighted average price of $25.47 per share. The Company has
the remaining authority to repurchase shares with an aggregate purchase price of $30.9 million
under a share repurchase program authorized by the Board of Directors through December 31, 2008.
All repurchased shares are retired as soon as is practicable after settlement.
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.
F-6
Securities
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% of the principal
outstanding has been collected is considered a maturity for purposes of classification and
disclosure.
Securities classified as available for sale are equity securities and those 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 available for sale would be based on various factors,
including significant movements in interest rates, changes in the maturity mix of the Companys
assets and liabilities, liquidity needs, regulatory capital considerations and other similar
factors. Securities available for sale are reported at fair value with unrealized gains or losses
reported as other comprehensive income (loss), net of the related deferred tax effect. Realized
gains or losses, determined on the basis of the cost of specific securities sold, are included in
earnings.
Purchase premiums and discounts are generally recognized in interest income using the interest
method over the term of the securities. For mortgage-backed securities, estimates of prepayments
are considered in the constant yield calculations.
Declines in the fair value of individual securities classified as held to maturity or
available for sale below their amortized cost that are determined to be other than temporary result
in write-downs of the individual securities to their fair value with the resulting write-downs
included in current earnings as realized losses. In determining other than temporary losses,
management considers many factors, including: (1) the length of time and the extent to which the
fair value has been less than cost, (2) the financial condition and near-term prospects of the
issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) the intent
and ability of the Company to retain its investment in the issuer for a period of time sufficient
to allow for any anticipated recovery in fair value. The assessment of whether an
other than temporary decline exists involves a high degree of subjectivity and judgment and is
based on the information available to management at a point in time.
Securities classified as measured at fair value are equity and debt securities for which the
company elected early adoption of Statement of Financial Accounting Standards (SFAS) No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities, effective January 1, 2007.
Securities for which the measured at fair value classification was made were generally fixed rate
securities with a relatively long duration and low coupon rates. Securities measured at fair value
are reported at fair value with unrealized gains or losses included in earnings.
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.
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.
F-7
Loans
Loans are stated at the amount of unpaid principal, reduced by unearned net loan fees and
allowance for loan losses.
The allowance for loan losses is established through a provision for loan losses charged to
expense. Loans are charged against the allowance for loan losses when management believes that
collectibility of the principal is unlikely. Subsequent recoveries, if any, are credited to the
allowance.
The allowance is an amount that management believes will be adequate to absorb probable losses
on existing loans that may become uncollectible, based on evaluation of the collectibility of loans
and prior credit loss experience. This evaluation also takes into consideration such factors as
changes in the nature and volume of the loan portfolio, overall portfolio quality, review of
specific problem credits, peer bank information and current economic conditions that may affect
the borrowers ability to pay. Due to the credit concentration of the Companys loan portfolio in
real estate secured loans, the value of collateral is heavily dependent on real estate values in
Nevada, Arizona and California. 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 Federal Deposit Insurance Corporation (FDIC) and
state banking regulatory agencies, as an integral part of their examination processes, periodically
review the Banks allowance for loan losses, and may require the Banks to make additions to the
allowance based on their judgment about information available to them at the time of their
examinations.
The allowance consists of specific and general components. The specific component relates to
loans that are classified as impaired. For such loans that are classified as impaired, an allowance
is established when the discounted cash flows (or collateral value or observable market price) of
the impaired loan is lower than the carrying value of that loan, pursuant to SFAS
114, Accounting by Creditors for Impairment of a Loan. The general component covers non-impaired
loans and is based on historical loss experience adjusted for qualitative and environmental
factors, pursuant to SFAS 5, Accounting for Contingencies.
A loan is impaired when it is probable the Company will be unable to collect all contractual
principal and interest payments due in accordance with the terms of the loan agreement. Impaired
loans are measured based on the present value of expected future cash flows discounted at the
loans effective interest rate or, as a practical expedient, at the loans observable market price
or the fair value of the collateral if the loan is collateral dependent. The amount of impairment,
if any, and any subsequent changes are included in the allowance for loan losses.
Interest and fees on loans
Interest on loans is recognized over the terms of the loans and is calculated under the
effective interest method. The accrual of interest on impaired loans is discontinued when, in
managements opinion, the borrower may be unable to make payments as they become due.
The Company determines a loan to be delinquent when payments have not been made according to
contractual terms, typically evidenced by nonpayment of a monthly installment by the due date. The
accrual of interest on loans is discontinued at the time the loan is 90 days delinquent unless the
credit is well secured and in the process of collection. Credit card loans and other personal loans
are typically charged off no later than 180 days delinquent.
All interest accrued but not collected for loans that are placed on non-accrual status or
charged off is reversed against interest income. The interest on these loans is accounted for on
the cash-basis or cost-recovery method, until qualifying for return to accrual status. Loans are
returned to accrual status when all the principal and interest amounts contractually due are
brought current and future payments are reasonably assured.
Loan origination and commitment fees and certain direct loan origination costs are deferred
and the net amount amortized as an adjustment to the related loans yield. The Company is generally
amortizing these amounts over the contractual life of the loan. Commitment fees, based upon a
percentage of a customers unused line of credit, and fees related to standby letters of credit are
recognized over the commitment period.
F-8
As a service for customers, the Company has entered into agreements with unaffiliated mortgage
companies to complete applications, loan documents and perform pre-underwriting activities for
certain residential mortgages. The mortgage loan pre-underwriting fees from these agreements are
recognized as income when earned.
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 to be surrendered when (1) the assets
have been isolated from the Company, (2) the transferee obtains the right (free of conditions that
constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and
(3) the Company does not maintain effective control over the transferred assets through an
agreement to repurchase them before their maturity.
Advertising costs
Advertising costs are expensed as incurred.
Bank owned life insurance
Bank owned life insurance is stated at its cash surrender value. The face amount of the
underlying policies is $217.3 million as of December 31, 2007. There are no loans offset against
cash surrender values, and there are no restrictions as to the use of proceeds.
Federal Home Loan Bank stock
The Banks, as members of the Federal Home Loan Bank (FHLB) system, are required to maintain an
investment in capital stock of the FHLB in an amount equal to 5% of its advances from the FHLB.
These investments are recorded at cost since no ready market exists for them, and they have no
quoted market value.
Other real estate owned
Other real estate owned (OREO) is real estate that is held for sale and is carried at the
lower of cost or fair value of the property based on appraisal, less estimated costs of disposal.
Any write-down to fair value at the time of transfer to OREO is charged to the allowance for loan
losses. Property is evaluated regularly to ensure the recorded amount is supported by its current
fair value and valuation allowances. In turn, a reduction in the carrying amount to fair value less
estimated costs to dispose are recorded as necessary. Costs relating to the development and
improvement of the property are capitalized. OREO is included in other assets on the balance sheet.
Revenue and expense from the operations of OREO and changes to the valuation allowance are included
in other non-interest expense.
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. Improvements to leased property are amortized over the lesser of the term of the lease
or life of the improvements. Depreciation and amortization is computed using the following
estimated lives:
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|
|
|
|
|
Years |
Bank premises |
|
|
31 |
|
Equipment and furniture |
|
|
3 - 10 |
|
Leasehold improvements |
|
|
6 - 10 |
|
Organization and start-up costs
Organization and start-up costs are charged to operations as they are incurred pursuant to
Statement of Position 98-5, Reporting on the Costs of Start-Up Activities. There were no
organization and start-up costs charged to operations during the years ended December 31, 2007 and
2005. Approximately $1.0 million of organization and start-up costs were charged to operations
during the year ended December 31, 2006.
F-9
Other intangible assets
Intangible assets consist of core deposit intangible assets, investment advisory and trust
customer relationships, and are amortized over periods ranging from 6 to 12 years.
Goodwill
The Company records as goodwill the excess of the purchase price over the fair value of the
identifiable net assets acquired. SFAS No. 142,
Goodwill and Other Intangible Assets, prescribes a two-step process for impairment testing of
goodwill, which is 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 Company has elected to perform its annual analysis during the fourth quarter of
each fiscal year as of October 1st. The Company determined that goodwill was not
impaired as of October 1, 2007.
Income taxes
Western Alliance Bancorporation and its subsidiaries, other than BW Real Estate, Inc., file a
consolidated federal tax return. Deferred taxes are provided on an asset and liability method
whereby deferred tax assets are recognized for deductible temporary differences and tax credit
carryforwards 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.
Stock compensation plans
The Company has the 2005 Stock Incentive Plan (the Plan), as amended, which is described more
fully in Note 13. Effective January 1, 2006 (the adoption date), the Company adopted SFAS No. 123 (revised 2006), Share Based Payment (SFAS 123R).
SFAS 123R requires the Company to record the fair value of stock options granted to employees as
expense over the vesting period. Except as discussed below, the cost of the award is based on the
grant-date fair value. Prior to adoption of SFAS 123R, the Company accounted for stock option
grants using the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations. Therefore, no stock option-based compensation was
reflected in net income, as all options are required by the Plan to be granted with an exercise
price equal to the estimated fair value of the underlying common stock on the date of grant.
Prior to the adoption of SFAS 123R, the Company applied the disclosure provisions of SFAS No. 123,
Accounting for Stock-Based Compensation. SFAS 123 required the disclosure of the pro forma impact
on net income and earnings per share as if the value of the options were calculated at fair value.
SFAS 123 permitted private companies to calculate the fair value of stock options using the minimum
value method while public companies were required to use a fair value model. Prior to the
Companys initial public offering (IPO) the Company used the minimum value method to calculate the
fair value of stock options. Subsequent to the Companys IPO, the Company utilizes the
Black-Scholes model to calculate the fair value of stock options.
The Company has adopted SFAS 123R using the prospective method for options granted prior to
the IPO and the modified prospective method for options granted subsequent to the IPO. Under the
Companys transition method, SFAS 123R applies to new awards and to awards that were outstanding on
the adoption date that are subsequently modified, repurchased, or cancelled. In addition, the
expense recognition provision of SFAS 123R applies to options granted prior to the adoption date
but subsequent to the IPO that were unvested at the adoption date.
During the year ended December 31, 2006, the Company granted stock options to the directors of
its subsidiaries. Directors of subsidiaries do not meet the definition of an employee under SFAS
123R. Accordingly, the Company applies EITF Issue No. 96-18, Accounting for Equity Instruments that
are Issued to Other than Employees for Acquiring, or in Conjunction with Selling Goods or Services
to
F-10
determine the measurement date for options granted to these directors. Therefore, the expense
related to these options is remeasured 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 (the method described in SFAS 123, Accounting for
Stock-Based Compensation):
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|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
|
2005 |
|
|
|
Net income: |
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
$ |
32,875 |
|
|
$ |
39,889 |
|
|
$ |
28,065 |
|
Deduct stock-based employee compensation expense
determined under the minimum value method for all awards
issued prior to the IPO |
|
|
(919 |
) |
|
|
(960 |
) |
|
|
(893 |
) |
Deduct stock-based employee compensation expense
determined under the Black Scholes for awards
issued subsequent to the IPO |
|
|
|
|
|
|
|
|
|
|
(118 |
) |
Related tax benefit for nonqualified stock options |
|
|
73 |
|
|
|
74 |
|
|
|
60 |
|
|
|
|
Pro forma |
|
$ |
32,029 |
|
|
$ |
39,003 |
|
|
$ |
27,114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic as reported |
|
$ |
1.14 |
|
|
$ |
1.56 |
|
|
$ |
1.36 |
|
Basic pro forma |
|
|
1.11 |
|
|
|
1.52 |
|
|
|
1.31 |
|
Diluted as reported |
|
|
1.06 |
|
|
|
1.41 |
|
|
|
1.24 |
|
Diluted pro forma |
|
|
1.03 |
|
|
|
1.38 |
|
|
|
1.20 |
|
Preferred stock
No shares of preferred stock are issued and outstanding, and we have no current intent to
issue preferred stock in the immediate future. 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 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.
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.
Trust assets and investment advisory assets under management
Customer property, other than funds on deposit, held in a fiduciary or agency capacity by the
Company is not included in the consolidated balance sheet because they are not assets of the
Company. Trust and investment advisory service income is recorded on an accrual basis. At December
31, 2007 and 2006, Premier Trust had $325 million and $256 million, respectively, in assets under
management and $520 million and $430 million, respectively, in total trust assets. At December 31,
2007 and 2006, Miller/ Russell & Associates had $1.56 billion and $1.40 billion, respectively, in
assets under management. Shine Investment Advisory Services was acquired in July 2007. At December
31, 2007 Shine had $428 million in assets under management.
Fair values of financial instruments
The Company adopted the provisions of SFAS No. 157, Fair Value Measurements, effective
January 1, 2007. Under this standard, fair value is defined as the price that would be received to
sell an asset or paid to transfer a liability (i.e., the exit price) in an orderly transaction
between market participants at the measurement date.
F-11
In determining fair value, the Company uses various valuation approaches, including market,
income and/or cost approaches. SFAS No. 157 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
Companys 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:
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|
Level 1Valuations based on quoted prices in active markets for identical assets or
liabilities that the Company has the ability to access. Valuation adjustments and block
discounts are not applied to Level 1 instruments. Since valuations are based on quoted
prices that are readily and regularly available in an active market, valuation of these
products does not entail a significant degree of judgment. Assets and liabilities
utilizing Level 1 inputs include adjustable-rate preferred stock and some U.S. Treasury
securities. |
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|
Level 2Valuations based on quoted prices in markets that are not active or for which
all significant inputs are observable, either directly or indirectly. Assets and
liabilities utilizing Level 2 inputs generally include interest rate swap derivatives;
municipal obligations; mortgage-backed securities and asset-backed securities. |
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|
|
|
Level 3Valuations based on inputs that are unobservable and significant to the overall
fair value measurement. Assets and liabilities utilizing Level 3 inputs include certain
collateralized debt obligations and structured notes, including those with embedded basket
credit default derivatives. |
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, SFAS 157 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 Statement No. 107, Disclosures about Fair Value of Financial Instruments, 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 Companys 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, 2007 or 2006. The estimated fair value amounts for 2007 and 2006 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 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
Companys assets.
F-12
Due to the wide range of valuation techniques and the degree of subjectivity used in making
the estimate, comparisons between the Companys 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 approximate their fair value.
Securities
The fair values of U.S. Treasuries and exchange-listed preferred stock are based on quoted
market prices and are categorized as Level 1 of the fair value hierarchy.
With the exception of certain collateralized debt obligations (CDO) and structured notes, the
fair value of most other investment securities are 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 CDO 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 market inputs when readily available. However, these observable
market inputs were adjusted based on the Companys 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 Companys subsidiary banks are members of the FHLB system and
maintain an investment in capital stock of the FHLB in an amount equal to 5% of its advances from
the FHLB. Alta Alliance Bank is a member of the Federal Reserve Bank (FRB) system and maintains an
investment in capital stock of the FRB. The Companys 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.
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 53% and 52% of the loan portfolio at December 31, 2007 and 2006, 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. As a
result, the fair value for loans disclosed in Note 17 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 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.
F-13
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). 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 is
categorized as Level 2 in the fair value hierarchy.
Federal Home Loan Bank and other borrowings
The fair values of the Companys borrowings are estimated using discounted cash flow analyses,
based on the market rates for similar types of borrowing
arrangements. The FHLB
and other borrowings have been categorized as Level 2 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 Companys 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.
Basic and diluted earnings per share, based on the weighted average outstanding shares, are
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
|
2005 |
|
|
|
Basic: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common stock |
|
$ |
32,875 |
|
|
$ |
39,889 |
|
|
$ |
28,065 |
|
Average common shares outstanding |
|
|
28,918 |
|
|
|
25,623 |
|
|
|
20,583 |
|
|
|
|
Earnings per share |
|
$ |
1.14 |
|
|
$ |
1.56 |
|
|
$ |
1.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common stock |
|
$ |
32,875 |
|
|
$ |
39,889 |
|
|
$ |
28,065 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding |
|
|
28,918 |
|
|
|
25,623 |
|
|
|
20,583 |
|
Stock option adjustment |
|
|
1,075 |
|
|
|
1,355 |
|
|
|
1,168 |
|
Stock warrant adjustment |
|
|
919 |
|
|
|
1,044 |
|
|
|
915 |
|
Restricted stock award adjustment |
|
|
107 |
|
|
|
196 |
|
|
|
|
|
|
|
|
Average common shares outstanding |
|
|
31,019 |
|
|
|
28,218 |
|
|
|
22,666 |
|
|
|
|
Earnings per share |
|
$ |
1.06 |
|
|
$ |
1.41 |
|
|
$ |
1.24 |
|
|
|
|
As of December 31, 2007, approximately 556,000 stock options and 131,000 stock warrants were
considered ant-dilutive and excluded for purposes of calculating diluted earnings per share.
F-14
Reclassifications
Certain amounts in the consolidated financial statements as of and for the years ended
December 31, 2006 and 2005 have been reclassified to conform to the current presentation. The
reclassifications have no effect on net income or stockholders equity as previously reported.
Recent accounting pronouncements
On January 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting for Uncertainty
in Income Taxes, an Interpretation of FASB Statement 109 (FIN 48), which clarifies the accounting
for uncertainty in tax positions. This Interpretation provides that the tax effects from an
uncertain tax position can be recognized in our financial statements only if the position is more
likely than not of being sustained on audit, based on the technical merits of the position. We had
no cumulative adjustment to retained earnings on our financial statements related to FIN 48.
SFAS No. 157, Fair Value Measurements, defines
fair value, establishes a framework for measuring fair value in generally accepted accounting
principles (GAAP), and expands disclosures about fair value measurements. The Company adopted SFAS
157 on January 1, 2007. The impact of this new standard on our financial statements is discussed
in Note 2 to the consolidated financial statements.
The Company adopted SFAS 159, The Fair Value Option for Assets and Financial
Liabilities-Including an Amendment of FASB Statement No. 115, on January 1, 2007. SFAS 159 permits
an entity to choose to measure many financial instruments and certain other items at fair value.
For financial instruments elected to be accounted for at fair value, the Company reports the
unrealized gains and losses in earnings. The impact of this new standard on our financial
statements is discussed in Note 2 to the consolidated financial statements.
In September 2007, the FASB ratified the consensus of the Emerging Issues Task Force (EITF)
Issue No. 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of
Endorsement Split-Dollar Life Insurance Arrangement. EITF 06-4 applies to endorsement split dollar
life insurance policies that provide a benefit to an employee that extends to postretirement
periods and requires an employer to recognize a liability for future benefits over the service
period based on the substantive agreement with the employee. EITF 06-4 is effective for fiscal
years beginning after December 15, 2007, with early adoption permitted. EITF 06-4 is not expected
to have a material impact on our financial statements.
In
September 2007, the FASB ratified the consensus reached by the
EITF
in Issue No. 06-5, Accounting for Purchases of Life Insurance Determining the Amount That Could
Be Realized in Accordance with FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life
Insurance (EITF 06-5). EITF 06-5 is effective for fiscal years beginning after December 15, 2007.
EITF 06-5 is not expected to have a material impact on our financial statements.
Note 2. Fair Value Accounting
The Company elected early adoption of SFAS No.
159, The Fair Value Option for Financial Assets and Financial Liabilities, effective January 1,
2007. Instruments for which the fair value option (FVO) was adopted and the reasons therefore are
as follows:
|
|
|
Junior subordinated debt |
|
|
|
|
All investment securities previously classified as held to maturity, with the exception
of tax-advantaged municipal bonds |
|
|
|
|
All fixed-rate securities previously classified as available for sale |
The junior subordinated debt, with a balance of $61.9 million at January 1, 2007, (before the
application of SFAS 159) is a primary source of funding for the Companys held to maturity
portfolio, which excluding tax-advantaged municipal obligations had an amortized cost of $88.2
million at the same date. The held to maturity portfolio consists primarily of fixed rate and
hybrid adjustable rate mortgage-backed securities and collateralized mortgage obligations. The
junior subordinated debt includes $20.0 million which carries a fixed rate through June 2011, with
the remaining balances carrying rates which reset
F-15
at least quarterly. This represents a natural
hedge on the Companys balance sheet, with changes in fair value of the fixed rate securities and
fixed rate junior subordinated debt moving inversely from one another as market rates move up and
down. The early adoption of SFAS 159 on these instruments will more accurately reflect this hedge
in the Companys consolidated financial statements. The FVO was not elected for tax-advantaged
securities since the tax benefit is based upon the contractual rate paid on the security at
time of purchase and does not include changes in fair value or accretion or amortization of
discounts or premiums resulting from revaluation. The carrying value of these tax-advantaged
securities was $7.9 million at December 31, 2007.
Fixed-rate available for sale securities had an amortized cost of $215.6 million and an
aggregate net unrealized loss of $5.9 million at January 1, 2007. These securities represent some
of the most volatile on the Companys balance sheet with long durations and low coupon rates
relative to the market. While initially these investments were funded with relatively long duration
non-interest bearing and administered rate money market deposits, as the liability structure of the
company has shortened they are now preponderantly funded with overnight FHLB
borrowings, customer repurchase agreements and CDs. All of these sources of funding have pricing
which moves with the market, and thus there is not an effective match for the fixed rate securities
on the liability side of the balance sheet. This causes volatility in reported earnings as interest
rates move and the net interest margin contracts and expands. The Companys ability to hedge the
market-value risk on the securities was historically limited by the complexities of accounting for
derivative financial instruments. The adoption of SFAS 159 on these securities provides more
transparency in the consolidated financial statements as users will be more able to ascertain
changes in the Companys net income caused by changes in market interest rates. The FVO was not
elected for variable-rate available for sale securities since the liability funding match is more
closely aligned with these shorter duration assets.
The following table provides the impact of adoption on the Companys balance sheet as of
January 1, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying |
|
|
|
|
|
|
Carrying |
|
|
|
Value |
|
|
Cumulative |
|
|
Value |
|
|
|
Prior to |
|
|
Effect |
|
|
After |
|
Description |
|
Adoption |
|
|
Adjustment |
|
|
Adoption |
|
|
Securities previously reported as held to maturity |
|
$ |
88,224 |
|
|
$ |
(2,267 |
) |
|
$ |
85,957 |
|
Securities previously reported as available for sale |
|
|
209,775 |
|
|
|
(5,861 |
) |
|
|
203,414 |
|
Junior subordinated debt |
|
|
(61,857 |
) |
|
|
(2,270 |
) |
|
|
(64,127 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Gross cumulative effect adjustment |
|
|
|
|
|
|
(10,398 |
) |
|
|
|
|
Less reclassification from other comprehensive income |
|
|
|
|
|
|
5,861 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax cumulative effect adjustment |
|
|
|
|
|
|
(4,537 |
) |
|
|
|
|
Effect on net deferred tax asset |
|
|
|
|
|
|
1,588 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect adjustment, net |
|
|
|
|
|
$ |
(2,949 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All securities for which the fair value measurement option has been elected are included in a
separate line item on the balance sheet entitled securities measured at fair value.
For the year ended December 31, 2007, gains and losses from fair value changes included in the
Consolidated Statement of Income were as follows:
F-16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in Fair Values for the Year Ended |
|
|
|
December 31, 2007 for Items Measured at Fair |
|
|
|
Value Pursuant to Election of the Fair Value Option |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
Unrealized |
|
|
|
|
|
|
Interest |
|
|
Changes in |
|
|
|
Gain/Loss on |
|
|
|
|
|
|
Expense on |
|
|
Fair Values |
|
|
|
Assets and |
|
|
|
|
|
|
Junior |
|
|
Included in |
|
|
|
Liabilities |
|
|
Interest |
|
|
Subordinated |
|
|
Current- |
|
|
|
Measured at |
|
|
Income on |
|
|
Debt and |
|
|
Period |
|
Description |
|
Fair Value, Net |
|
|
Securities |
|
|
Borrowings |
|
|
Earnings |
|
Securities measured at fair value |
|
$ |
(1,071 |
) |
|
$ |
1,777 |
|
|
$ |
|
|
|
$ |
706 |
|
Junior subordinated debt |
|
|
4,257 |
|
|
|
|
|
|
|
388 |
|
|
|
4,645 |
|
Fixed-rate term borrowings |
|
|
(768 |
) |
|
|
|
|
|
|
|
|
|
|
(768 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,418 |
|
|
$ |
1,777 |
|
|
$ |
388 |
|
|
$ |
4,583 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The difference between the aggregate fair value of $62.2 million and the aggregate unpaid
principal balance of $66.5 million of junior subordinated debt was $4.3 million at December 31,
2007.
The difference between the aggregate fair value of $30.8 million and the aggregate unpaid
principal balance of $30.0 million of fixed-rate term borrowings measured at fair value was $0.8
million at December 31, 2007.
Interest income on securities measured at fair value are 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. As of January 1, 2007, a premium was recorded for certain junior
subordinated debt offerings. These premiums are being amortized over the expected lives of the
offerings.
During the year ended December 31, 2007, the Company elected the FVO for two newly acquired
financial instruments. These financial instruments and the reasons for the election are as follows:
|
|
|
Collateralized debt obligation |
|
|
|
|
Fixed-rate term advance from the FHLB |
The collateralized debt obligations fair value is influenced by the perceived credit risk of
the underlying collateral. The election of the FVO will allow the Company to better reflect the
potential market value volatility of this instrument in its consolidated financial statements.
The fixed-rate term advance from the FHLB, with a par value of $30.0
million, has an interest rate of 4.91% and is due in May 2010. The Company secured this advance
primarily as a means of hedging a portion of the market value risk inherent in our securities
measured at fair value portfolio.
The Company measures certain assets and liabilities at fair value on a recurring basis,
including securities available for sale, securities measured at market value and junior
subordinated debt. The fair value of these assets and liabilities were determined using the
following inputs at December 31, 2007:
F-17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using: |
|
|
|
|
|
|
Quoted Prices |
|
|
|
|
|
|
|
|
|
|
in Active |
|
Significant |
|
|
|
|
|
|
|
|
Markets for |
|
Other |
|
Significant |
|
|
|
|
|
|
Identical |
|
Observable |
|
Unobservable |
|
|
|
|
|
|
Assets |
|
Inputs |
|
Inputs |
Description |
|
December 31, 2007 |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale |
|
$ |
486,354 |
|
|
$ |
53,664 |
|
|
$ |
316,769 |
|
|
$ |
115,921 |
|
Securities measured at fair value |
|
|
240,440 |
|
|
|
|
|
|
|
237,653 |
|
|
|
2,787 |
|
Interest rate swaps |
|
|
2,101 |
|
|
|
|
|
|
|
2,101 |
|
|
|
|
|
|
|
|
Total |
|
$ |
728,895 |
|
|
$ |
53,664 |
|
|
$ |
556,523 |
|
|
$ |
118,708 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate term borrowings |
|
$ |
30,768 |
|
|
$ |
|
|
|
$ |
30,768 |
|
|
$ |
|
|
Junior subordinated debt |
|
|
62,240 |
|
|
|
|
|
|
|
|
|
|
|
62,240 |
|
Interest rate swaps |
|
|
1,326 |
|
|
|
|
|
|
|
1,326 |
|
|
|
|
|
|
|
|
Total |
|
$ |
94,334 |
|
|
$ |
|
|
|
$ |
32,094 |
|
|
$ |
62,240 |
|
|
|
|
Fair Value Measurements Using
Significant Unobservable Inputs
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities Available |
|
Securities Measured |
|
Junior Subordinated |
|
|
For Sale |
|
at Fair Value |
|
Debt |
|
|
|
Beginning balance January 1, 2007 |
|
$ |
63,149 |
|
|
$ |
|
|
|
$ |
(64,127 |
) |
Total gains or losses (realized/unrealized)
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings |
|
|
(5,427 |
) |
|
|
(2,213 |
) |
|
|
4,645 |
|
Included in other comprehensive income |
|
|
(27,962 |
) |
|
|
|
|
|
|
|
|
Purchases, issuances, and settlements, net |
|
|
86,161 |
|
|
|
5,000 |
|
|
|